The Securities and Exchange Commission said Friday that it has settled charges against registered investment advisers Wells Fargo Clearing Services LLC and Wells Fargo Advisors Financial Network LLC along with Merrill Lynch, Pierce, Fenner & Smith Inc. for failing to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder relating to the firms’ cash sweep programs.
The firms agreed to settle the SEC’s charges and pay $60 million in total civil penalties. Wells Fargo agreed to pay $28 million; Wells Fargo Advisors Financial Network agreed to pay a civil penalty of $7 million; and Merrill agreed to pay $25 million.
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, according to the SEC’s orders.
These firms or their affiliates set the interest rates offered in the BDSPs and, during periods of rising interest rates, the yield differential between the BDSPs and other cash sweep alternatives at times grew to almost 4%, the order states.
According to the orders, Wells Fargo Advisors and Merrill Lynch failed to adopt and implement reasonably designed policies and procedures to consider the best interests of clients when evaluating and selecting which cash sweep program options to make available to clients, including during periods of rising interest rates, and 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.”
Without admitting or denying the SEC’s findings, Wells Fargo Clearing Services, Wells Fargo Advisors Financial Network, and Merrill Lynch 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.
"As the SEC noted, Merrill took several significant steps before becoming aware of the Commission’s investigation, including increasing the rates paid to advisory clients in Merrill’s Bank Deposit Program, lowering the minimum thresholds for investing cash in certain money market funds, and adopting and implementing enhanced supervisory procedures," Merrill said Friday in a statement. "In fact, Merrill was one of the first large firms to offer a significantly higher cash sweep rate for advisory clients’ uninvested cash."
Merrill increased the cash sweep rate in April 2024, the spokesperson said.
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