Wells Fargo & Merrill Lynch Penalized $60 Million for Compliance Failures

The Securities and Exchange Commission (SEC) has recently announced settlements with Wells Fargo and Merrill Lynch over compliance failures related to their cash sweep programs. Combined, the firms will pay $60 million in civil penalties.

The SEC’s investigation uncovered that these firms, acting as registered investment advisers, failed to establish and implement adequate written policies and procedures to safeguard clients' best interests in their cash sweep programs. These programs, known as bank deposit sweep programs (BDSPs), allowed client cash to be swept into interest-bearing accounts managed by the firms or their affiliates.

The SEC’s orders revealed that Wells Fargo Advisors and Merrill Lynch offered BDSPs as the default cash management option for most advisory clients. Both firms benefited financially from the cash held in these accounts while setting interest rates offered to clients.

During periods of rising interest rates, the gap between the yields offered by BDSPs and other cash management options widened significantly, at times reaching nearly 4 percent. Despite this, the SEC found that the firms failed to maintain policies and procedures to:

1. Ensure that cash sweep options aligned with clients' best interests, especially during fluctuating interest rate environments.
2. Clarify the duties of financial advisers in managing client cash held within advisory accounts.

SEC’s Warning on Client-Centric Policies

“Cash sweep programs impact nearly all advisory clients, who often pay advisory fees on assets held in these accounts,” stated 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, the firms consented to orders imposing the following penalties:

• Wells Fargo Clearing Services LLC: $28 million
• Wells Fargo Advisors Financial Network LLC: $7 million
• Merrill Lynch, Pierce, Fenner & Smith Incorporated: $25 million

In addition to financial penalties, the firms were censured and ordered to cease and desist from further violations of the Advisers Act.

The SEC’s action underscores the importance of compliance policies and internal controls that prioritize client interests, especially in areas involving fees or other financial incentives. As cash sweep programs continue to play a critical role in advisory accounts, firms are reminded that neglecting robust oversight mechanisms can result in significant regulatory and reputational repercussions.

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