UBS is facing a lawsuit over its cash sweep programs, the latest of several firms, including LPL, Wells Fargo and Ameriprise, named as defendants in similar litigation.
South Carolina resident Kelly Goldsmith filed the suit against UBS in New York federal court this week, claiming she was a customer with retail brokerage accounts managed “on an advisory basis” between 2013 and 2023. She’s seeking class action status.
Like many firms, UBS offers “cash sweep” programs in which clients’ excess cash balances (from securities transactions or other deposits) are transferred (or “swept”) into interest-bearing accounts at different banks.
According to Goldsmith, UBS makes more money when client funds are invested in UBS cash sweep programs as opposed to other options, and UBS sets interest rates with the banks it works with on its cash sweep programs. But Goldsmith alleges those interest rates were “neither reasonable nor in compliance with its legal duties.”
According to the suit, UBS offered several cash sweep options for different audiences, including retail clients holding trusts, retirement advisory accounts, and retail accounts that are not retirement advisory accounts.
However, UBS’ annual percentage yields for clients in the sweep programs were far lower than those of competitors like Vanguard and Fidelity. While some firms automatically sweep uninvested cash into money market funds with high rates of interest, those options weren’t available to Goldsmith or other retail clients with cash sweeps, according to the complaint.
“UBS has devised a scheme by which it generates significant profits using clients’ cash balances,” the complaint read. “The scheme is devised to maximize profits for UBS while at the same time disregarding its clients’ best interests - in fact, UBS generates interest income on its clients’ cash balances that are orders of magnitude greater than amounts the client receives.”
A UBS spokesperson declined to comment for this story.
In its second-quarter earnings call, CFO Todd Tuckner said the firm expects to “adjust the sweep deposit rates” in U.S. advisory accounts by the middle of the fourth quarter, which the firm expected would reduce pretax profits by about $50 million annually.
UBS is not the only firm targeted by class action requests related to cash sweeps; in recent months, LPL, Wells Fargo, Ameriprise and others have been the subject of lawsuits filed in federal court. LPL and Ameriprise were defendants in three suits filed this week alone.
Morgan Stanley and Wells Fargo have also disclosed SEC probes into their cash sweep programs. Last month, Bank of America Merrill Lynch added to its SEC quarterly filings that it could face legal and regulatory risks due to its cash sweep programs, according to Barron’s. Wells Fargo’s most recent quarterly filing indicated it was in “resolution discussions” with the commission about the inquiry.
Moody’s also recently warned wirehouses and other firms that continued investigations into cash sweep programs could negatively impact their credit ratings by lowering the “spread-based revenue” earned on clients’ uninvested cash and boosting legal and regulatory costs.
Wells Fargo, BofA and Morgan Stanley all revealed they’d reassess their sweep deposit programs in recent quarterly earnings reports and calls.
This week, the New York-based law firm Bernstein Litowitz Berger & Grossmann teamed up with former SEC Commissioner Robert J. Jackson (now a professor at NYU School of Law) to launch a “cash sweep task force” to investigate firms’ cash sweep practices, including Wells Fargo, Ameriprise, LPL and E*Trade, among others.
