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July 26, 2016 at 05:22 PM
State Street Bank and Trust Co. agreed Tuesday to pay $382.4 million in a global settlement with the SEC, DOJ and DOL, for misleading mutual funds and other custody clients by applying hidden markups to foreign currency exchange trades.
State Street must pay $167.4 million in disgorgement and penalties to the Securities and Exchange Commission, a $155 million penalty to the Department of Justice, and at least $60 million to ERISA plan clients in an agreement with the Department of Labor.
According to the regulators, as part of its custody bank line of business, State Street safeguards clients’ financial assets and offers such services as indirect foreign currency exchange trading (Indirect FX) for clients to buy and sell foreign currencies as needed to settle their transactions involving foreign securities.
An SEC investigation found that State Street realized “substantial revenues by misleading custody clients about Indirect FX, telling some clients that it guaranteed the most competitive rates available on their foreign currency exchange trades, provided ‘best execution,’ or charged ‘market rates’ on the transactions.”
State Street instead set prices largely driven by predetermined, uniform markups and made no effort to obtain the best possible prices for these clients, the regulators said.
Under the terms of the agreement, the SEC will issue its order instituting the settled administrative proceeding only after a federal court approves State Street’s proposed settlement with private plaintiffs in pending securities class-action lawsuits concerning its pricing of foreign currency exchange trades.
State Street has agreed to admit certain findings in the SEC’s order.
“State Street misled custody clients about how it priced their trades and tucked its hidden markups into a corner where they were unlikely to notice,” said Andrew Ceresney, director of the SEC’s Division of Enforcement, in a statement. “Financial institutions cannot mislead their customers about their trading costs.”
