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Wells acknowledged in November last year that the Securities and Exchange Commission was looking into its
The suit says that $350 million figure is almost an admission that something is wrong with Wells' sweeps policies, calling it "evidence of the massive windfall the programs provide to defendants at the expense of [
A lawyer for the plaintiff declined to comment.
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Sweeping up
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Robert Finkel, a senior partner at New York-based Wolf Popper representing clients in two similar cases against Merrill and another against Morgan Stanley, said the sudden flurry of litigation likely results from firms having offered paltry sweeps returns for so long.
"The rates have stayed so low compared with market rates, which tend to be high," Finkel said. "The delta between the two just suggests that there is something inappropriate with how low the sweep rates have stayed."
Unlike the recent series of cases accusing wealth managers of not living up to their fiduciary duty to put clients' interests first, Finkel's suits against Merrill and Morgan Stanley accuse the firms of failing to secure "reasonable" rates of return on money held in retirement accounts. Finkel said he had no estimate for when resolutions in those cases might be coming.
"It wouldn't surprise me if the firms bringing these sweeps lawsuits drew inspiration from those earlier cases," Herskovits said.
Herskovits said the new suit against Wells seems to rely greatly on the idea that the firm had a fiduciary obligation with its handling of clients' cash. But Herskovits said there's a real question about whether such a duty applies to cash held in brokerage accounts.
Peter Crane, the president of the money-market tracker
"It's not like they hold you hostage," Crane said. "The nature of cash is you're welcome to leave at any time."
Wells' sweeps program
The new suit against Wells contends the firm's main sweeps program moves uninvested cash into five affiliated and unaffiliated banks. Rather than trying to negotiate for higher returns on behalf of its clients, the suit argues, Wells merely accepts the rates offered by its directly affiliated partners and then directs unaffiliated banks to pay the same.
In doing so, according to the suit, "[
The lawsuit also contends that Wells began to revise its public statements about its sweeps policies after other firms started coming under scrutiny for their handling of clients' cash. In late 2023, for instance, Wells changed its disclosure about cash sweeps to say that the returns offered through the program "are typically lower" than yields from regular bank deposits.
The change was still misleading, according to the suit. The yields on sweeps accounts are "always" lower, it contends, not just "typically."
The suit also notes that Wells began saying in its disclosures in 2023 that clients could most likely make better returns by putting their cash into money markets and similar vehicles. The action accuses Wells of breach of fiduciary duty, gross negligence, negligent misrepresentation and omissions and violations of New York state laws banning deceptive acts and unlawful practices, among other things.
Holding steady
Although firms are coming under increasing scrutiny for their cash sweeps policies, some are showing little inclination to budge in response. Executives at
Meanwhile, Morgan Stanley executives said in their firm's second-quarter call that they are raising yields on advisor-led sweeps accounts in response to "competitive dynamics." A Morgan Stanley spokesperson later confirmed reports that the firm was raising its returns to 2% for clients with $250,000 or more in certain sweeps accounts.
Defenders of sweeps generally argue that the accounts give investors a place to hold their cash for the short term while they decide if they want to put it into stocks, bonds or other investments. They also note that sweep accounts offer protection from the Federal Deposit Insurance Corp., which guarantees up to $250,000 on individual accounts.
In response to the suit questioning Ameriprise's sweeps policies, for instance, a spokesperson for the firm said, "Our cash sweep is intended for money in motion, not as an investment option for significant cash balances over extended periods. Our programs comply with legal and regulatory requirements."
— This article has been updated with comments from industry experts.