- Morgan Stanley avoids SEC enforcement over cash sweep practices
- The investigation centered on low-yield sweep accounts and client disclosures
- SEC ended the probe without recommending action as of March 11
- The bank had
raised sweep rates to 2% shortly before confirming the investigation
- Morgan
Stanley is still under investigation by an unnamed state regulator
- Facing
class-action lawsuits in New Jersey and New York
- Lawsuits
allege failure to pay reasonable interest on client cash
- Wells Fargo,
Merrill Lynch, and LPL Financial previously settled similar charges
- Federal
scrutiny ended but reputational risk remains
- Broader
industry debate on sweep transparency and client fiduciary rights continues
Morgan Stanley will not face enforcement action from the U.S. Securities and Exchange Commission (SEC) over its handling of client cash sweep accounts, the Wall Street giant revealed in its latest quarterly filing.
The announcement marks the end of a nearly yearlong federal investigation into the New York-based bank’s program, which automatically moves clients’ idle cash into low-yield accounts or money market funds.
According to the filing, the SEC informed Morgan Stanley on March 11 that it had concluded its probe and would not recommend any enforcement measures.
The investigation had aimed to determine whether firms steered clients into sweep accounts offering minimal interest without adequately disclosing alternative options with potentially higher returns.
The practice of cash sweeps – where excess client funds are parked in designated accounts unless customers opt out – has come under fire from both regulators and consumer advocates.
In Morgan Stanley’s case, the bank drew additional scrutiny after keeping sweep rates as low as 0.01% on advisory accounts until mid-2023, before abruptly raising them to around 2% just days before the investigation was publicly disclosed.
While Morgan Stanley has dodged a federal bullet, the saga is far from over. The bank disclosed that it remains under investigation by an unnamed state securities regulator over the same cash sweep practices.
Furthermore, Morgan Stanley and its E*Trade subsidiary are facing multiple class-action lawsuits, particularly in New Jersey and New York, alleging that they failed to provide clients with competitive interest on sweep balances.
The outcome stands in contrast to penalties levied against several other major financial institutions.
Late in the Biden administration, two Wells Fargo subsidiaries paid a combined $35 million to settle SEC allegations related to cash sweep practices. Merrill Lynch agreed to pay $25 million, and LPL Financial settled for $18 million.
Neither Morgan Stanley nor the SEC commented on the matter following the public disclosure.
While the federal investigation’s closure may offer temporary relief, the lingering lawsuits and state-level scrutiny mean that Morgan Stanley’s exposure to legal and reputational risks remains unresolved.
As clients and regulators alike continue to press for transparency and fair returns, the broader conversation around cash sweeps and fiduciary responsibility is unlikely to fade anytime soon.