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From Securities Regulation Daily, September 7, 2017

Disclosure failures lead to over $35M in penalties

By R. Jason Howard, J.D.

In anticipation of the institution of cease-and-desist proceedings by the SEC, State Street Bank and Trust Company along with State Street Global Markets, LLC, and State Street Global Advisors Funds Distributors, LLC, submitted offers of settlement relating to a scheme to defraud six transition management customers between February 2010 and September 2011 (In the Matter of State Street Bank and Trust Company, Release No. 33-10410, September 7, 2017; In the Matter of State Street Global Markets, LLC,Release No. 33-10411, September 7, 2017).

Transition management. Transition management is a service provided by some financial institutions to institutional customers that are undergoing a "transition," such as changing investment advisers or investment strategies and the scheme charged those customers "hidden and unauthorized markups and commissions beyond the fees, mark-ups, or commissions that the customers had agreed to pay on trading in U.S. and European securities."

To advance the scheme, 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, unauthorized markups is fraudulent mistreatment of customers," said Paul G. Levenson, Director of the SEC’s Boston Regional Office that investigated the overcharges.

GovEx. A separate order found that State Street marketed its government securities platform, GovEx, as fair and transparent but failed to inform its clients that it provided one subscriber with a "Last Look" trading functionality. That allowed the subscriber to reject a match to a submitted quote for a short period of time which led to the rejection of 57 matches that each had a $1 million face value.

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

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

To settle the fraud charges for the hidden transition services markups, which violated sections of the Securities Act of 1933 as well as the Exchange Act of 1934, State Street Global Markets LLC, State Street Global Advisors Funds Distributors LLC, and State Street Bank and Trust Company agreed to pay a $32.3 million penalty.

The releases are No. 33-10410 and No. 33-10411.

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