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State Street Settles SEC Charges for Adding Undisclosed Markups on Client Expenses


Washington D.C., June 27, 2019 —

The Securities and Exchange Commission today announced that State Street Bank and Trust Company has agreed to pay over $88 million to settle charges for overcharging mutual funds and other registered investment company clients for expenses related to the firm's custody of client assets. The overcharges included a secret markup that State Street tacked on to the cost of sending secured financial messages through the Society of Worldwide Interbank Financial Telecommunication (SWIFT) network.

As described in the order, State Street's clients agreed to pay the firm back for out-of-pocket custodial expenses that the firm paid on the clients' behalf. Instead of charging clients for the actual amount of the expenses, however, the SEC order finds that State Street routinely overbilled its clients. According to the SEC’s order, from 1998 to 2015, State Street collected $170 million from the overcharges, with $110 million coming from the hidden SWIFT markup charged to thousands of its registered investment company clients. Subsequently, State Street has been and undertakes to continue reimbursing these overcharges, with interest, to affected clients.

"For years, State Street sent clients a bill for expense reimbursement, without disclosing that State Street had added extra compensation for itself – compensation that clients had not agreed to pay," said Paul G. Levenson, Director of the SEC's Boston Regional Office. "Fund expenses make a big difference to mutual fund investors and advisers; they have a right to receive honest information about what they’re paying for."

The SEC's order finds that State Street violated Section 34(b) of the Investment Company Act of 1940 and caused violations of Section 31(a) of the Investment Company Act and Rules 31a-1(a) and 31a-1(b) thereunder. Without admitting or denying the SEC's findings, State Street agreed to cease and desist from committing or causing any future violations of these provisions, to pay disgorgement and prejudgment interest of $48.78 million, which State Street has been returning directly to the affected registered investment companies, and to pay a civil penalty of $40 million. The order recognizes that State Street self-reported its conduct to the Commission and that it provided substantial cooperation to the Commission staff during the investigation.

The SEC's investigation was conducted by Michael Moran, Eric Forni, Jonathan Allen, and Amy Gwiazda of the Boston Regional Office, as well as Ruth Anne Heselbarth, formerly of the Boston Regional Office.


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