The Securities and Exchange Commission today announced that State Street Bank and Trust Company has agreed to pay over $88 million to settle charges that for almost two decades the global firm systemically overcharged retail mutual fund clients to custody their assets.
The Boston-based institution, which custodies some $32 trillion, overcharged clients $170 million including a “secret markup” the firm tacked on to the cost of sending secured financial messages through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, the SEC said in its order.
As part of the settlement, State Street has agreed to pay $48.78 million to reimburse affected clients for overcharges and interest. The firm will also pay a civil penalty of $40 million.
"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 advisors; they have a right to receive honest information about what they’re paying for," Levenson added.
State Street, which acts as a custodian for mutual fund and registered investment companies, overcharged approximately 5,000 fund accounts, the SEC reported.
A State Street spokesperson said, “Today’s announcement by the SEC relates to the billing errors that we self-disclosed in 2015. We regret these invoicing errors and the impact on our clients. We have compensated the affected clients with interest, and we have and continue to invest significant resources to improve and strengthen our invoicing processes, controls and governance. The costs associated with this settlement are within our previously established reserve.
“We have not resolved at this time inquiries by all governmental authorities,” the spokesperson added.
According to the SEC’s order, from 1998 to 2015, State Street erroneously collected $170 million from the overcharges, with $110 million coming from the hidden SWIFT markup charged to thousands of its mutual fund clients.
State Street entered into fee agreements with its custody clients, which typically provided for compensation to State Street in the form of fees based on a percentage of client assets (an asset-based fee), transaction charges at specified dollar amounts (such as a specified charge to transfer money by wire) and “out-of-pocket” expenses.