SEC keeps up pressure on firms' cash sweep accounts

With the Securities and Exchange Commission teeing up an inquiry into another giant firm's cash sweep business, this time that of Wells Fargo & Co., securities attorneys said there is plenty for registered investment advisors connected to broker-dealers and banks to worry about if they're falling short on telling clients how they manage their cash.

The SEC has been focused on cash sweep account options for the past few years and has made sizable settlements regarding the issue, most notably with the Charles Schwab Corp. last year for $187 million.

Wells Fargo disclosed Tuesday in a filing with the SEC that it was facing an "advisory account cash sweep investigation" by the commission. A spokesperson for Wells Fargo declined to comment further.

According to the Wells Fargo filing, the SEC "has undertaken an investigation regarding the cash sweep options that the company provides to investment advisory clients at account opening."

"Every one of these issues is a little different, but on the face of it, if these firms are RIAs, they are fiduciaries who have to work in clients' best interest," said Max Schatzow, co-founder of RIA Lawyers. "When a firm sets up one of these cash sweep programs and doesn't maximize returns or if the transaction results in a fee to an affiliate, that must be disclosed."

After the 2008 credit crisis, interest rates fell to zero, essentially decimating a profit center for broker-dealers that had made money on client cash. Broker-dealers profit from cash held in client accounts, margin loans used to buy more securities and banking activity in general.

Interest rates crept up again before the Covid crisis of 2020, then bottomed out once more as the Federal Reserve slashed interest rates to stimulate the economy. But since January 2022, interest rates have risen once more, meaning broker-dealers and RIAs have another way to boost income.

Now that clients can make a decent return on cash again, firms must tread carefully, particularly as the SEC is looking at RIA operations, which must adhere to a fiduciary duty for clients, attorneys said.

"Big firms should be well aware of what the SEC is looking at when it comes to conflicts of interest in money market funds or cash sweep programs," Schatzow said. "It’s a good time for a bank or broker-dealer to review their disclosures."

"These cash sweep programs became big 20 years ago because there was a lot of money on it," said a senior attorney at a large broker-dealer who asked not to be named. "Starting in 2008, there was no spread on cash and no money to be made because interest rates were at zero. Now interest rates are coming back, so where you put clients' money in cash is an issue again."

Wells Fargo Advisors acknowledged a conflict of interest when dealing with clients' cash in a Form ADV filed in July.

"Wells Fargo Advisors has a conflict of interest as a result of these benefits because it and its affiliates benefit financially from the Bank Deposit Sweep Programs and Wells Fargo Advisors chooses to include these options as default cash sweep options in advisory programs, instead of selecting other cash investment options that would not generate these financial benefits, and that typically pay [the client] higher rates of interest," according to the filing.