State Street in settlement talks with the SEC for allegedly overcharging custody clients

US custodian in ongoing settlement talks with regulator after first proposal was rejected for being 'too low'.

By Joe Parsons

The US Securities and Exchange Commission (SEC) is in talks with State Street over a potential settlement alleging the bank had overcharged certain custody clients.

State Street revealed in its annual report that the SEC is in the process of bringing an action against the bank claiming that it overcharged registered investment companies for custody expenses.

The action would accuse State Street of violating the Investment Company Act of 1940 through the overcharges.

State Street’s report also outlined that it had submitted a response to the US regulator, “which included a settlement proposal”, however this was rejected as it was “too low”.

“We remain in discussions with the [SEC] staff as to a possible settlement.”

State Street added it will likely commence discussions with the Department of Justice in the first half of 2019 “regarding a potential resolution of their investigation regarding this matter” enabling State Street to “better assess the potential penalises and/or sanctions they will be seeking.”

The potential settlement would add to a growing list of overcharging cases for State Street in recent years.

In 2015, State Street admitted it had overcharged asset servicing clients through incorrect invoicing, and in 2017 it was found the custodian had overcharged for services in its retirement services business.

In 2017, State Street agreed to pay $64 million to US authorities to resolve an investigation that it had deliberately overcharged six European clients for transition management services. It also paid a £22.9 million fine to the UK Financial Conduct Authority (FCA) in 2014 for the same offence.

State Street said in its report that it expects to reimburse clients of at least $380 million for all the overcharges. This does not include any potential settlements.

In a statement sent to Global Custodian, a State Street spokesperson said: “In 2015, State Street announced that it was reviewing the manner in which it had invoiced certain expenses to asset servicing clients. We have reimbursed most of our affected customers, and we have implemented enhancements to our billing processes.  Since that time, we have included this matter in our public disclosures, including our cooperation with investigations by governmental and regulatory authorities.”

In February, State Street said it will put together a new executive deal review committee, consisting of 13 of the bank’s senior leaders, which will evaluate pricing decisions and the implications they will have on the firm.

State Street added in its report: “The outcome of any of these proceedings and, in particular, any criminal sanction could materially adversely affect our results of operations and could have significant collateral consequences for our business and reputation.”

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