LPL, Morgan Stanley responding to regulators' new sweeps inquiries

LPL Financial and Morgan Stanley revealed Monday that they're responding to new regulatory inquiries into their cash sweeps policies.

The disclosures come amid a series of lawsuits taking LPL, Morgan Stanley and many of its rival firms to task for their alleged failure to provide clients with fair returns on uninvested cash sitting in advisory and brokerage accounts. LPL notes in a quarterly 10-Q filing with the Securities and Exchange Commission on Monday that it received a request for information in August from the SEC inquiring about "certain elements of the Company's cash management program for corporate advisory accounts." 

"The company has been cooperating with the request," according to the 10Q.

Morgan Stanley, in its own 10-Q submitted on Monday, likewise disclosed that it is responding to an unnamed state regulator's request for information about its sweeps policies.

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Morgan Stanley declined to comment, and LPL didn't immediately respond to a request for comment. Both firms are separately amid a group of wealth managers being sued in federal court for allegedly not treating their customers fairly with their cash sweeps policies.

Cash sweeps generally refers to wealth managers' practice of taking clients' uninvested cash and shuffling it over to affiliated or unaffiliated banks where it can be invested or lent out for relatively high returns. The recent rash of lawsuits accuses firms of keeping the lion's share of the money generated for themselves and allowing only small amounts to flow back to investors. The suits generally allege money managers could easily secure better returns for clients simply by putting their uninvested cash in money markets, many of which now yield around 5%.

LPL's 10-Q on Monday acknowledges that it's the subject of several of these legal actions. 

"The company intends to defend vigorously against the lawsuits," according to the filing.

Morgan Stanley's separate filing notes that it's the subject of three separate putative class action suits over its cash sweeps policies. One of those accuses the firm's predecessor broker-dealer, Smith Barney, along with its online brokerage E-Trade of failing to secure reasonable returns in clients' retirement accounts. The other two allege Morgan Stanley has not looked out for clients' interests with its sweeps policies.

This isn't the first time large wealth managers have acknowledged in a quarterly filing that they're responding to regulatory inquiries into their cash sweeps policies. Morgan Stanley disclosed in August that it's responding to an SEC request for information about its sweeps. And Bank of America and Wells Fargo have similarly disclosed that regulators are seeking information about their sweeps practices. 

Bank of America's Merrill and Wells are also among the many firms now being sued for allegedly not giving clients a fair return from their sweeps accounts.

And the scrutiny doesn't likely stop there. There are no doubt firms that are now responding to SEC requests for information without disclosing the inquiries in regulatory filings, wrote analyst Steven Chubak of Wolfe Research in a note released Tuesday.

Chubak said LPL's acknowledgement of the SEC request for information shouldn't be a cause for concern for investors. Even amid regulatory and legal scrutiny, LPL has consistently shown confidence in its sweeps policies, Chuback noted.

"Requests for information from regulators are fairly commonplace and typically do no warrant disclosure in regulatory filings (i.e., (Morgan Stanley's) and (LPL's) legal/compliance teams may have disclosed out of an abundance of caution, whereas other firms did not feel compelled to follow suit)," Chubak wrote.

Christina Zaroulis Milnor, who served in various enforcement capacities at the SEC from 2013 to 2024 and is now a member of the boutique law group Mincey Bell Milnor, agreed that regulatory requests for information are not necessarily indicative of deeper concerns.

"It doesn't mean it's a high priority thing or they're giving lots of staff resources to it," Milnor said. "It could just be an everyday response to something they see in the news."

Chubak also noted that LPL lowered its rates on sweeps accounts in September, a month after receiving notice of the SEC's inquiry. That reduction came in response to the Federal Reserve's decision, also in September, to lower its target interest rate by half a percent. Many of LPL's rivals subject to the same legal pressures have meanwhile been raising the payout rates that go to clients on their sweeps accounts.

Wells Fargo Chief Financial Officer Michael Santomassimo, for instance, said in September at the Barclays Global Financial Services Conference in New York that his firm was raising its payouts on certain sweeps accounts to match the returns offered on money markets. Wells Fargo had previously estimated the higher sweeps rates would cost it $350 million a year.

Morgan Stanley, Bank of America and UBS have also announced plans to raise their sweeps rates on certain accounts. Morgan Stanley and Bank of America haven't put a price tag on the changes yet, while UBS has said its will reduce its pretax profits by around $50 million annually.

Chubak's report does caution investors that LPL "derives a significant portion of its earnings from advisory sweep cash and the regulatory/legal uncertainty remains an overhang." 

LPL reported in its latest 10-Q that it made nearly $353.9 million on clients' cash in the third quarter, or over a tenth of its total revenue. LPL had $45.8 billion in client cash balances at the end of the quarter.