One of the largest custodial banks in the world, State Street, will pay $88.8 million to settle with the SEC for overcharging clients through mutual fund and investment product fees.
The company’s bank and trust division secretly collected $170 million in non-disclosed profit from clients over 17 years through billings it advertised as reimbursement for its custodial services to funds, according to the
"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," said Paul Levenson, director of the SEC’s Boston Regional Office, in a statement.
The SEC says the bank self-reported its conduct, and a State Street spokesman said it did so in 2015.
“We regret these invoicing errors and the impact on our clients,” he said. “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.”
State Street overcharged clients in thirteen categories of expenses, telling them the fee charges were reimbursement for services including asset pricing, valuation services and internal controls reviews, according to the SEC order. The custodial bank established a rate to charge clients, but “failed to update the rate over time,” the order says.
The majority of the secret profit — over $110 million of it — came through reimbursement charges for messages sent through a secure network called SWIFT, the Society for Worldwide Interbank Financial Telecommunication.
State Street billed 5,000 of its mutual fund clients and other registered investment companies as reimbursement for messages it sent through the SWIFT network since 1998, charging a $5.00 per message fee, in addition to a fee per message unit.
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In early 2009, the company estimated the cost per message for State Street was really around 25 cents per message, according to the SEC order, which notes records of senior employees expressing awareness of a discrepancy since 2002. One vice president at the company wrote there “has always been a gross up over the costs” and “[t]he issue is we make money on this product, not charged at the true costs,” according to the regulator.
State Street did reduce the message fee to reflect the $.25 cost in 2009. Still, it allegedly continued to charge all existing clients a rate of $5 per message — with some client-specific exceptions, according to the SEC.
The $88.8 million settlement will go to pay disgorgement, prejudgment interest and a civil monetary penalty, according to the order.
State Street has over $30 trillion assets under custody and administration, according to the SEC.
