Wells Fargo branch in Baltimore, MD. Photo: Diego M. Radzinschi/ALM
After warning investors in 2023 of a Securities and Exchange probe related to its cash sweep program, Wells Fargo will pay $35 million in civil penalties to settle SEC charges for failing to adopt and implement written policies and procedures reasonably designed to prevent violations and the rules relating to the firms’ handling of investment accounts “cash sweep” program.
Soon after warning investors of the probe, Wells Fargo was hit with a class action lawsuit last year, accusing the firm of underpaying interest to clients in its cash sweep program. In a cash sweep program, a brokerage firm moves a customer’s uninvested cash from a brokerage account into an interest-bearing account.
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Wells Fargo, which failed to pay advisory customers a fair rate, “underpaid its customers in violation of its fiduciary and contractual duties in order to enrich itself at its customers’ expense,” according to the lawsuit. “Rather than pay its customers a reasonable rate of interest on their cash as it was required to do, Wells Fargo instead paid minuscule rates to its customers, while it earned hundreds of millions of dollars on that cash due to rising interest rates.”
Merrill Lynch has agreed pay $25 million in civil penalties to settle the same SEC cash sweep charges. The firm promptly pursued remedial action and cooperated with SEC staff to expedite the process. “Merrill Lynch also provided detailed narrative responses on numerous topics which expedited the Commission staff’s investigation,” according to the SEC filing.
Wells Fargo Advisors (from 2019 to 2024 and Merrill Lynch (from 2022 to 2024) automatically offered only one bank deposit sweep program for most advisory clients and received "significant financial benefits from advisory client cash," according to the SEC’s filing.
Wells Fargo and Merrill Lynch (or their affiliates) set the interest rates offered in the cash sweeps and that, during periods of rising interest rates, the yield differential between the cash sweeps and other alternatives at times grew to almost 4%, according to the SEC filing.
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, according to the SEC orders.
“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 Division of Enforcement. “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.”
Related: Vanguard to pay SEC $106M to settle violations over ‘misleading’ target date fund statements
Without admitting or denying the SEC’s findings, Wells Fargo and Merrill Lynch consented that they violated the Advisers Act and were ordered to cease and desist from violating the charged provisions. Wells Fargo Clearing Services agreed to pay a civil penalty of $28 million; Wells Fargo Advisors Financial Network agreed to pay a civil penalty of $7 million; and Merrill Lynch agreed to pay a civil penalty of $25 million.
After the SEC settlement, a Wells Fargo spokesperson said the agreement “puts this broader industry matter behind us, and as the settlement states, we have already successfully addressed the issues covered by the resolution.”
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
