By Rodney F. Tonkovic, J.D.
State Street Bank and Trust Company has agreed to pay over $382 million to settle charges that it misled custody clients by applying hidden markups to foreign currency exchange trades. In its capacity as a custody bank, State Street misled clients about its indirect foreign currency exchange trading service. The bank told its clients that it provided "best execution" on FX transactions when it really applied a predetermined, uniform markup. The Commission ordered State Street to pay $75 million in disgorgement, plus $17.4 million in interest, as well as a $75 million civil penalty (In the Matter of State Street Bank and Trust Company, Release No. IC-32390, December 12, 2016).
Indirect FX. State Street offered a method of foreign currency exchange called Indirect FX. The service was used by State Street’s custody clients to buy and sell foreign currencies as needed to settle transactions involving foreign securities. State Street realized substantial revenues from Indirect FX.
According to the Commission, until October 2009, State Street provided certain of its custody clients with materially misleading statements describing its pricing for Indirect FX. Clients were told, among other similar representations, that State Street provided "best execution" on FX transactions, that its priority was to obtain the best possible prices, and that it guaranteed the most competitive rates available. Contrary to these statements, State Street priced Indirect FX transactions via a predetermined, uniform markup applied to current interbank market rates. Consequently, Indirect FX trades were often executed at or near the highest or lowest rates in the interbank market.
In addition, from at least January 2006 to October 2009, State Street also provided its custody clients with detailed and itemized daily records of all transactions. While the records routinely contained the dates of Indirect FX transactions and the prices at which they were executed, they did not specify the time of day when the transactions were executed, or provide information about how the prices were determined. The Commission concluded that, In light of State Street's misstatements Indirect FX pricing, the records misleadingly omitted information that would have revealed that State Street did not execute the transactions in the manner described.
Sanctions. The Commission found that State Street provided its registered investment company custody clients with trade confirmations and monthly transaction reports that were materially misleading in light of the representations it made about how it priced foreign currency exchange transactions. This conduct willfully violated Investment Company Act Section 34(b) and caused violations of Section 31(a) and Rule 31a-1(b). In addition to a cease and desist order, State Street will pay disgorgement of $75 million plus prejudgment interest of $17,369,416.51 and a civil money penalty in the amount of $75 million.