Compliance July 18, 2018

Former State Street Executive Found Guilty of Defrauding Transition Management Customers

State Street replies that "since the overcharging was discovered [we] have substantially enhanced our controls."

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A jury in the U.S. District Court for the District of Massachusetts convicted Ross McLellan, a former State Street Corp. executive, of engaging in a scheme to defraud customers of State Street’s Transition Management line of business.

McLellan was found guilty of applying secret commissions to billions of dollars of securities trades executed on behalf of these customers, the Securities and Exchange Commission (SEC) announced.

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In a statement to PLANADVISER, a State Street spokesperson said: “We entered into settlements in 2014 with the UK Financial Conduct Authority and in 2017 with the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) relating to the overcharging of transition management clients in 2010 and 2011. We deeply regret that this occurred, accept responsibility for the actions of our former employees, and since the overcharging was discovered have substantially enhanced our controls. We are fully cooperating with the United States Attorney’s Office for the District of Massachusetts and the Department of Justice in connection with this matter.”

The SEC’s complaint alleges that between February 2010 and September 2011 McLellan led a scheme to add secret commissions to securities trades performed for at least six clients of State Street’s transition management business, which helps institutional clients move their investments between asset managers or otherwise restructure large investment portfolios. The complaint further alleges that these commissions were charged in addition to fees the clients had expressly agreed to pay the bank, and that McLellan took steps to conceal the commissions from the clients and others within State Street.

More information about the litigation is here.
The Markets July 17, 2018

Fixed Income Favored in 401(k) Trades During June

According to the Alight Solutions 401(k) Index, June was a slow month for trading in defined contribution plans; when 401(k) investors made trades, they tended to favor fixed income.

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The June 2018 update of the Alight Solutions 401(k) Index shows just one day of above-normal trading activity during the month.

As June progressed, 401(k) investors continued movement away from equities, the index shows, with 13 of 21 days favoring fixed income funds. On average, a modest 0.013% of balances were traded daily.

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Year-to-date there have been 29 days with above-normal trading activity, suggesting that the month of June brought back a bit of a sense of tranquility for investors after a difficult start to the year. Other index data shows trading inflows mainly went to small U.S. equity, mid U.S. equity, and stable value funds, while outflows were primarily from target-date funds (TDFs), emerging markets, and international funds.

By asset class, small U.S. equity funds received the most inflows, netting 41% of the monthly inflow volume to the tune of $153 million. Midsized U.S. equity funds garnered 21% of the inflows ($78 million), and stable value funds received 17% of the flow ($64 million). On the flip side, 36% of the outflows ($133 million) came from target-date funds, 23% from emerging markets ($84 million), and 14% from international funds ($53 million). Important to note, target-date funds remain the most prevalent asset class in 401(k) plans, with 27% of the total market volume, according to the index.

At the end of June, asset allocation in equities were in line with May, with 68.5% of assets in equities. At the same time, 68.1% of new contributions were invested in equities at the end of June, up slightly from 68% in May.

The index update explains that domestic equities experienced slightly positive market returns for the month, with both large U.S. equities (represented by the S&P 500 Index) and small U.S. equities (represented by the Russell 2000 Index) up over 1%. U.S. bonds (represented by the Bloomberg Barclays U.S. Aggregate Index) fell -0.1%, while the International equities (represented by the MSCI All Country World ex-U.S. Index) fell close to -2%.

Additional findings are available here.

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