SEC shuts probe into Morgan Stanley cash sweep program with no enforcement action

The Securities and Exchange Commission has formally concluded its investigation into Morgan Stanley’s advisory cash sweep program without pursuing any enforcement action, according to a regulatory filing published by the bank on Monday.

The closure of the probe brings an end to over a year of scrutiny by the SEC’s enforcement division, which since April last year had been seeking information since last year regarding how uninvested client cash was swept into affiliated bank deposit accounts.

The firm had previously confirmed the inquiry in an August filing with the regulator.

Cash sweep practices raise fiduciary flags

Cash sweep programs automatically move idle cash into interest-bearing vehicles, such as deposit accounts or money market funds. These programs are a common feature in advisory accounts, but have drawn regulatory attention as interest rates have risen and clients have grown more conscious of yield disparities.

The SEC’s inquiry focused on whether Morgan Stanley’s sweep practices aligned with disclosure obligations and fiduciary standards under the Investment Advisers Act of 1940.

A new Reuters report reveals that the agency has concluded the probe with a decision not to pursue charges. Nonetheless, the investigation has placed a spotlight on the financial incentives tied to cash holdings in advisory accounts– particularly the spread between what clients earn and what firms retain.

Morgan Stanley’s wealth management division is a key contributor to its earnings, and cash sweeps represent a profitable component due to net interest margins.

Last July, the firm revealed plans to adjust its cash sweep rates, citing competitive pressures. At the time, Sharon Yeshaya, Morgan Stanley’s chief financial officer, told analysts the company was reacting to changing conditions in the market.

“In the third quarter, we intend to make changes to our advisory sweep rates against the backdrop of changing competitive dynamics,” she said during an earnings call.

SEC penalties highlight regulatory concerns

Earlier this year, Merrill Lynch and two advisory affiliates of Wells Fargo paid a combined $60 million to settle SEC charges involving their own sweep programs. The SEC alleged those firms offered clients lower interest rates than what was available through other sweep options, at times resulting in a differential of nearly four percentage points.

The agency said that in those cases, affiliated banks set the rates in bank deposit sweep programs and did not make appropriate adjustments as interest rates increased. Neither Merrill Lynch nor Wells Fargo admitted or denied the regulator’s findings.

Cash management practices have become a higher-profile issue across the advisory industry amid ongoing interest rate volatility. In some cases, firms have faced internal and client-driven pressure to pass along more favorable returns on idle cash.

“This was a big deal a year or two ago with the Securities and Exchange Commission, but these recent moves look more like a result from competitive pressure,” a senior industry executive told InvestmentNews last summer.

Morgan Stanley’s resolution comes as the SEC continues to monitor the use of sweep vehicles in advisory accounts, particularly in the context of transparency and client best interest obligations.

While the agency did not act against Morgan Stanley, firms may still be expected to review their disclosure practices and ensure cash management strategies are clearly communicated to clients.

“Clients are waking up to the fact you can get better yields on money market funds rather than these bank sweep advisory accounts,” the same executive said, pointing to a growing awareness among retail and high-net-worth investors.