- SEC has closed its investigation into Morgan Stanley’s cash sweep program with no enforcement action
- The probe examined whether clients were steered into low-interest sweep accounts
- Morgan Stanley raised sweep rates just before the SEC review was disclosed
- Other firms, including Wells Fargo and Merrill Lynch, paid multi-million dollar settlements
- A state-level securities investigation into Morgan Stanley is still ongoing
- Multiple class-action lawsuits in New York and New Jersey allege the bank underpaid interest
- Morgan Stanley and the SEC declined to comment on the outcome
- Critics argue cash sweep programs can disadvantage clients for institutional gain
- Legal and reputational risks remain despite SEC closure
- The wider financial sector remains under scrutiny for sweep practices
Morgan Stanley revealed this week that it will face no enforcement action from the U.S. Securities and Exchange Commission (SEC) following a nearly year-long investigation into its cash sweep program.
In a quarterly filing released Monday, the Wall Street giant said the SEC informed the firm on March 11 that it had “concluded” its probe and did not intend to pursue any penalty or further enforcement.
The investigation centered around the bank’s practice of cash sweeping, a process by which idle customer funds are automatically transferred into interest-bearing accounts or money market funds unless the customer actively opts out.
Regulators had launched inquiries into whether financial institutions, including Morgan Stanley, were steering clients into sweep options with paltry returns – often well below market rates – and whether advisers had a fiduciary duty to guide clients toward higher-yield alternatives.
While the SEC’s decision brings relief for Morgan Stanley at the federal level, the matter is far from closed.
According to the same Monday filing, the bank is still under investigation by a state-level securities regulator, though the specific state has not been disclosed.
Additionally, Morgan Stanley – along with its E*Trade subsidiary – has been named in several ongoing class-action lawsuits.
Plaintiffs in New Jersey and New York claim the bank failed to pay fair interest rates on swept cash, arguing that the practice deprived customers of significant earnings.
The controversy gained traction last year when Morgan Stanley confirmed the SEC was reviewing its cash sweep practices.
Just days before the announcement, the firm increased its sweep rates on advisory accounts from a meager 0.01% to approximately 2%, a move that some critics interpreted as a defensive maneuver amid growing regulatory scrutiny.
Other firms have not been as fortunate. In the final weeks of the Biden administration, two Wells Fargo subsidiaries agreed to pay $35 million in a settlement with the SEC over similar allegations.
Bank of America’s Merrill Lynch division settled for $25 million, and investment adviser LPL Financial paid $18 million to resolve its own SEC sweep-related charges.
Despite avoiding federal penalties, Morgan Stanley’s reputational risk may still be in play. The lawsuits accuse the bank of exploiting customer cash balances for profit, without adequate disclosure or competitive returns.
If the state-level investigation or class actions gather momentum, the bank could find itself battling financial and public relations fallout.
Neither Morgan Stanley nor the SEC offered public comments on the case’s resolution this week.
Cash sweep programs have become a lucrative but controversial component of brokerage and wealth management services.
Critics argue that while they offer convenience, they often funnel funds into low-yield accounts that benefit banks more than customers – particularly when rates are set far below market averages.
As interest rates continue to fluctuate and transparency in financial services remains under the microscope, industry observers will be watching closely to see whether Morgan Stanley’s legal woes deepen or dissipate.
For now, the firm may have dodged a bullet – but the chamber isn’t empty.