State Street Encounters Heightened Scrutiny Over FX Transactions With SEC Probe

(May 12, 2011) — The Securities and Exchange Commission (SEC) is investigating State Street over its pricing of some foreign-exchange services, which has been a large source of revenue and profits at banks.

In its latest quarterly filing, Boston-based State Street, the third-largest custody bank, disclosed the SEC investigation, noting that “attorneys general from a number of [states] as well as US attorney’s offices, the SEC and other regulators have made inquiries or issued subpoenas.”

State Street is also currently being investigated by Massachusetts’ chief securities regulator over its handling of foreign-exchange transactions. Regarding the pricing of its foreign-exchange transactions, State Street has already been sued by California and the Arkansas Teacher Retirement System for alleged fraud. Filed in early February in the US district court in Boston, the suit alleges that State Street, the custody bank for more than 40% of US public pension funds, violated state law by overcharging customers for currency trades. According to the suit, the bank generated as much as $500 million in profits annually — a rate of profit that accounts for about 50% of State Street’s foreign exchange profits over the last decade. In response, State Street says the Boston-based company is “firmly committed to providing its clients with quality service and transparency in meeting their FX needs. We will vigorously defend the allegations made in the complaint and we stand by our business practices,” State Street says.

In 2009, the nation’s two largest public pension systems — the $226.6 billion California Public Employees’ Retirement System (CalPERS) and the $146.4 billion California State Teachers’ Retirement System (CalSTRS) — launched a case, which is ongoing, against State Street over it’s foreign-exchange fees.

State Street’s rival, Bank of New York Mellon, is the subject of similar claims from Virginia, Florida, and a public pension fund in Pennsylvania, accused of manipulating FX transactions and overcharging pension systems for transactions in order to maximize their profits at the expense of clients.