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Fair Foreign Exchange Rates: Not Just for Travelers

Currency exchange rates displayed for public viewing on an electronic display board. Several currencies displayed, red LED on a black glossy background. Street view reflected on display.

Euro, pound, krone, rupee, yen, peso ... no matter the currency or the country, anyone traveling abroad wants to get the best exchange rate for their dollars.

When you’re looking for the best exchange rate, conventional travel wisdom tells you to use your credit card when possible since your bank can obtain a better foreign exchange rate than the ones you’re offered at an airport currency kiosk or local currency exchange. That’s because your bank is able to base your foreign exchange rate on a more favorable “interbank” rate, the one banks use to exchange currency amongst themselves.

Pension plans, like international travelers, also need foreign currency. And while pension plans aren’t “traveling” overseas to take in the sights, they do make international investments. When a pension plan wants to make an investment in a foreign-based company, the trade must be made using the currency of the country in which the company is based. And like the individual traveler, pension plans (or the fiduciaries who act on their behalf) want to obtain the best exchange rate possible to maximize the return on the plan’s investments. Fiduciaries will often seek the services of the banks holding the plans’ assets because these banks may provide in-house foreign exchange services and a competitive rate for the pension plan client.

State Street Bank, a Massachusetts-based financial institution and one of the world’s largest custodial banks – that is, a bank that takes care of people’s or institutions’ money – provided its clients, including pension plan clients, with these kinds of foreign exchange services. And from as far back as 1999, State Street led many of these clients to believe it could provide them with the “best execution” rate for their foreign currency needs.

But after an investigation by the Labor Department and two other federal agencies – the Securities and Exchange Commission and the Justice Department − State Street admitted that the bank generally didn’t price foreign exchange transactions at prevailing interbank market rates. Instead, it applied a predetermined mark-up to the prevailing interbank rate for the foreign exchange − a mark-up that it didn’t disclose to many of its clients. The government agencies also claimed that State Street falsely informed custody clients that it guaranteed the most competitive rates available on foreign exchange transactions.

The reality was that prices were largely driven by the hidden mark-ups designed to maximize State Street’s profits. The Labor Department’s investigation found that the bank’s failure to accurately and candidly disclose how it priced its foreign exchange practices to its pension plan clients violated the Employee Retirement Income Security Act of 1974.

When banks provide services to their pension plan clients, it’s their job to ensure that fees are fair, reasonable and properly disclosed. And when they don’t, it’s our job to hold them accountable. This wasn’t the first time we uncovered such behavior either. Last year we reached a settlement with the Bank of New York Mellon following similar foreign exchange violations. Following the federal investigations and private lawsuits filed against the bank as a result of these practices, State Street entered into a global settlement with all the parties in July 2016, and agreed to pay a total of $530 million. This includes $60 million to pension plan clients in an agreement with the Labor Department, $155 million in penalties to the Justice Department, and $167.4 million in disgorgement and penalties to the Securities and Exchange Commission. State Street will also pay an additional $147.6 million to settle the private class action law suits filed on behalf of the bank’s custodial customers.

The bottom line: Pension plans and their beneficiaries might not use foreign currency to see the Taj Mahal, but the law guarantees them a fair and transparent exchange rate nonetheless.

Suzanne Reilly is a senior trial attorney in the department’s Office of the Solicitor in Boston. The Labor Department’s case was investigated and negotiated by the Employee Benefits Security Administration’s Boston regional office with assistance from Senior Trial Attorneys Suzanne Reilly, Nathan Goldstein and Nathan Henderson, and ERISA Counsel Marjorie Butler of the Boston regional Office of the Solicitor.


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Typical! Big banks steal money and nobody goes to jail.