Two Wall Street titans are jointly issuing $60 million to the U.S. Securities and Exchange Commission for allegedly serving their own interests at the expense of their clients.
The SEC says Wells Fargo and Bank of America Merill Lynch failed to develop legitimate written policies and procedures for their cash sweep programs.
According to the SEC, the two firms told their advisory clients that they could only park their uninvested funds in bank depository accounts (BDSPs) – an option that came with paltry payments despite a rising interest rate environment.
Investment advisors typically tell clients who have not yet made investment decisions to move their money into such programs. The accounts are designed to keep uninvested money working by generating interest rather than just letting the money lie dormant.
The returns offered by these programs typically increase when the Federal Reserve raises interest rates.
But the SEC says Wells Fargo and Merill Lynch short-changed advisory clients after capping the interest paid out by BDSPs at a time when the Fed was in the midst of a cycle of rapid rate hikes.
“The orders show that these companies or their subsidiaries determined the interest rates offered in the BDSPs and that, during periods of rising interest rates, the yield differential between the BDSPs and other cash sweep alternatives sometimes grew to nearly 4 percent.”
The regulator also claims that Wall Street firms have profited from customers’ uninvested money by keeping BDSP returns low.
Says Sanjay Wadhwa, Acting Director of the SEC’s Enforcement Division:
“Cash sweep programs impact almost all advisory clients, who often pay advisory fees for the assets in these accounts. These actions reinforce that advisory firms must have reasonably designed policies and procedures to consider the interests of their clients when evaluating potential sweep options for cash in advisory accounts and to ensure that cash in an advisory account is properly way is managed by financial advisors, in accordance with a client investment profile.”
Wells Fargo and Merill Lynch settled with the SEC without admitting or denying the regulator’s findings.
Wells Fargo has agreed to pay a $35 million civil penalty, while Merill Lynch is expected to cough up $25 million. The firms also agreed to be censured and refrain from further violations of the Advisers Act.
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