State Street’s Investment Manager Guide (provided to many investment managers for custody clients), however, described out-of-pocket expenses as “generally understood in the securities industry to mean costs for items paid by the custodian on behalf of the investor,” which are “reimbursable to the custodian.”
As described in the order, State Street's clients signed agreements to pay the firm back for out-of-pocket custodial expenses the firm paid on the clients' behalf. But instead of charging clients the actual amount of expenses, the SEC found that State Street routinely overbilled clients.
Beyond overcharging for SWIFT costs, the firm also overcharged for asset pricing and valuation services from third-party vendors, audit reports, fund transaction and balance information reports, as well as archiving client records, issuing checks, delivery and courier services, printing and copying, forms and supplies, computer equipment, telephone services and wire transfers.
“For many of these categories of expenses, State Street had established a rate to charge clients at some point in the past and failed to update that rate over time,” the SEC said in its order. “As volumes increased or costs decreased, the gap between the amount that State Street charged and its cost per unit grew. State Street’s internal controls did not include procedures to periodically reassess these unit costs.”
The order “recognizes that State Street self-reported its conduct to the [SEC] and that it provided substantial cooperation to the commission staff during the investigation,” the SEC said in the statement announcing the settlement.