Ameriprise and LPL Financial are both facing more lawsuits related to their cash sweep programs, while a New York-based law firm is looking into firms’ cash sweep practices with the aid of a former SEC commissioner.
Ameriprise is facing two suits filed this week in Minnesota federal court. California resident Mark Frey and New York resident Mary Bender each filed calls for a class action, alleging Ameriprise continually violated its duties to customers in managing cash sweep programs.
Like many firms, Ameriprise has programs that automatically transfer (or sweep) the remaining excess cash balances from clients’ eligible cash (including securities transaction proceeds and cash deposits) into interest-bearing deposit accounts. These are typically done via agreements with affiliated banks, and the total compensation is dependent on the federal funds rate.
When interest rates are low, this doesn’t normally matter, but starting in 2022, the Federal Reserve dramatically raised them. In his suit, Frey said this increased banks’ yields, which should have put brokerages in a position to negotiate higher rates of return for clients.
“Unfortunately, that has not been the case with some firms such as Ameriprise,” the complaint read. “Instead, Ameriprise places sweep deposits with affiliated banks that it negotiates with to pay less than reasonable interest rates to customers and more money to itself.”
According to Frey, the interest rates paid to Ameriprise clients with cash sweep deposits were “paltry,” ranging from 0.0% to about 0.3%, considerably lower than the current Federal Funds Rate target range of 5.25% to 5.50%. However, Ameriprise’s net interest income from the programs was significant, amounting to $3.07 billion between June 2023 and June 2024, according to Frey.
To Frey, Ameriprise benefitted by depositing the cash into affiliated banks, paying little interest to customers and more to Ameripise (a setup Frey insists Ameirprise negotiated).
“Had Ameriprise obtained reasonable rates for its customers like other brokerages, however, it would have earned less,” the complaint read. “Ameriprise put its financial interests ahead of that of its customers instead was able to handsomely line its pockets with massive revenues.”
The Bender complaint is similar in many respects. It accuses Ameriprise Enterprise Investment Services, which is responsible for sweeping the excess cash into sweep deposits, of being “an agent serving two masters”—namely, the firm’s customers and the firm itself (including its affiliated companies such as Ameriprise Bank).
“(Bender) alleges that while the fee AEIS kept for itself from unaffiliated Participant Banks was unreasonable, in violation of industry rules of practice—especially when it had to do very little to earn that money—those amounts were far below what Ameriprise earned by directing customer cash to its affiliated bank, where Defendants stood to make far more money compared to what Defendants received from the unaffiliated Participant Banks,” Bender’s complaint read.
However, an Ameriprise spokesperson asserted that the firm’s cash sweep programs were “intended for money in motion, not as an investment option for significant cash balances over extended periods.”
“Our programs comply with legal and regulatory requirements,” the spokesperson said.
LPL’s Practices Come Under Scrutiny
Hieu Vu filed her own call for a class action against LPL Financial in California federal court earlier this week. The allegations mirror those of the numerous lawsuits LPL is facing related to its sweep account deposit programs. In the complaint, Vu alleges LPL broke its fiduciary duty to its advisory clients.
The language in the LPL complaint is similar and, at many points, matches the writing in Frey’s complaint. Both Frey and Vu are represented by, among others, Rosemary Rivas and Rosanne Mah at Gibbs Law Group (Frey is also represented by Brian Johnson from that firm and attorneys from Berger Montague).
An LPL spokesperson said it wouldn't comment on particular pending litigation, but did note other firms in the industry were facing similar suits, and the company intend to defend itself "vigorously.”
“We also offer investment options suitable for a longer-term horizon, such as money market funds, CDs, and fixed income funds,” the spokesperson said. “This flexibility allows our clients to tailor their investment strategies to align with their risk tolerance and financial goals.”
There’s been a rash of cash sweep-related class action requests against some of the industry’s largest brokerage firms, including Wells Fargo as well as previous suits naming LPL and Ameriprise as defendants.
Recently, Morgan Stanley also disclosed that the SEC has been looking into the wirehouse’s cash sweep programs since April. Wells Fargo disclosed its own regulatory probe last year and, in its most recent quarterly filing, that it was in “resolution discussions” with the commission.
Wells Fargo also revealed it would increase interest rates in its cash sweep programs this year (joining Bank of America and Morgan Stanley in reassessing their sweep deposit programs). However, LPL CEO Dan Arnold said during its most recent quarterly earnings call it had “no plans” to reassess its cash sweep rates.
Moody’s also recently warned that continued investigations into firms’ cash sweep policies could hurt their credit ratings “because it could lower their spread-based revenue earned on clients’ uninvested cash balances and increase legal and regulatory compliance costs.”
According to Max Schatzow, a partner with RIA Lawyers, rising interest rates are the primary driver behind the glut of class action complaints filed in recent months. When interest rates were low, there’d be little appetite for scrutinizing sweep programs or rates, and attorneys were not willing to take a chance on such a suit.
“But, with rates rising, I think there are people willing to argue that their broker/dealer may not have met their duty owed to clients,” he said.
As the scrutiny of cash sweep deposits swells, the New York-based firm Bernstein Litowitz Berger & Grossmann is launching a “Cash Sweep Task Force” with the help of former SEC Commissioner Robert J. Jackson Jr., who was nominated by President Donald Trump in 2017 (he’s currently a professor at NYU School of Law).
The task force is investigating Wells Fargo, Ameriprise, LPL and E*Trade (among other firms).
In a statement about the new task force, Jackson said banks and brokerages had “shortchanged their retail customers” when failing to pay fair interest rates on the sweep accounts.
“Our nation’s largest financial institutions should not be profiting at the expense of their own customers—essentially picking customers’ pockets in order to line their own,” he said. “The SEC is doing its part to expose and put a stop to this activity, but retail customers need to take action to recover the monies they are owed."
