The U.S. Securities and Exchange Commission Thursday charged a pair of employees from Boston-based State Street Bank and Trust Co. with misleading investors about their exposure to subprime investments.

The SEC alleges that the two men, including State Street Bank’s former chief investment officer, marketed one of the firm’s funds as an “enhanced cash” investment strategy that was an alternative to a money market fund. However, the commission says that, in fact, by 2007 the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives. It claims that investors were misled about the riskiness and credit quality of the fund.

Additionally, the commission says that the firm provided better information to certain investors, some of whom decided to redeem their investments in the fund, which caused the fund to sell its most liquid holdings to meet those redemption requests, thereby leaving the fund and its remaining investors with largely illiquid holdings.

None of these allegations against the individuals have been proven. Earlier, State Street settled allegations of its own relating to similar allegations and agreed to pay more than US$300 million to investors as a result. As part of that settlement, it also agreed to provide information to enable the SEC to assess the potential liability of individuals involved with State Street’s investor communications about the fund, the SEC notes.

Robert Khuzami, director of the SEC’s division of enforcement, said, “The SEC is committed to identifying and holding accountable those who violated the law and harmed investors through subprime investments.”

IE