Morgan Stanley found innocent in SEC probe on ‘cash sweeps’ but under scrutiny by state authorities

In recent news, Morgan Stanley has been cleared by the Securities and Exchange Commission (SEC) in the “cash sweeps” probe that has previously implicated other financial institutions. While Wells Fargo and Merrill Lynch faced penalties of $60 million earlier this year due to violations related to their cash sweep programs, Morgan Stanley will not be subjected to any penalties by the SEC. However, it is worth noting that the firm is still under investigation by a state securities regulator.

The cash sweep program, a common practice where brokerage firms transfer customers’ uninvested cash from brokerage accounts into interest-bearing accounts with low interest rates, has come under scrutiny in recent years. This practice, which went relatively unnoticed when interest rates were low, has gained attention with the rise in interest rates. As the Federal Reserve increased interest rates, investors became more aware of the low interest rates they were earning on their cash. This led to lawsuits against firms like Morgan Stanley, LPL Financial, and Ameriprise Financial, accusing them of breaching fiduciary duty by implementing cash sweep practices that did not prioritize clients’ best interests.

Financial advisers have a duty to act in their clients’ best interests and must adhere to disclosure requirements when making financial decisions on behalf of their clients. Wells Fargo faced a class-action lawsuit last year for allegedly underpaying interest to clients participating in its cash sweep program, violating the Advisers Act. The SEC highlighted that Merrill Lynch and Wells Fargo lacked proper policies and procedures to ensure compliance with the law requiring financial advisers to act in the best interest of their clients.

Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, emphasized the impact of cash sweep programs on advisory clients, who often pay fees on assets held in these accounts. The SEC’s actions against financial institutions underscore the importance of having well-designed policies and procedures in place to consider clients’ best interests when evaluating cash sweep options and managing cash in advisory accounts according to clients’ investment profiles.

Last August, Morgan Stanley disclosed that the SEC was examining its cash sweep program. The firm, along with other financial institutions, has also been named in class-action lawsuits in New Jersey and New York, alleging that they failed to offer reasonable interest rates on cash sweeps, particularly through its E*Trade subsidiary.

In conclusion, while Morgan Stanley has been cleared by the SEC in the cash sweeps probe, the broader implications of this investigation highlight the need for financial institutions to prioritize their clients’ best interests and ensure compliance with regulatory requirements in managing cash sweep programs.