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The US Securities and Exchange Commission is investigating allegations that Wells Fargo, Morgan Stanley and other Wall Street groups have been systematically cheating customers out of billions of dollars of interest payments.
The probe into “cash sweep” accounts comes as a number of firms have upped the interest they are paying clients. But the rates being offered to savers, particularly by the nation’s largest banks, remains far lower than the returns paid to banks based on short-term interest rates set by the Federal Reserve.
The issue has arisen from idle cash sitting in customer accounts at brokerage firms and large banks, which “sweep” otherwise uninvested funds into interest-bearing alternatives in order to generate income. The SEC is looking into whether the firms steered those clients into sweep accounts that paid little or no interest, and whether the financial advisers at those groups had a fiduciary duty to advise clients they could make higher returns if they moved their cash into other accounts.
“You are talking about a big transfer of wealth from customer to brokerage firm,” said Robert Finkel, a senior partner at Wolf Popper, who filed a lawsuit in February against Morgan Stanley on behalf of customers over the issue. “It is in the billions of dollars that we are talking about.”
Morgan Stanley disclosed in a securities filing on Monday that the SEC first sought information from it about the matter in April. The bank, which is fighting the case, declined to comment.
The SEC is handling the inquiry as a so-called sweep investigation, in which it queries a number of firms on a particular issue to see how certain ones deviate from industry practices. An SEC spokesperson declined to comment.
Wells Fargo said it is engaged in “resolution talks” with the SEC on the issue in a financial disclosure last week. It declined to comment for this article.
The other groups that have disclosed being investigated include Ameriprise, Bank of America, Charles Schwab and LPL Financial.
Two private class-action lawsuits were filed last month against LPL, the largest independent broker-dealer in the US, over cash sweep accounts, and another against Ameriprise. Wells Fargo, which was already facing suits from clients, was hit with two additional class-action claims in July.
All of the cases are similar in their allegations that the brokerages have put their bottom lines ahead of clients, pocketing much of the interest earned on client cash balances and short-changing customers.
“Defendants’ misconduct was and continues to be extremely lucrative for Defendants but was and continues to be extremely detrimental to their clients — in flagrant violation of their duties to their clients,” argued plaintiffs in the Ameriprise case.
LPL acknowledged the lawsuits in a recent SEC filing and said it would defend itself “vigorously.” In a statement, a spokesperson for the firm emphasised that its cash sweep vehicles prioritised “security, liquidity and yield — in that order” and noted that it offered other investment options that were more suitable for longer investment horizons.
Wells Fargo, which earlier this year paid as little as 0.05 per cent in interest on sweep accounts, recently upped the rate paid on its default sweep accounts. On a call with analysts, the bank estimated that the rate increase would reduce the bank’s interest income by $350mn this year.
Additional reporting by Joshua Franklin in New York
