By Andrew Welsch

Merrill Lynch and two units of Wells Fargo have agreed to pay $60 million in combined penalties to settle Securities and Exchange Commission charges that they failed to consider the best interest of clients when designing automatic cash sweep programs that paid low interest rates to customers.

The penalties come amid mounting scrutiny of widespread cash sweep practices at brokerage and wealth management firms. For years, firms have been sweeping clients' uninvested dollars into bank deposit sweep programs that are profitable for the companies but that can pay next to nothing in interest to customers. The practice drew additional attention when yields on cash vehicles such as high-yield saving accounts and money-market funds jumped above 5%, highlighting the relatively low returns on the sweep accounts. Last year, some wealth managers such as Morgan Stanley disclosed that the SEC was scrutinizing cash sweep practices and disclosures. And investors also filed lawsuits last year against a slew of firms, accusing them of failing to act in clients' best interests.

The SEC's announcement Friday illustrates some of the issues at play. The regulator said Wells Fargo and Merrill Lynch offered bank deposit sweep programs as the only cash sweep option for most advisory clients. The companies automatically swept clients uninvested dollars into the accounts, according to the SEC. The firms or their affiliates set the interest rates offered in the programs, which were designed in such a way that the yield differential between the programs and other cash sweep alternatives at times grew to almost 4%, the commission said.

Wells Fargo maintained a duty to provide clients advice on cash and charged them an advisory fee on the cash in advisory accounts, according to the SEC. But the company's disclosures were inconsistent, the regulator said. For instance, the disclosures stated that "it does not have any duty to monitor the cash sweep vehicle for your account, or make recommendations about, or make changes to, the Cash Sweep Program that may be beneficial to you," according to the SEC's regulatory order.

"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 advisors consistent with a client's investment profile."

The companies agreed to pay the penalties without admitting or denying the SEC's findings.

"Our agreement with the SEC puts this broader industry matter behind us, and as the settlement states, we have already successfully addressed the issues covered by the resolution," a spokeswoman for Wells Fargo said in a statement.

A Merrill Lynch spokeswoman said: "As the SEC noted, Merrill took several significant steps before becoming aware of the Commission's investigation, including increasing the rates paid to advisory clients in Merrill's Bank Deposit Program, lowering the minimum thresholds for investing cash in certain money-market funds, and adopting and implementing enhanced supervisory procedures."

Wells Fargo and Merrill Lynch, which is a unit of Bank of America, are two of the nation's largest wealth managers, overseeing trillions of dollars in assets. Shares of Wells were down 0.5% Friday morning while shares of Bank of America were up 0.3%.

Both companies have revised some policies and procedures related to sweep accounts and increased rates paid to advisory clients, according to the SEC, which didn't specify what those rates were.

Wells Fargo currently pays as little as 0.02% in sweep accounts, according to its website, which notes that advisory accounts and nontaxable accounts may receive rates higher than the published rates.

Merrill Lynch's sweep program currently pays advisory clients 4.21%. Brokerage clients earn 0.01% to 0.15% in their sweep accounts depending on their balances.

Write to Andrew Welsch at andrew.welsch@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 17, 2025 11:15 ET (16:15 GMT)

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