Morgan Stanley violates its duties to act in clients' best interests by paying brokerage and advisory customers unreasonably low interest rates on balances in its cash sweep program, a proposed class action lawsuit alleges.
"This case concerns a simple ruse: in violation of its fiduciary duties and contractual obligations and a regulatory mandate to act only in the 'best interests' of its customers, Morgan Stanley … fails to secure for its brokerage and advisory customers reasonable interest rates on its customers' cash balances," the lawsuit alleges.
The financial services firm's net interest income — the spread between what it secures from customers and makes in the market — has grown exponentially during the rising-interest-rate environment since March 2022, according to the lawsuit brought in U.S. District Court for the Southern District of New York earlier this month.
While that growth has been "extremely lucrative" for Morgan Stanley and its affiliates, with net interest income surpassing $8 billion in 2023 alone, the scheme is "extremely detrimental to its customers," who could receive higher rates elsewhere, according to the suit, filed by the estate of the late Bernard Sherlip, a Connecticut physician who died last year.
"The rates offered by Morgan Stanley through its Bank Deposit Program (BDP) — essentially Morgan Stanley's account sweep program — are significantly lower than sweep programs at other brokerage and advisory firms," the complaint, which seeks a jury trial, says.
The lawsuit includes a a chart alleging that Morgan Stanley's cash sweep program pays from 0.01% to 0.50% in interest, depending on the cash balance, while Vanguard's pays 4.7% or 2%, depending on balance, and Fidelity's 2.69%.
"Thus, other brokerage and advisory financial institutions that use sweep programs pay or secure significantly higher rates than Morgan Stanley," the lawsuit alleges.
The suit alleges the firm breaches its fiduciary duties, contracts with customers and the Securities and Exchange Commission's Regulation Best Interest by failing to secure reasonable interest rates for clients.
