A trio of advisory firms are being sanctioned for only providing clients with low-paying options in their cash sweep accounts amid the rising interest rate environment.
On Friday, the U.S. Securities and Exchange Commission (SEC) said it settled charges against a pair of Wells Fargo affiliates (Wells Fargo Clearing Services LLC and Wells Fargo Advisors Financial Network LLC) and a third firm, Merrill Lynch, Pierce, Fenner & Smith Inc., for failing to prioritize clients’ interests in their cash sweep program offerings.
According to the regulator’s orders — between 2018 and 2024 for Wells Fargo, and between 2022 and 2024 for Merrill Lynch — the firms only offered one option for their cash sweep accounts for advisory clients.
When prevailing interest rates were low, the gap between the rates paid on cash sweep programs and alternative cash vehicles that the firms offered was minimal. But when rates rose, that gap increased, in one case to almost 400 basis points.
As a result, advisory clients received much lower returns in their cash sweep accounts than they could have had from other cash investment vehicles.
The regulator alleged that the firms violated the rules governing investment advisors by failing to adopt policies that prioritized clients’ interests when making account options available to them, and in managing the cash in clients’ accounts.
Cash sweep programs automatically collect clients’ uninvested cash balances, allowing investors to generate a return on those holdings until the cash is invested, or otherwise deployed.
Without admitting or denying the SEC’s findings, the firms agreed to settle the allegations and to pay a total of US$60 million in penalties — including US$28 million by Wells Fargo Clearing Services, US$7 million by Wells Fargo Advisors, and US$25 million by Merrill Lynch. They also agreed to be censured, and to cease and desist from the alleged violations.
The settlements also acknowledged that the firms made changes to address the shortcomings of their cash sweep programs.
For instance, Merrill Lynch increased the rates paid to advisory clients and adopted enhanced supervisory procedures for accounts with significant cash holdings. Wells Fargo made improvements to its policies and procedures for selecting cash sweep options for advisory clients and for allocating client cash.
“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 enforcement division, in a release.
“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,” he added.