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SEC Probes Big Banks' Forex Trading Activities

David P. Meyer, Esq.

The SEC is probing deeper into the foreign-exchange trading activities of big "custody" banks undertaken on behalf of institutional investors, particularly public pension funds ("SEC Deepens Probe of Forex Trading," Wall Street Journal, May 24, 2011).

As reported by the WSJ, both Bank of New York Mellon Corp. and State Street Corp. are currently under investigation by the SEC due to allegations that the banks misrepresented the manner in which they would carry out foreign-exchange trades. A whistleblower group has sued both banks, and claims that Bank of New York and State Street have improperly priced currency trades for certain customers.

At issue is the fact that foreign-exchange trading typically does not fall under direct SEC jurisdiction, because private agreements reached between the banks and the banks' clients tend to give the banks wide discretion over trading fees. The SEC is using its authority to investigate whether the banks violated securities laws in executing the Forex trades to probe into the banks' currency trading activities.