Reluctant Voices - Extracts about RMPF

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It’s whispered through phone lines in Manhattan, in London, in Hong Kong. It’s spoken in hushed tones over lunch at the Capital Grille and Four Seasons. It’s passed, in the form of illicit emails, between a whistleblower in Pittsburgh and an aggressive Attorney General in Florida. In whatever form of communication, the message is often the same: FX and transition management, taken together, is a dirty, dirty business.

It’s not nearly that simple. Like in love, all transgressions within the cloistered world of custodial banking look the same from outside. A lover can be unfaithful in various ways, but to a bystander the variation is meaningless. Similarly, a stream of supposedly sordid scandals have wracked the likes of State Street, Northern Trust, and BNY Mellon since the onslaught of the financial crisis, and one could be forgiven for believing that every scandal bore the same method of infidelity. One would be wrong. Be it securities lending (circa 2008), FX transaction costs (circa 2009), or transition management (circa 2011), the method of transgressions within the custodial world was and is unique.

The business of securities lending, of course, has been battered and rebounded. Clients were made whole and reputations have been slowly repaired following material losses in cash-collateral reinvestment pools. Disintermediation—in this case, the separation of securities lending from the custody-banking model—has been spoken about more than acted upon, and whatever the outcome, the problems within this industry have been exposed and dealt with. This is not the case with transition management or FX execution—and vendors fear a similar client backlash, reputational beating, and bottom-line gouging. They are right to be worried.

Within the confines of One Lincoln Street—State Street’s global headquarters in the heart of Boston’s financial district—Nicholas Bonn is the financial equivalent of a fireman. Wherever there is fire, Bonn can be found inside, hose in hand, attempting to douse the flames. In June 2010, as issues surrounding securities lending swirled around the industry and the large custodian, Bonn was brought in from the transition management business to calm client nerves. Having successfully poured water on this potentially explosive situation, Bonn was brought back to transition management in the fall of 2011 after Edward Pennings, a London-based employee in the unit, went rogue. State Street cannot comment on United Kingdom-based employment, but numerous sources told aiCIO that Pennings had misled at least one client and internal compliance about fees on a significant fixed-income transition. That client—the £25 billion Royal Mail pension plan, which until now has not been revealed as the fund at the center of the Pennings Affair—was fully reimbursed, but it takes only a minute for reputations to be ruined, and Bonn has spent the better part of the last six months airport-jumping in an effort to calm customer concerns regarding the pricing—and transparency of that pricing—for transitions. As part of that effort, the firm released a letter to clients stating: “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…a commission and a management fee were applied without that being expressly communicated to the client.”

Multiple sources also confirmed that upwards of five separate pension funds were looking into past transitions that involved Pennings, and “multiple” funds, including the Sainsbury’s pension fund, have been compensated in the same manner as Royal Mail.