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State Street Fined for Charging Funds a ‘Secret Markup’

The corporation settled with the SEC, but said it hasn’t yet “resolved inquiries by all governmental authorities.”

A unit of State Street Corp. has agreed to pay more than $88 million to settle charges from the Securities and Exchange Commission that it overcharged mutual funds for custody services.

State Street Bank and Trust Co. added a “secret markup” to the cost of sending secured financial messages through the SWIFT (Society of Worldwide Interbank Financial Telecommunication) network, according to an SEC statement Thursday. Under the settlement, State Street will pay a civil penalty of $40 million plus disgorgement for a total of $88.7 million, the SEC said in an order filed the same day.

“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 Levenson, director of the SEC’s Boston regional office, in the statement.

State Street allegedly collected $170 million by overbilling from 1998 to 2005, including $110 million in hidden SWIFT markups charged to thousands of its clients, the regulator claimed. The firm violated rules prohibiting any person from making any untrue statement of material fact in documents, according to the order.

“Fund expenses make a big difference to mutual fund investors and advisers,” said Levenson. “They have a right to receive honest information about what they’re paying for.”

The SEC’s announcement relates to billing errors that State Street “self-disclosed” in 2015, according to an emailed statement from a State Street spokesman. “We regret these invoicing errors and the impact on our clients.”

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“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 State Street spokesman said in the emailed statement. “We have not resolved at this time inquiries by all governmental authorities.” 

In addition to the monetary penalty, State Street has agreed to pay about $48.5 million of disgorgement plus interest for a total $88.7 million, according to the order. 

This case follows a long-running overcharging scandal for State Street, which culminated last October in a prison sentence for a former transition management executive. 

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