Wells Fargo Advisors and Merrill Lynch have been penalized by the Securities and Exchange Commission over compliance failures related to cash sweep programs, according to AdvisorHub.
The firms agreed to pay a total of $60 million in fines after the SEC determined they had not taken appropriate measures to consider the best interests of advisory customers, who were not paid a fair rate of interest on cash sweeps.
The SEC said that Wells Fargo Advisors and Merrill Lynch offered bank deposit sweep programs (BDSPs) as the only cash sweep option for most advisory clients and received a significant financial benefit from advisory client cash in the BDSPs.
The SEC’s orders “find that these firms or their affiliates set the interest rates offered in the BDSPs and that, during periods of rising interest rates, the yield differential between the BDSPs and other cash sweep alternatives at times grew to almost 4 percent.”
According to the orders, Wells Fargo Advisors and Merrill Lynch failed to adopt and implement reasonably designed policies and procedures (1) to consider the best interests of clients when evaluating and selecting which cash sweep program options to offer them, including during periods of rising interest rates, and (2) concerning the duties of financial advisors in managing client cash in advisory accounts.
“Cash sweep programs impact nearly all advisory clients, who often pay advisory fees on assets held in these accounts,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “These actions reinforce that advisory firms must have reasonably designed policies and procedures to consider their clients’ best interest when evaluating potential sweep options for cash held in advisory accounts and to ensure that cash held in an advisory account is properly managed by financial advisers consistent with a client’s investment profile.”
Wells Fargo and Merrill Lynch did not admit or deny the findings but consented to the entry of orders finding that they violated the Advisers Act and ordering them to be censured and to cease and desist from violating the charged provisions. Wells Fargo Clearing Services agreed to pay a civil penalty of $28 million; Wells Fargo Advisors Financial Network agreed to pay a civil penalty of $7 million; and Merrill Lynch agreed to pay a civil penalty of $25 million.
A Merrill Lynch spokesperson noted that the SEC credited the firm with raising rates for customers and enhancing supervisory procedures prior to becoming aware of any regulatory investigation. It also provided helpful cooperation that “expedited” the SEC’s investigation, according to the settlement.
“In fact, Merrill was one of the first large firms to offer a significantly higher cash sweep rate for advisory clients’ uninvested cash,” the Merrill spokesperson said.
In a statement, a Wells Fargo spokesperson said, “Our agreement with the SEC puts this broader industry matter behind us, and as the settlement states, we have already successfully addressed the issues covered by the resolution.”
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