Massachusetts and Galvin may be looking at broker-dealers’ cash sweep programs

As major broker-dealers continue to disclose they are facing questions from the Securities and Exchange Commission about clients’ cash in advisory accounts, at least one state regulator also appears to be focused on the issue of the amount of interest firms pay to clients who hold cash in advisory accounts. 

On Monday, Morgan Stanley in a filing with the SEC reported that a “state securities regulator” has been seeking information from the firm about “brokerage account cash balances swept to the affiliate bank deposit program.”

A Morgan Stanley spokesperson declined to comment on the matter. 

Morgan Stanley did not name the specific regulator looking at its cash sweep programs, but one senior industry executive noted that it most likely is Massachusetts’ Secretary of the Commonwealth William Galvin, widely acknowledged as the most aggressive state securities regulator when it comes to Wall Street and the retail securities industry.

“I don’t have direct knowledge if it’s Galvin’s office, but we’re pretty sure this is Massachusetts,” said one senior industry executive who spoke confidentially to InvestmentNews.

“This is totally within Galvin’s method of operation,” the executive said, noting that Massachusetts often runs parallel investigations to the SEC or the Financial Industry Regulatory Authority Inc. of firms in the headlines.

A spokesperson for the Secretary of the Commonwealth’s office did not return a call Thursday afternoon to comment.

“I still think the interest paid on cash in sweep accounts will not be a big issue for regulators, because the firms have sufficiently disclosed it,” the executive said.

The SEC has been focused on cash sweep account options for the past few years and has made sizable settlements regarding the issue, including with the Charles Schwab Corp. in 2022 for $187 million.

Meanwhile, LPL Financial Holdings Inc. this week also said it had faced SEC questions about cash in clients’ advisory accounts.

“The company received a request for information from the SEC regarding certain elements of the company’s cash management program for corporate advisory accounts, which based on the nature of the request we believe is part of an industry-wide inquiry,” a filing with the SEC Monday read.

LPL said in the filing it was cooperating with the SEC’s request.

The issue of yields on cash has been simmering for months.

Facing potential questions from regulators and increased competition from a number of firms, Wells Fargo & Co., bank of America Corp. and Morgan Stanley in July said they would be raising rates they pay clients in cash advisory accounts to bring yields more in line with money market accounts, which can earn in the neighborhood of 200 basis points more interest annually than in cash.

Broker-dealers are particularly interest-rate-sensitive companies. They generate income from spreads on customer cash and margin loans to clients. Ever since interest rates began rising in 2022 post the Covid-19 pandemic, wealth management firms have faced questions about low interest rates they continued to pay clients on cash deposits, which can typically make up between 2 percent and 5 percent of a client’s overall portfolio.