State Street agreed yesterday to settle enforcement action by the SEC alleging that it applied undisclosed markups to foreign currency exchange trades by its custody clients, which include mutual funds.
The agreement is part of a global settlement with SEC, DOJ and DOL totaling $382.4 million, $167.4 million of which is disgorgement and penalties with respect to the SEC enforcement action. The SEC will issue its order only after a court approves State Street’s settlement of related securities class actions.
The SEC’s order “will find” that State Street willfully violated Section 34(b) of the ’40 Act and caused violations of Section 31(a) and Rule 31a-1(b) by giving mutual fund custody clients “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.”
The SEC used similar reasoning in its 2011 enforcement action against Morgan Asset Management. Release No. 34-64720 (“Any person who makes a material misrepresentation … in the records required to be maintained by the Fund, or submits inflated prices to be included in the Fund’s NAV calculations and the records forming the basis for the Fund’s financial statements, violates Section 34(b)”).