Merrill to pay $39 million in cash sweep settlement

The toll continues to mount for Merrill Lynch and claims it paid too little interest to clients holding cash, with the Thundering Herd agreeing this week to pay $39 ​million to settle a class action lawsuit that alleged it paid brokerage clients close-to-zero ‌interest rates instead of market rates on cash in retirement accounts.

This week’s settlement is on top of a $25 million penalty the Securities and Exchange Commission in January 2025 hit Merrill Lynch with for not paying clients appropriate interest in advisory in advisory accounts.

A Merrill Lynch spokesperson did not return a call on Friday to comment about this week’s class action settlement. Along with the SEC penalty, the total for the two actions is $64 million.

The financial advice industry has been facing inquiries into its cash sweep programs for years now. The SEC has been focused on cash sweep account options since at least 2022, when interest rates began their rise, and has made sizable settlements regarding the issue, most notably with the Charles Schwab Corp. in 2022 for $187 million.

Financial advisors working at registered investment advisors have a fiduciary obligation to work in the best interest of clients when it comes to investment safety and returns. That includes not using only one investment option for any part of their portfolio, including cash.

The preliminary settlement was filed late Wednesday in Manhattan federal court and requires approval by US District Judge Valerie Caproni, according to Reuters.

The settlement resolved claims by holders of Merrill Edge online accounts between December 15, 2016 ​and March 15, 2020 that allegedly paid 0.05% to 0.14% while other brokerages paid their customers ​about 2%, according to Reuters. Merrill Lynch denied wrongdoing.

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, in the wake of the recent Merrill Lynch actions, realize they must tread carefully when it comes to paying appropriate interest rates to clients on their cash.