State Street Being Probed by SEC, Department of Justice For Possible Misconduct While Soliciting Pension Business

SEC Building

An interesting piece of information was tucked away in a new State Street Corp. regulatory filing.

In an SEC filing filed Monday, State Street said it was being subpoenaed by the SEC and the Department of Justice for information related to the way the bank solicits business from public pension funds.

State Street admits in the filing that “in at least one instance” a consultant employed by the firm made political contributions while bidding for pension business.

From the filing:

We are responding to subpoenas from the Department of Justice and the SEC for information regarding our solicitation of asset servicing business of public retirement plans. We have retained counsel to conduct a review of these matters, including our use of consultants and lobbyists in our solicitation of business of public retirement plans and, in at least one instance, political contributions by one of our consultants during and after a public bidding process. While we are unable to predict the outcome of these matters, adverse outcomes could have a material adverse effect on our business and reputation.

Depending on the nature of the political contribution, the action could violate SEC pay-to-play rules.

Under the SEC’s current rules, investment advisors can’t make donations to politicians that have any influence—direct or indirect—over the hiring of investment firms.

Specifics of Rule 206 (4)-5, as explained by law firm Bracewell & Giuliani:

Rule 206 (4)-5, which was adopted in 2010, prohibits investment advisers from providing compensatory advisory services to a government client for a period of two years following a campaign contribution from the firm, or from defined investment advisers, to any government officials, or political candidates in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. Some de minimus contributions are permitted, topping out at $350 if the contributor is eligible to vote for the candidate, and the contribution is from the person’s personal funds.

Businessweek reached a State Street spokewoman for comment:

“We are cooperating with governmental authorities and have retained counsel to conduct an internal review of these matters,” said Alicia Curran Sweeney, a spokeswoman for State Street, while declining to comment further on confidential discussions with regulators.

Earlier this year, investment firm TL Ventures was busted when an employee was found to have made a political donation to Pennsylvania’s governor while the firm was working with the Philadelphia Board of Pensions. The consequences: the firm has to give up over $250,000 in fees it earned from the work, and pay a $35,000 fine.