WSJ: SEC, Brokerage Sweeps Settle
The Wall Street Journal writes, "Banks Scrimped on Customer Interest. Now They’re Paying for It." The article explains, "Wall Street is starting to pay the price for the stingy interest rates it gave some customers for their cash. Wells Fargo and Bank of America's Merrill Lynch unit agreed to pay a combined $60 million to settle Securities and Exchange Commission probes into the accounts that hold cash for some of their wealth-management clients, the agency said Friday. Investors often have some incidental cash in their brokerage accounts, including from dividends and interest on their holdings. Many firms automatically put that money into so-called sweep accounts that pay very low interest rates. The settlement over these sweep accounts follows a period when brokerages paid clients minimal interest even when broader rates were rising." It tells us, "When the Federal Reserve started raising its benchmark rates in 2022, banks kept paying very little on sweep accounts. That allowed them to increase profits, since they were able to raise the interest rates they charged on loans to keep pace with the Fed's hikes. Similar products such as money-market funds reached around 5%.... While this extra cash usually makes up a small percentage of any individual account, taken together, it is a pot of money worth billions of dollars for a big bank. 'It's a giant cash machine,' said Peter Crane, who tracks these accounts for his firm Crane Data." The piece adds, "Bank of America, Morgan Stanley and Wells Fargo last year substantially raised the rates they pay on cash in these advisory accounts, where clients pay a management fee instead of commissions on trades. Bank of America's Merrill unit, for instance, went from paying effectively nothing to shelling out about 4.2%. Paying more costs the banks money. In October, Wells Fargo said paying these customers more shaved $128 million off the bank's quarterly profit from interest. Morgan Stanley has said the SEC has asked for information about its sweep accounts. Money in accounts overseen by financial advisers makes up about 10% to 20% of the $2 trillion sweeps market, according to Crane. The rest of that money sits in brokerage accounts that aren't subject to adviser requirements, and those accounts are still earning little. The average rate on sweep deposits under $250,000 fell after the Fed started cutting rates last year and is now 0.4%, according to Crane Data." (See the SEC's release, "SEC Charges Pair of Wells Fargo Advisory Firms and Merrill Lynch with Compliance Failures Relating to Cash Sweep Programs.")
