12th September 2017

State Street fined for secret mark-ups and disclosure failures

The Securities and Exchange Commission (SEC) has announced that State Street has agreed to pay more than $35m to settle charges that it fraudulently charged secret mark-ups for transition management services and separately omitted material information about the operation of its platform for trading US Treasury securities.

An SEC order finds that State Street’s scheme to overcharge transition management customers generated approximately $20m in improper revenue for the firm. State Street used false trading statements, pre-trade estimates, and post-trade reports to misrepresent its compensation on various transactions, especially purchases and sales of bonds and other securities that trade outside large transparent markets.

“Agreeing to a fee arrangement and then secretly tucking in hidden, unauthorised mark-ups is fraudulent mistreatment of customers,” said Paul G. Levenson, Director of the SEC’s Boston Regional Office that investigated the overcharges.

In a separate SEC order, the agency found that State Street failed to inform subscribers to its government securities trading platform called GovEx that despite marketing the system as “fair and transparent” it provided one subscriber with a “Last Look” trading functionality that allowed a short period of time for the subscriber to reject a match to a submitted quote. The subscriber used Last Look to reject 57 matches that each had a $1m face value. State Street did not inform the counterparties that their orders had been rejected with Last Look. While developing Last Look, State Street even told one subscriber that the platform did not have Last Look functionality at all.

“Firms that run trading platforms cannot mislead subscribers about their order handling operations,” said Kathryn A. Pyszka, Associate Director of the SEC’s Chicago Regional Office that investigated the GovEx-related disclosure failures.

State Street Bank and Trust Company agreed to pay a $3m penalty without admitting or denying the findings that its GovEx-related disclosure failures violated Section 17(a)(2) of the Securities Act of 1933.