Commonwealth Financial Network has been hit with a class-action lawsuit for sweeping client money into accounts that paid interest rates as low as 0.01% while the federal funds rate exceeded 3.6%.
The suit, filed Monday in the U.S. District Court for the District of Massachusetts, involves Commonwealth's Core Account Sweep Programs, which include the Bank Deposit Sweep Program and Advisory Retirement Sweep Program.
The complaint claims breach of fiduciary duty, breach of contract, violations of Massachusetts and Kentucky consumer protection statutes and unjust enrichment, seeking compensatory, treble and punitive damages along with disgorgement and injunctive relief.
The suit seeks to "recover damages and to stop Commonwealth's unlawful conduct" related to its Core Account Sweep Programs.
The conduct, according to the suit, involved Commonwealth:
- Failing to provide program participants with interest rates that tracked prevailing economic and business conditions and the market;
- Violating program participants' reasonable expectations to receive market-based interest rates; and
- Prioritizing itself over its customers by taking the vast majority of the interest earned on program participants' cash for itself.
The Core Account Sweep Programs "automatically transfers free credit balances from its customers' investing accounts into interest-bearing deposit accounts selected by Commonwealth at other institutions, referred to as the 'Program Banks,'" the suit states.
"In truth, over the past four years, contrary to Commonwealth's contractual, fiduciary, and common law obligations, as interest rates dramatically increased, Commonwealth used the Programs as a highly lucrative revenue stream and paid paltry, below-market interest rates to Program Participants," the suit maintains.
"While Program Banks paid (and continue to pay) high, market-based interest rates on Program Participants' cash, Commonwealth passes along minuscule interest rates, wholly divorced from the market to its customers and pockets the vast majority of the interest earned on Participants' cash for itself by taking a non-market-based fee," the suit continues.
"Thus, while the purpose of the Programs is to provide Participants with interest on their cash, Commonwealth frustrates that purpose by using the Programs to generate massive revenue for itself at the expense of its customers, many of whom were paid interest rates that never exceeded 0.75% over the past four years, despite the fact that interest rate benchmarks," including the Federal Funds Effective Rate and the Federal Funds Target Rate, soared to a 15-year high, reaching 5.33% and 5.50% respectively, according to the suit.
Today, cash in the programs "earns interest rates as low as 0.15% for the BDSP and 0.01% for the ARSP even as the EFFR remains at 3.63% and FFTR remains at 3.75%," the suit states.
Commonwealth, which is now part of LPL Financial, didn't respond to a request for comment.
Several other big firms have faced cash-sweep litigation since the Federal Reserve started raising interest rates in 2022. A similar suit was filed against Cetera in early June. In late February, the Securities and Exchange Commission closed an investigation of LPL Financial's cash sweep program, according to the broker-dealer's annual report, but other lawsuits are still pending. LPL said in March that it "intends to defend vigorously against the lawsuits."
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