Two Wall Street titans are shelling out a combined $60 million to the U.S. Securities and Exchange Commission for allegedly serving their own interests at the detriment of clients.
The SEC says Wells Fargo and Bank of America’s Merill Lynch failed to develop legitimate written policies and procedures for their cash sweep programs.
According to the SEC, the two firms told advisory clients that they could only park their uninvested funds in bank deposit sweep programs (BDSPs) – an option that came with paltry payments despite a rising interest rate environment.
Investment advisors typically tell clients who have not yet made investment decisions to move their funds into such programs. The accounts are designed to make uninvested cash work by generating interest instead of just letting the money lay dormant.
The yields offered by these programs typically rise if the Federal Reserve hikes interest rates.
But the SEC says Wells Fargo and Merill Lynch short-changed advisory clients after limiting the yields paid out by BDSPs at a time when the Fed was in the midst of a rapid rate-hiking cycle.
“The 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.”
The regulator also alleges that the Wall Street firms made bank on clients’ uninvested cash by keeping BDSP yields low.
Says Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement,
“Cash sweep programs impact nearly all advisory clients, who often pay advisory fees on assets held in these accounts. 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.”
Wells Fargo and Merill Lynch settled with the SEC without admitting or denying the regulator’s findings.
Wells Fargo has agreed to pay a $35 million civil penalty while Merill Lynch is set to cough up $25 million. The firms also consented to be censured and to cease and desist from further violations of the Advisers Act.
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