The National Law Review posted a brief titled, "Scrutiny of Cash Sweep Programs Intensifies as Brokers Face Wave of Class Action Suits." Written by Thomas Panoff and Matt Benz of Sheppard, Mullin, Richter & Hamilton, it states, "On August 5, a prominent investment brokerage firm disclosed in a quarterly filing that it has been responding to requests from the SEC since April related to the firm's practice of sweeping uninvested customer account balances into interest-bearing deposit programs at affiliate banks in order to generate income. This disclosure comes on the heels of the firm being named in two separate class action lawsuits earlier this year, both alleging that the firm breached customer agreements and its fiduciary duties to account holders by failing to pay reasonable interest rates on cash balances swept to affiliate bank deposit programs."
The update continues, "These cases are representative of the broader wave of recent class action litigation accusing several large brokerage firms of unlawfully profiting off of their 'cash sweep' programs. The class actions generally allege that defendant firms breached their fiduciary duties to account holders by failing to adequately disclose that customers could realize greater returns if they moved their cash into other accounts or cash-alternatives like money market funds with higher interest rates. In addition, certain of the class actions also involve contractual claims alleging that the failure to pay reasonable interest rates to account holders in connection with cash sweep programs constitutes a breach of the firms' brokerage agreements with customers."
It tells us, "While class actions based on breach of fiduciary duty in connection with cash sweep programs date back as far back as 2007, the number of such cases brought in recent months, along with the mounting scrutiny from regulators, indicate a more discernable trend than has been seen in the past."
The brief adds, "Given that the current wave of class action litigation aimed at cash sweep programs is relatively new, it is difficult to assess the plaintiffs' likelihood of success, especially given the many meritorious defenses that exist. However, considering the scope of the legal theory being advanced in support of the plaintiffs' claims, other brokerage firms employing similar cash sweep programs face a potential risk as the class action suits continue to snowball.... In light of the potential exposure, firms should be proactive in considering mitigation strategies, such as bolstering disclosures made to customers and increasing the interest rates paid back to account holders on swept funds."
Also, a website called Banking Dive discussed the issue in a column, "Dive Deposits: It might be the season of the cash sweep." The piece says, "A look at Morgan Stanley and Wells Fargo's most recent 10-Qs might indicate it's the season of the cash sweep. For the uninitiated, a cash sweep happens when uninvested funds from brokerage or bank accounts are transferred into options that earn higher interest on the thought that investors would get a better return than if they simply held cash."
It continues, "Morgan Stanley, in its quarterly filing Monday, told investors that, since April, it 'has been engaged with and is responding to requests for information from the Enforcement Division of the SEC regarding advisory account cash balances swept to affiliate bank deposit programs and compliance with the Investment Advisers Act of 1940.'"
This brief states, "Wells Fargo, however, may be the bellwether for cash sweep season. It indicated Friday that it's 'in resolution discussions with the SEC' on the matter. The bank first flagged the regulator's probe -- into which cash sweep options Wells offers its investment advisory clients when they open accounts -- last October."
For more on recent Brokerage Sweep News, see these CraneData.com stories: "Barron's: BofA Cites Risk from Sweeps" (8/8/24), "Tradeweb Completes ICD Acquisition; AdvisorHub on Wells Sweep Suit" (8/2/24), "IN: Ameriprise Sued Over Sweeps" (7/31/24), "Federated Hermes' Donahue, Cunningham Call Hits Sweeps, Flows, Rates" (7/29/24), "Ameriprise, Raymond James Discuss Sweeps Issues on Earnings Call Q&As" (7/26/24), "Barron's Writes on Pressure on Sweeps" (7/25/24), "WSJ, Investment News on Brokerage Deposit, Advisory Sweep Pressures" (7/19/24), "Schwab, BlackRock Q2 Earnings: Cash Migration Slowing, But Continues" (7/17/24).
In related news, money fund yields inched down to 5.11% on average in the week ended Aug. 9 (as measured by our Crane 100 Money Fund Index, an average of 7-day yields for the 100 largest taxable money funds) after falling 1 bp the week prior. Yields were 5.13% on 6/28, 5.14% on 5/31, 5.13% on 4/30, 5.14% on 3/31 and 2/29/24, 5.17% on 1/31/24, 5.20% on 12/31/23, 4.94% on 6/30/23, 4.61% on 3/31/23 and 4.05% on 12/31/22. The vast majority of money market fund assets now yield 5.0% or higher. Assets of money market funds rose by $24.9 billion last week to $6.556 trillion according to Crane Data's Money Fund Intelligence Daily. Weighted average maturities were down 1 day at 33 days. The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 706), shows a 7-day yield of 5.01%, down 2 bps in the week through Friday. Brokerage sweep rates also remained unchanged, contrary to the discussions on a number of brokerage earnings calls in recent weeks.
Prime Inst money fund yields were down 3 bps at 5.15% in the latest week. Government Inst MFs were down 1 bp at 5.10%. Treasury Inst MFs were down 2 bps at 5.05%. Treasury Retail MFs currently yield 4.83%, Government Retail MFs yield 4.81%, and Prime Retail MFs yield 5.00%, Tax-exempt MF 7-day yields were down 26 bps to 2.91%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (8/9), 69 money funds (out of 826 total) yield under 3.0% with $39.5 billion in assets, or 0.6%; 55 funds yield between 3.00% and 3.99% ($93.2 billion, or 1.4%), 266 funds yield between 4.0% and 4.99% ($1.360 trillion, or 20.7%) and 436 funds now yield 5.0% or more ($5.063 trillion, or 77.2%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged (again) at 0.62%. The latest Brokerage Sweep Intelligence, with data as of Aug. 9, shows that there was one change over the past week. RW Baird increased rates to 1.96% for accounts up to $999K, 3.07% for accounts of $1 million to $1.99 million, and 3.98% for accounts of $5 million and greater. (We haven't seen many of the changes mentioned on earnings calls, which apparently only apply to a narrow slice of "advisory" accounts. Only a couple of brokerages report these rates, which aren't included on our BSI report.) Eleven weeks ago, we removed the rates for TD Ameritrade from the listings, which completed its merger with Charles Schwab and which pushed the averages higher (2 bps). Three of the 10 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
