The Securities and Exchange Commission has charged two registered investment advisor units of Wells Fargo and Merrill Lynch with compliance failures relating to their cash sweep programs. The firms have agreed to pay civil penalties of $60 million to settle the charges.
The charges against Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network claim that the firms failed to adopt and implement written policies and procedures related to its bank deposit sweep program. The regulator says from at least 2019 through May 2024, the Wells Fargo entities offered the program as the only cash sweep option for most advisory clients and received significant financial benefits.
The firms set the interest rates offered in the programs, and at times, the yield differential between their bank deposit sweep program and other alternatives was nearly 4% higher.
The charges against Merrill Lynch were similar. The SEC claims the three firms’ policies and procedures did not consider clients’ best interests when evaluating and selecting cash sweep options. They also failed to consider the duties of financial advisors in managing client cash in advisory accounts.
“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, in a statement. “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.”
According to the SEC order, Wells Fargo has already improved its policies and procedures for selecting cash sweep options.
“Our agreement with the SEC puts this broader industry matter behind us, and as the settlement states, we have already successfully addressed the issues covered by the resolution,” said Beth Richek, spokeswoman for Wells Fargo.
The SEC also noted remedial acts taken by Merrill Lynch. The firm increased the rates paid to advisory clients and enhanced its supervisory procedures targeted at a subset of investment advisor program accounts with significant cash holdings. The firm also lowered the minimum thresholds for investing cash in certain money market funds. It also provided detailed narrative responses to the SEC to speed up its investigation.
"Merrill took several significant steps before becoming aware of the Commission’s investigation, including increasing the rates paid to advisory clients in Merrill’s Bank Deposit Program, lowering the minimum thresholds for investing cash in certain money market funds, and adopting and implementing enhanced supervisory procedures," said Naomi R. Patton, a spokeswoman for Merrill Lynch. "In fact, Merrill was one of the first large firms to offer a significantly higher cash sweep rate for advisory clients’ uninvested cash."
The firms did not admit or deny the SEC’s findings but agreed to a censure and cease and desist from violating the charged provisions. Wells Fargo Clearing Services agreed to pay $28 million in civil penalties, Wells Fargo Advisors Financial Network will pay $7 million, and Merrill Lynch will pay $25 million.
Many large institutions have cash sweep programs that automatically transfer (or sweep) the remaining cash balances in the client’s eligible cash (including proceeds of securities transactions, cash deposits and other money) into “interest-bearing deposit accounts.”
The SEC has been investigating these programs at several big firms. In August, Wells Fargo disclosed that it was in “resolution discussions with the SEC” on the cash sweep issue. The firm revealed in the second quarter it would increase the interest rates in its cash sweep programs, reducing the firm’s revenue by approximately $350 million per year.
Morgan Stanley and Merrill Lynch had also disclosed in SEC filings last year they could face legal and regulatory risks due to their cash sweep programs.
Several of the big firms, including Wells Fargo, Morgan Stanley, Merrill, UBS, Ameriprise and LPL are facing class action lawsuits related to their cash sweep programs.
