Cash Sweep Clients 'Were Paid Peanuts': Ex-SEC Commissioner

Analysis August 23, 2024 at 01:30 PM
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What You Need To Know

  • The task force is being launched by Bernstein Litowitz Berger & Grossmann LLP.
  • Robert Jackson, the former SEC commissioner, is partnering with the firm.
  • The agency warned in June that cash sweep programs can involve conflicts and violate Reg BI.
Melanie Waddell

Robert Jackson, a former commissioner with the Securities and Exchange Commission, is partnering with a law firm to spearhead a new Cash Sweep Task Force to help brokerage customers who have been underpaid in what is estimated to be billions of dollars in interest cash sweep programs at major banks, brokerages and financial institutions.

The task force, launched by Bernstein Litowitz Berger & Grossmann LLP, is investigating Wells Fargo, Ameriprise Financial, LPL Financial and E-Trade, among others, "whose retail clients' cash balances were kept in accounts at heavily depressed interest rates, allowing the institutions to reap significant profits at their clients' expense," the firm said in a recent statement.

Jackson will be joined on the task force by Edwin Hu, a professor at the University of Virginia School of Law who previously served as an advisor to the White House's National Economic Council and as chief economist to Jackson at the SEC.

"For years, the SEC has warned that firms offering sweep accounts must take seriously their promises to pay reasonable interest on Americans' hard-earned cash," Jackson said in an email Friday.

As rates rose, "millions of Americans thought they were earning real interest — but many firms paid them peanuts, padding their profits instead," said Jackson, a professor of law at New York University School of Law. "Those who did so broke their promises to investors and turned cash-sweep accounts into a trillion-dollar conflict of interest."

Under both the Trump and Biden administrations, "the SEC has said that investors deserve better — and that's why I'm so proud to be a part of this effort to get Americans real returns on their hard-earned savings," Jackson relayed.

While the SEC "is doing its part to expose and put a stop to this activity," Jackson said, "retail customers need to take action to recover the monies they are owed."

As the law firm explained, "Sweeps are operated by banks and brokerages to move client cash into money-market or other higher-yield accounts in order to maximize its growth.  In reality, institutions have largely aggregated customer cash into accounts paying a small fraction of yields otherwise available in today's high interest-rate environment."

Bernstein Litowitz Berger & Grossmann's Cash Sweep Task Force includes partners Jerry Silk, Avi Josefson, Adam Wierzbowski and Scott Foglietta, as well as associates Emily Tu and Nicole Santoro.

SEC Inquiry and Lawsuits

The SEC is pursuing a broad investigation on the cash sweep programs, seeking information from multiple firms including Morgan Stanley, Wells Fargo, Ameriprise Financial and LPL Financial.

Lawsuits are also being filed, with two more actions against Ameriprise and LPL lobbed in mid-August. Both of those suits maintain that LPL and Ameriprise were "able to generate massive revenues while paying customers a pittance." Another suit filed the same day against JPMorgan Chase alleges the bank used its "Bank Deposit Sweep Program to confer outsized benefits upon itself and its affiliates."

On Aug. 26, Raymond James was hit with a lawsuit claiming the firm implemented "a scheme whereby they use their clients' cash balances to generate massive profits for themselves while shortchanging their clients."

Former SEC enforcement chief Stephanie Avakian warned in 2019 that the agency was looking  at conflicts associated with cash sweep arrangements.

Cash Sweeps and Reg BI

In June, the SEC warned in Reg BI guidance that cash sweep programs are among the common sources of conflicts of interest that "might incline a broker-dealer, investment adviser or financial professional — consciously or unconsciously — to make a recommendation or render advice" that is not in clients' best interest.

"Previous SEC cases show that investment advisers must assess and determine that the cash sweep vehicles they choose for American savers are in those investors' best interest," Jackson said in the email.

"It's hard to see how, in a high-rate environment, putting customers in cash-sweep vehicles that pay virtually nothing is in investors' best interest."

Wierzbowski added that "companies that took advantage of the recent rise in interest rates to enrich themselves at the expense of their own customers — in disregard of their fiduciary and contractual obligations — face serious liability for such misconduct."

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