The SEC is looking into Morgan Stanley’s cash sweep programs, according to the regulatory report the wirehouse filed Monday with the regulator.
The firm’s quarterly filing states that it has been “engaged with and is responding to” information requests from the commission’s Enforcement Division since April regarding “advisory cash balances swept to affiliate bank deposit programs and compliance with the Investment Advisers Act of 1940.”
Morgan Stanley’s admission follows last November’s revelation from fellow wirehouse Wells Fargo that the SEC was investigating that company’s cash sweep programs. Sweep programs enable firms to put clients’ uninvested cash to work, generating yield for the firm and customers.
According to Reuters, Wells Fargo’s cash was placed in interest-bearing accounts and money market funds. In a regulatory filing last week, Wells Fargo noted it was in “resolution discussions with the SEC” on the cash sweep issue. However, it couldn’t offer “any assurance as to the outcome of those discussions.”
During its quarterly earnings call last month, Morgan Stanley Chief Financial Officer Sharon Yeshaya said the company intended to change its advisory sweep rates “against the backdrop of changing competitive dynamics.”
Wells Fargo and Bank of America also announced projected changes in the pricing of their cash sweep programs, though LPL Financial demurred. LPL CEO Dan Arnold said the firm had “no plans” to change cash sweep pricing during the firm’s second-quarter earnings call.
“As for the firms that have made changes, they have different business models and monetization frameworks than ours, so we can only speculate as to the issues they may be addressing,” Arnold said.
LPL and Wells Fargo are defendants in lawsuits filed by clients in recent weeks over their cash sweep programs; in his lawsuit filed against Wells Fargo in California federal court, Keith Bujold argued the firm used its bank sweep programs “to generate enormous fees for itself at the expense of its customers who receive only a minimal return on their cash deposits.”
According to the Morgan Stanley filing, the wirehouse has been named in two class actions regarding its cash sweep programs.
In February, a client sued Morgan Stanley and E*Trade Securities, alleging the firms broke customer agreements by failing to pay reasonable interest rates to retirement account holders with cash balances swept to banks. The estate of a decreased client also filed a suit alleging the firm broke its fiduciary duty by paying low interest rates via their cash sweep programs to retirement, brokerage and advisory account holders.