Risk & Compliance

State Street Fined $382M Over Hidden Markups

The SEC says the bank made "substantial revenues" by misleading clients about the pricing of foreign exchange trades.
Matthew HellerJuly 27, 2016

State Street Bank and Trust Co. has agreed to pay $382.4 million to settle allegations that it charged custody clients hidden markups on foreign currency exchange trades.

According to the U.S. Securities and Exchange Commission, the Boston-based bank used the markups to realize “substantial revenues,” misleading customers by telling them it priced FX transactions at prevailing interbank market rates, provided “best execution” on FX transactions, or guaranteed the most competitive rates available.

“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 SEC said Tuesday in a news release.

To settle the SEC’s investigation, State Street agreed to pay $167.4 million in disgorgement and penalties. It will also pay 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.

“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,” Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said. “Financial institutions cannot mislead their customers about their trading costs.”

The bank’s custody clients include public pension funds, financial institutions and non-profit organizations. As part of its custody bank line of business, State Street offers such services as indirect foreign currency exchange trading for clients to buy and sell foreign currencies as needed to settle their transactions involving foreign securities.

Carmen M. Ortiz, U.S. Attorney for the District of Massachusetts, said custody clients “had a right to expect that State Street would execute transactions in an honest and forthright manner. Instead, State Street executed FX transactions in a manner that enabled it to reap substantial profits at the expense of its custody clients.”

The SEC will issue an administrative settlement order after a federal court approves State Street’s proposed $147.6 million settlement with customers in pending class action lawsuits over its pricing of FX trades.