In the first full rejection of a lawsuit over firms’ “cash sweeps,” a federal judge has tossed claims that U.S. Bank was paying unreasonably low returns on money held in brokerage accounts.
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Eric Tostrud of the U.S. District Court for Minnesota last week dismissed a suit brought by three U.S. Bank customers who argued they had not been treated fairly by the bank’s cash sweeps program. In general, cash sweeps refers to the practice of taking uninvested cash sitting in brokerage accounts and shifting it over to affiliated or unaffiliated banks where it can be lent at relatively high rates.
Lawsuits filed in the past year and a half against Morgan Stanley, LPL Financial, Wells Fargo, Charles Schwab, Ameriprise and other wealth managers have generally accused the firms of keeping the lion’s share of the revenue generated from cash sweeps and providing too little to their clients. Many of the suits have tried to show that defendant firms are paying unreasonably low returns by comparing the yields offered from their sweeps policies with those provided by industry rivals.
READ MORE: ‘Sweeps’ suits pile up with new complaints against Wells Fargo, LPL
No promise to pay a ‘reasonable’ interest rate on cash sweeps
In the U.S. Bank lawsuit, for instance, plaintiffs Adam Saul Futo and James Bartley Ellis noted that the bank was paying 0.23% to 1.80% last April on uninvested cash sitting in brokerage accounts. Its rivals Vanguard and Fidelity Investments were meanwhile paying 3.65% and 3.97%, respectively.
Tostrud rejected those comparisons, saying U.S. Bank had never promised to pay its clients a “reasonable” rate of interest. Instead, the judge found, the bank disclosed to its clients that yields from its sweeps program, “‘may be higher or lower than the interest rates available’ through other investment vehicles, and that ‘[U.S. Bank] has no obligation to ensure you receive a particular rate or the highest rate available.'”
“Plaintiffs do not allege that [U.S. Bank] failed to disclose the vehicles or funds into which swept cash would be deposited,” Tostrud wrote. “And defendants disclosed their financial interests in the program and the conflicts those financial interests created.”
Tostrud dismissed the case against U.S. Bank with prejudice, meaning the plaintiffs are barred from trying to resubmit it in an amended form. Both the plaintiff’s law firm, Gustafson Gluek of Minneapolis, and U.S. Bank declined to comment for this article.
READ MORE: Despite $50M sweeps hit, Wells Fargo’s wealth profits soar
Partial dismissal of cash sweeps case against Osaic
Cash sweeps are big business for firms. LPL Financial, for instance, reported last week that it made almost $455.7 million from client’s uninvested cash holdings in its latest quarter.
Many now-pending sweeps lawsuits look specifically at the years 2022 and 2023, when the Federal Reserve was raising its benchmark interest rates in a bid to tame inflation. The Fed eventually hiked its key rate to a range of 5.25% to 5.5%. Plaintiffs have argued the yields on cash sweeps should have risen accordingly.
While other sweeps lawsuits have yet to be dismissed outright, several of them have suffered setbacks. Last week, a federal judge in Arizona partially rejected claims from three plaintiffs that the broker-dealer giant Osaic had underpaid them on cash held in its brokerage accounts.
Many of these cases also allege that firms have a fiduciary obligation to do what’s best for their clients and ensure they receive a fair return on their uninvested cash. With Osaic, the plaintiffs argued the firm was acting as an agent whose “discretionary” control over their money gave rise to a duty to put their interests first.
Judge Krissa Lanham of the U.S. District Court of Arizona rejected that idea.
“The plaintiffs argue Osaic Wealth and Osaic Institutions exercised ‘discretionary management’ over the funds because they selected sweep program terms, set default enrollment, selected participating banks and set sweep rates,” the judge wrote. For a firm really to have a fiduciary duty, she wrote, it must have “discretionary authority to make individualized investment decisions or execute transactions in the customer’s account without the customer’s direction.”
DiCello Levitt, the law firm representing the plaintiffs in the Osaic case, noted that the decision left untouched various other complaints against Osaic and its subsidiaries. Those include breach of contract claims against Osaic Wealth and Osaic Institutions, as well as breach of contract and fiduciary duty claims against American Portfolios Advisors, a firm Osaic (then Advisor Group) acquired in 2022.
“This ruling clears the way for Osaic’s brokerage and advisory clients to pursue the core allegations in the next phase of litigation,” DiCello Levitt said in a statement. “We remain committed to holding Osaic accountable and recovering the financial losses suffered by our clients and other affected investors.”
Judge Lanham gave the plaintiffs a couple of weeks to file an amended version of their suit. A spokesperson for Osaic said the court allowed the case to proceed “without interpreting the applicable contracts and without considering the detailed disclosures that Osaic Wealth provides about the cash sweep program and its returns. Those issues will be addressed later.”
“We believe we have satisfied our obligations to our clients with respect to their swept cash and will vigorously defend this action,” the spokesperson added.
Partial dismissal of cases against Wells Fargo, LPL
Similar fiduciary claims have been rejected in other sweeps cases. Last summer, separate federal judges in California partly dismissed complaints against Wells Fargo and LPL after finding the firms had no fiduciary obligations to their clients. Those cases were also allowed to proceed under modified terms.
In the suit against U.S. Bank, Judge Tostrud similarly rejected any notion that the firm had a fiduciary obligation to its brokerage clients. “In Minnesota, a broker-customer relationship does not ordinarily impose a fiduciary duty on the broker,” he wrote.
The fiduciary standard, which generally applies to financial advisors rather than brokerages, calls for always putting clients’ interests first. Brokers, by contrast, are governed by a looser conduct standard known as Regulation Best Interest, which requires them to do what’s best for clients but also gives them greater leeway to disclose, rather than eliminate, conflicts of interest.
Tostrud wrote that U.S. Bank clearly told clients it never intended to act as a fiduciary with regard to clients’ sweeps accounts.
In disclosure documents, he said, the bank explained that “when [it] act[s] in a brokerage capacity, you will exercise your own independent judgment in determining whether to act on our recommendations. We are not your investment adviser or fiduciary unless we have expressly agreed with you in writing to act in such a capacity.”
READ MORE: Judges reject fiduciary claims in Wells Fargo, LPL sweeps suits
Failed consolidation of sweeps cases and regulatory actions
Many other sweeps cases are meanwhile proceeding in separate jurisdictions. An attempt was underway at one point to combine all the lawsuits, but that was rejected last February by the U.S. Judicial Panel on Multidistrict Litigation, which has authority over such consolidation attempts.
That means the cases now must be fought one by one. In December, federal judge Jed Rakoff in New York allowed plaintiffs suing Oppenheimer over its cash sweeps policies to pursue their claims as a class action. Judges have also denied motions to dismiss sweeps lawsuits filed against Merrill, Ameriprise and Robinhood Markets.
Regulators have separately swooped in and extracted some hefty fines. Wells Fargo and Merrill agreed in January 2025 to pay the Securities and Exchange Commission $60 million combined to resolve allegations that they hadn’t taken client interests into account enough with their sweeps policies. And Osaic is paying $5.1 million to the Financial Industry Regulatory Authority, which regulates broker-dealers, over accusations that one of its subsidiaries had improperly calculated interest earned on clients’ uninvested cash held in “sweeps” accounts.
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