SEC imposes $60 million in fines on Wells and Merrill for cash sweep violations

The Securities and Exchange Commission imposed a $60 million combined penalty on Wells Fargo Advisors and Merrill Lynch for not providing fair rates on cash sweeps to advisory customers, as announced on Friday.

Wells agreed to pay $35 million, including $7 million associated with violations at its independent Financial Network channel. On the other hand, Merrill paid a civil penalty of $25 million. While neither firm admitted nor denied any wrongdoing, they were not required to provide any remediation to clients.

The SEC found that both firms automatically transferred customer cash to a bank deposit program offering yields up to 4% lower than reasonable alternatives. These violations occurred between 2019 and May 2024 at Wells and January 2022 and April 2024 at Merrill. Firms have an incentive to provide lower rates because they profit from the discrepancy between the rates paid by banks on cash and what is ultimately passed on to customers.

Both Wells and Merrill violated the Advisers Act by failing to adopt policies and procedures that consider the best interest of customers when evaluating cash sweep options, especially during periods of increasing interest rates, according to the SEC.

Sanjay Wadhwa, acting director of the SEC’s enforcement unit, emphasized the importance of advisory firms having appropriately designed policies and procedures to prioritize their clients’ best interests when considering potential sweep options for cash in advisory accounts.

Back in November 2023, Wells disclosed that it was under investigation by the SEC regarding its sweeps program. Merrill’s parent company, Bank of America, and Morgan Stanley also disclosed regulatory inquiries last year, leading all three firms to raise rates on bank deposit programs in advisory accounts.

In response to the SEC’s investigation, a Merrill spokesperson highlighted the firm’s initiative to raise rates for customers and enhance supervisory procedures before being aware of the regulatory investigation. This move expedited the SEC’s inquiry.

Merrill, with around 11,000 experienced brokers alongside private bankers and consumer bank-based Edge advisors, manages approximately $4.25 trillion in assets. On the other hand, Wells, with about 12,000 brokers, handles $2.29 trillion in assets.

Both firms expressed satisfaction with the resolution reached with the SEC. A Wells spokesperson stated that the agreement puts the industry matter behind them, emphasizing that they have already addressed the issues covered by the settlement.