Two Wall Street titans are detailing a combined $60 million to the US Securities and Exchange Commission for allegedly advancing their own interests to the detriment of clients.
The SEC says Wells Fargo and Bank of America Merill Lynch have not developed legitimate written policies and procedures for their cash sweep programs.
According to the SEC, the two firms told advising clients that they could only park their uninvested funds in Bank Deposit Sweep Programs (BDSPS) – an option that came with paltry payments despite a rising interest rate environment.
Investment advisors typically tell clients who have not yet made any investment decisions to move their funds into such programs. The accounts are designed to create uninvested cash work by generating interest rather than just letting the money lie dormant.
The yields offered by these programs typically increase when the Federal Reserve increases interest rates.
But the SEC says Wells Fargo and Merill Lynch briefly switched advisory clients after capping the yields paid by BDSPs at a time when the Fed was in the midst of a rapid rate-hiking cycle.
“The orders find that these companies or their affiliates set the interest rates in the BDSPS and that, during periods of rising interest rates, the yield differential between the BDSPs and other cash sweep alternatives sometimes grew to nearly 4 percent.”
The regulator also claims that Wall Street firms have been banking on customers’ uninvested cash by keeping BDSP yields low.
Says Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement,
“Cash sweep programs impact almost all advisory clients, who often pay advisory fees on assets held in these accounts. These actions reinforce that advisory firms have reasonably designed policies and procedures to consider the best interests of their clients when evaluating the client’s investment profile. “
Wells Fargo and Merill Lynch settled with the SEC without admitting or denying the regulator’s findings.
Wells Fargo has agreed to pay a $35 million civil penalty, while Merill Lynch will cough up $25 million. The companies also agreed to be censured and cease and desist from further violations of the Advisers Act.
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