According to an article in RIA Biz, a publication for investment advisors, "Schwab Advisor Services alerted its 7,000 RIAs that it will liquidate the money market holdings in their client accounts by Dec. 1 and put the money in Schwab Bank." The article, entitled, "Schwab Alerts its RIAs that it Will Liquidate Client Money Market Holdings by Dec. 1," and subtitled, "The San Francisco-based broker is shipping all cash in sub-$500K accounts to its bank," explains, "The cash-sweeping to Charles Schwab Bank applies to households with accounts totaling less than $500,000 and apply to accounts that were opened prior to Oct. 1, 2014." In other news, we also report on the latest in a legal fight between Double Rock, Reserve Funds' former FDIC insured deposit "amalgamation" unit, and Reich & Tang.
The article on Schwab's sweeps says, "The email from the San Francisco-based custodian was unsigned but in the space reserved typically for a signature were the words: "Own your tomorrow," written in the company's stylized handwritten script. The cash-sweeping to Charles Schwab Bank applies to households with accounts totaling less than $500,000 and apply to accounts that were opened prior to Oct. 1, 2014."
Ria Biz explains, "In the initial test-the-waters roll-out last year, only new accounts -- one opened after Oct. 14 -- were subject to Schwab's enforced allocation to its own bank. "On or after December 1, 2015, their cash feature will be changed from the Money Fund Sweep feature to the Bank Sweep feature," Schwab writes. "Accounts with Household Balances greater than $500,000 will not be affected." Schwab spokesman Greg Gable confirmed by email."
It continues, "Norm Boone, founder and president of San Francisco-based Mosaic Financial Partners Inc., with more than $6.1 billion of assets under management, says he is not concerned about the change. "Almost none of our clients use the sweep feature. Cash amounts paid -- typically for interest or dividends -- stay in the accounts wherein the payment arose, and as needed, we reinvest it," he writes in an email. "The change from the Schwab MMF to the Schwab Bank MMF actually will help clients, based on today's interest rates.""
The piece adds, "Michael Halloran, chief of West Coast business development for MaxMyInterest.com, left Morgan Stanley to help build this company aimed at boosting returns on cash held by financial advisors. He says Schwab is actually slow in making this play for cheap assets. "Merrill Lynch implemented this prior to Morgan Stanley in the mid-2000's," he says." (For more on brokerages switching sweeps to banks from money funds, see our June 3 News, "Bank Deposit Keep Growing Despite Regs; Amalgamated FDIC Insurance.")
Schwab's Joe Martinetto wrote in a recent "CFO Commentary," "We noted ... that average interest bearing assets reached $161 billion in August, up 16% year-over-year. This strong growth reflects our continued success in building our client base, as well as our focus on transitioning a significant portion of client sweep cash balances to Schwab Bank as capital levels allow.... As discussed during our Business Update back in July, we expect to utilize this additional capital to support the transition of certain client sweep cash balances from money funds to Schwab Bank. Our initial plans call for moving approximately $4 billion of these balances over several months, beginning in September, with the majority transferring in December."
In other FDIC sweep news, Island Intellectual Property and Double Rock, owned by Bruce Bent, and formerly affiliated with The Reserve Fund's Reserve Management Company, filed a motion with the New York County Clerk on September 14 in opposition to defendant Reich & Tang's motion to dismiss the lawsuit that Double Rock filed against Reich & Tang. Double Rock sold its FDIC-insured cash management business to Reich & Tang in 2010, but the two entities got into a dispute over the payment of royalties to Double Rock.
Double Rock sued Reich & Tang earlier this year seeking royalty payments according to the "Summons with Notice" filing in the Supreme Court State of New York, County of New York. Justice Shirley Werner Kornreich is hearing the case. In September, Reich & Tang bought itself out from Natixis Asset Management as we reported in the story, "Reich and Tang Buyout; TCG Funds Acquired by Catalyst; FDIC Update."
The accompanying "Memorandum of Law" says in its Preliminary Statement, "Relying on Defendants' false promise to make ongoing royalty payments, Double Rock sold its entire FDIC-insured cash management business to Reich & Tang for a cash payment that was just a fraction of that business' true value. In particular, to induce Double Rock to sell the business, Defendants promised to make an upfront cash payment of $15 million and to cover the remainder of the consideration for the business through ongoing royalty payments under a separate license agreement, which were projected to yield approximately $92 million over the life of the license. Defendant Michael Lydon, Reich & Tang's President and Chief Executive Officer, personally (and repeatedly) assured Double Rock that Defendants were committed to growing the FDIC-insured cash management business and to honoring the royalty payments. However, almost immediately after executing the transaction, it became clear that Defendants never intended to perform under the license agreement. After making the very first royalty payment, Mr. Lydon demanded that Double Rock renegotiate the license terms to substantially reduce the royalty rates, and claimed that Reich & Tang did not have to satisfy its payment obligations at all since it was no longer using the licensed intellectual property, knowing full well that the royalty payments are not conditioned on use. Mr. Lydon persisted in trying to renegotiate more favorable terms over the next few years."
It adds, "Then, in 2014, the U.S. Supreme Court issued the Alice Corp. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014) decision, which held that the particular software patents at issue in that case were invalid. Although Island IP's patents were not addressed or at issue in Alice, almost immediately after the decision was issued, Reich & Tang unilaterally proclaimed that the licensed patents were "void" and that it was no longer obligated to honor its remaining royalty payments. Shortly thereafter, despite having acquired a very valuable business for its own benefit and profiting from Plaintiffs' business and intellectual property, Reich & Tang breached the license agreement by failing to make its first and second quarter 2015 royalty payments. Defendants also made it clear that they have no intention of honoring their remaining contractual obligations."
In related news, an update was recently posted on "Reserve's Yield Plus Fund - In Liquidation," which says, "This Fund Update is intended to provide shareholders of the Yield Plus Fund -- In Liquidation with current information regarding litigation that could affect the amount of assets available for distribution in the future. A consolidated class action entitled William Ross and Dawn Ross v. Reserve Management Company, Inc. et al. involving the Yield Plus Fund-In Liquidation ("Fund") has been pending since 2008, (U.S.D.C. Southern District of New York, No.08-cv-10261-PGG) ("Class Action")."
The site explains, "On June 4, 2015, the Settling Parties in this matter filed a Stipulation [that] would resolve all outstanding claims among the Settling Parties, including certain potential claims for indemnification, expenses and management fees involving the Fund. The filing of the Stipulation is the first step in a process that may result in the conclusion of the Class Action and the making of a distribution to Class Members and shareholders of the Yield Plus Fund."
