UK - State Street was forced to reimburse a client for a transition management trade after an internal investigation, which led to the dismissal and possible dismissal of senior transition managers Ross Mclellan and Edward Pennings, found the client had been double charged on fees.
Sources confirmed that the client was a UK pension fund who had hired State Street to conduct a transition involving fixed income assets.
Spokeswoman Lucy Davidson said: "State Street has conducted a review of a transition conducted earlier this year for a UK client. We have concluded that this client should be reimbursed and we have done so. Our review also concluded that in completing this transition, certain employees did not meet the standards we expect of them. We have zero tolerance for this behaviour."
Davidson confirmed as a result of the internal investigation, global head of State Street Global Markets' portfolio solutions group McLellan is no longer with the firm, and Pennings (pictured), head of operations for Europe, the Middle East and Africa, "is not in the office". Nicholas Bonn, executive vice president at State Street Global Markets, will now lead the firm's transition management operations.
In a letter to clients and consultants seen by Global Pensions (read the full text below), State Street said: "Our normal practice is to reflect our compensation as a commission on market trades and/or a management fee. While we may agree to a compensation arrangement that entails both a commission and a management fee, in this instance both a commission and a management fee were applied without that being expressly communicated to the client."
It is understood the error was found by performance analysis firm Inalytics on behalf of one of its clients. Graham Dixon, director at Inalytics, said he could not comment on client issues.
Whether or not other clients have been affected is still unknown. In its letter, State Street said it was conducting an internal review of other European client portfolios to see if others were double-charged. The firm has hired an external consultant to help with that review.
At least one European client said they are putting their transition activity with State Street on hold for now and may consider not using them going forward. "We're obviously disappointed. We're internally looking at how to cope with this," said the institutional scheme managers who declined to be named. "We're putting them on hold."
He said going forward, he may consider conducting more audits of his transition management events.
However, he said he was satisfied with the swift action State Street took once it discovered the situation.
Davidson confirmed the firm self-reported the incident to the UK's Financial Services Authority.
Full text of letter to clients:
October 7, 2011
Transition Management Update
As a valued client of State Street, I want to update you on some changes. Given questions that you may have with respect to these changes, I want to ensure we communicate fully
With immediate effect, I am taking interim responsibility for our Transition Management team. I am a 19-year veteran of State Street, the founder of our Transition Management
business and have been closely involved with its growth over the years. I am overseeing a global team, which is long-tenured and more than 100-person strong.
Following a review of a specific transition for a UK client earlier this year we concluded that in implementing the transition, the standards that State Street requires were not met. We have zero tolerance for this behaviour. Therefore we have reimbursed the client and taken appropriate internal steps to guard against further occurrences of this nature.
Our normal practice is to reflect our compensation as a commission on market trades and/or a management fee. While we may agree to a compensation arrangement that entails both a
commission and a management fee, in this instance both a commission and a management fee were applied without that being expressly communicated to the client.
As you would expect, we are conducting a comprehensive review of the small number of other transitions in Europe from earlier this year in which we agreed to apply a management
As one of the main proponents of the T-Charter, we have always been committed to transparency in this industry and will continue to uphold that standard. Our focus remains on
delivering the most innovative portfolio solutions in the industry. We are very proud of our position as one of the world's most experienced and largest transition managers, with nearly $500 billion in assets transitioned annually. We also realise that this business has been built, over a number of years, on trust and transparency with our clients. My senior team and I will be reaching out to you personally in the coming days to answer any additional questions you may have. As always, we remain available to answer any questions or address any immediate concerns.
Executive Vice President
State Street Global Markets
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