Morgan Stanley offices in Washington, D.C. Photo: Diego M. Radzinschi/ALM
While Wells Fargo and Merrill Lynch paid $60 million for a ‘cash sweep’ Securities and Exchange Commission violation in February, Morgan Stanley will see no penalty from the SEC over the firm’s cash sweep program, however, it still faces an investigation from a state securities regulator, the Wall Street wealth management firm has announced.
Several financial institutions’ cash sweep programs caught the SEC’s attention last year. In a cash sweep program, a brokerage firm moves a customer’s uninvested cash from a brokerage account into an interest-bearing account that pays little interest to clients, which has been a long-held practice.
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However, the practice garnered little attention when interest rates were near zero, but that changed in recent years as the Federal Reserve hiked interest rates. With many money-market funds and online savings accounts paying 4% or more, investors become more aware of what they are earning on cash and filed lawsuits accusing Morgan Stanley, LPL Financial and Ameriprise Financial of a breach of fiduciary duty over cash seep practices in brokerage accounts.
Financial advisers are generally required to make decisions that are in clients’ best interests and are also subject to various disclosure requirements.
Soon after warning investors of the probe, Wells Fargo was hit with a class action lawsuit last year, accusing the firm of underpaying interest to clients in its cash sweep program, in violation of the Advisers Act. Wells Fargo and Merrill Lynch (or their affiliates) set the interest rates offered in the cash sweeps and that, during periods of rising interest rates, the yield differential between the cash sweeps and other alternatives at times grew to almost 4%, according to the SEC filing.
Merrill Lynch and Wells Fargo didn’t have proper policies and procedures in place to prevent violations of a key law that requires financial advisers to act in a client’s best interest, according to the SEC.
“Cash sweep programs impact nearly all advisory clients, who often pay advisory fees on assets held in these accounts,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “These actions reinforce that advisory firms must have reasonably designed policies and procedures to consider their clients’ best interest when evaluating potential sweep options for cash held in advisory accounts and to ensure that cash held in an advisory account is properly managed by financial advisers consistent with a client’s investment profile.”
Related: SEC fines Wells Fargo $35M, Merrill Lynch $25M for ‘cash sweep’ violations
Last August, Morgan Stanley announced that the SEC was reviewing its cash sweep program.
Morgan Stanley and other financial firms also have been named as defendants in several class-action lawsuits – notably in New Jersey and New York – that claim the firm or its E*Trade subsidiary failed to pay a reasonable interest rate on cash sweeps, according to the filing.
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
