The Securities and Exchange Commission ("SEC") announced it had settled charges against State Street Bank and Trust for overbilling mutual funds and other investment company clients by more than $170 million over a 17-year period.
The SEC said the majority of the overcharges - approximately $110 million - resulted from hidden automated markups State Street made on secured messages exchanged using the Society of Worldwide Interbank Financial Telecommunications ("SWIFT") network.
The SEC determined that approximately 5,000 mutual fund accounts that contracted with State Street to custody their assets were billed for out-of-pocket expenses that the firm incurred as part of its work. But the agency found that between 1998 and 2015, State Street routinely padded the bill for those expenses by adding a $5 per-message fee that for many years far exceeded the firm's actual overhead costs to send SWIFT messages.
State Street was found to have reduced the SWIFT per-message price to $0.25 in 2009, but only for new clients or existing clients the firm had not previously charged. The SEC also said State Street overbilled for Service and Organization Controls (SOC) reports, which auditors hired by the firm issued on its internal controls related to processing client transactions and other services.
The SEC alleged that State Street violated Section 34(b) of the Investment Company Act and caused violations of Section 31(a) of the Investment Company Act and Rule 31a-1(a) and Rule 31a-1(b) thereunder. State Street agreed to a settlement, without admitting or denying the charges.
In its findings, the agency noted that State Street has taken proactive steps to reduce regulatory risk created by self-reporting the conduct, reimbursing clients and engaging a consulting firm to assist in the calculation of reimbursements.
In addition, the SEC acknowledged State Street's development of a new standard fee schedule templates designed to reduce ambiguity and potential misunderstanding as to the firm's application of its stated invoicing practices and methodologies.
Steps to Prevent Client Overbilling
The case against State Street is in line with the SEC's ongoing push to make certain client fees are being calculated accurately and thoroughly disclosed.
Investment advisors should review and test the fee disclosures in their Form ADV no less often than every 12 months. A review of fee disclosures can be performed using the same "follow the money" method espoused by the FBI's W. Mark Felt, better known as informant Deep Throat, to Washington Post reporters Bob Woodward and Carl Bernstein during the Watergate scandal that prompted the resignation of President Richard Nixon in 1974.
Fee disclosure can be tested by frequent and comprehensive reviews of all financial transactions and related billing processes. A common issue arises when software used by investment advisors calculates fees based on a different account value that what is stated in their disclosures. Often, fee issued can be identified by simply comparing information in an advisor's Form ADV to its client invoices.
Contact Jacko Law Group to Help
Our knowledgeable and experienced team can help you with any and all regulatory and compliance issues, including assessing whether the fees and expenses charged to clients are consistent with the language in your Form ADV. For assistance in reviewing your firm's policies and procedures, contact the attorneys at Jacko Law Group, PC, here.
Let our experience work for you.
Robert D. Conca is a Partner at Jacko Law Group, PC. His practice includes representation of investment advisers, broker-dealers, private funds, and non-financial industry companies, and their personnel, in a variety of ...
Add a comment
- New SEC Climate Change and ESG Task Force to Enhance Investor Protection by Red Flagging Examples of Corporate Greenwashing
- What Investment Advisers Must do to Qualify for the DOL’s Prohibited Transaction Exemption for IRA Rollovers
- SEC Division of Examinations Cites Enhanced Focus on Business Continuity Processes, Protection of Retail Investors and ESG-Related Risks Among its 2021 Priorities
- FINRA Report Suggests Growing Need for Enhanced Risk Management in Cybersecurity and Outside Business Activities
- Deadline Approaching: Considerations for Your Form ADV
- Leveraging JLG's Latest Service: Real Estate
- Safeguarding Your Firm Against Fraudulent or Improper Recognition of Revenue
- New Advisers Act Advertising Rule to Undergo Further Review
- Investors, Advisers Must be Mindful to Comply with New U.S. Ban on Estimated $1 Trillion of Chinese Securities
- Your First Meeting on the SEC’s New Investment Adviser Marketing Rule Should Address These Topics
- Securities and Exchange Commission (SEC)
- Investment Advisers
- Regulatory Examinations
- Policies and Procedures
- Social Media Marketing
- Due Diligence
- Transition Services
- California Consumer Privacy Act (CCPA)
- Aging Clients
- Advisers Act
- Virtual Currency
- Dodd-Frank Act
- Ponzi Scheme
- Office of Compliance Inspections and Examinations (OCIE)
- Broker Protocol
- Securities Law
- Form U5
- Private Equity
- Private Funds
- Hedge Funds
- Regulation Best Interest
- Personally Identifiable Information (PII)
- Government Shutdown
- Risk Alert
- Exchange-Traded Funds (ETFs)
- Investment Company Act
- Rule 6c
- Wells Fargo