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Large Custody Bank to Pay $89 Million for Marking Up Out-of-Pocket Expenses

A large custody bank agreed to pay almost $89 Million in fines, disgorgement, and interest to settle charges that it overcharged investment company clients by marking up purported out-of-pocket expenses for nearly two decades. The most significant markups occurred on SWIFT messages as the bank failed to adjust the charges as its internal costs decreased over time. The SEC also maintains the bank overcharged investment company clients on 12 other classes of expenses, collecting $170 Million in profit during the period. The SEC charges the custody bank with causing its fund clients to maintain inaccurate books and records.

This case should prompt fund financial officers to review the charges imposed by the custody bank. That nickel and diming on everything from wire fees to foreign custody reports may be unlawful. Service providers should also take note that the SEC will initiate enforcement for overcharging registrants even where the service provider itself is not an SEC registered or regulated entity.

Service Providers Accountable for Destruction of Broker-Dealer Records

 The SEC recently warned service providers to broker-dealers that they could not delete or discard required records in response to non-payment of fees.  The SEC explained that it has experienced difficulty in accessing required records in situations where a broker-dealer had financial problems.  The staff opined that contractual provisions that permitted the service providers to delete or discard records because of the non-payment of fees would violate Rule 17a-4.  Moreover, the loss of records could subject the service provider to secondary liability for causing or aiding and abetting the broker-dealer’s primary violation.

 Firms such as banks and consultants should take notice that the SEC and/or FINRA will take action for failure to preserve required records.  Consult your compli-pro to ascertain the records required by Rules 17a-3 and 17a-4