The ongoing effort by the Securities and Exchange Commission to get the financial advice industry to focus on the interest big firms pay to clients for their cash took another turn today when the SEC penalized two broker-dealers of Wells Fargo Advisors $35 million and Merrill Lynch $25 million for not paying clients appropriate interest in advisory accounts.
According to the SEC, the difference between the interest paid to customers by the two wirehouses on cash and the yield in other cash sweep programs was almost 4 percent, or 400 basis points.
“These penalties are certainly significant enough to draw the big firms’ attention and get the issue straightened out,” said Sander Ressler, managing director of Essential Edge Compliance Outsourcing Services.
Financial advisors working at registered investment advisors have a fiduciary obligation to work in the best interest of clients when it comes to investment safety and returns. That includes not using only one investment option for any part of their portfolio, including cash.
The financial advice industry has been facing inquiries into its cash sweep programs for years now. The SEC has been focused on cash sweep account options since at least 2022, when interest rates began their rise, and has made sizable settlements regarding the issue, most notably with the Charles Schwab Corp. last year for $187 million.
Wells Fargo & Co. reported in November 2023 that it was facing an "advisory account cash sweep investigation" by the SEC. And over the summer, some firms, including Wells Fargo, said they had recently increased pricing on sweep deposits in advisory brokerage accounts.
“Wells Fargo Advisors and Merrill Lynch offered bank deposit sweep programs, or BDSPs, as the only cash sweep option for most advisory clients and received a significant financial benefit from advisory client cash in the BDSPs,” the SEC stated.
The SEC’s orders “find that these firms or their affiliates set the interest rates offered in the BDSPs and that, during periods of rising interest rates, the yield differential between the BDSPs and other cash sweep alternatives at times grew to almost 4 percent.”
Wells Fargo Advisors and Merrill Lynch “failed to adopt and implement reasonably designed policies and procedures to consider the best interests of clients when evaluating and selecting which cash sweep program options to make available to clients, including during periods of rising interest rates, and concerning the duties of financial advisors in managing client cash in advisory accounts,” the SEC stated.
Wells Fargo Clearing Services agreed to pay a civil penalty of $28 million; Wells Fargo Advisors Financial Network, or FiNet, agreed to pay a civil penalty of $7 million; and Merrill Lynch agreed to pay a civil penalty of $25 million. Neither Wells Fargo nor Merrill admitted or denied the SEC’s findings in the matter.
“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,” Wells Fargo said in a statement provided by a spokesperson.
“As the SEC noted, 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,” a company spokesperson wrote in an email. “In fact, Merrill was one of the first large firms to offer a significantly higher cash sweep rate for advisory clients’ uninvested cash.”
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