Morgan Stanley is no longer under SEC scrutiny for its often-lucrative practice of “sweeping” uninvested cash held in clients’ brokerage accounts over to affiliated or unaffiliated banks.
In a quarterly regulatory filing this week, Morgan Stanley said the Securities and Exchange Commission’s division of enforcement told it on March 11 that it was no longer under investigation over its cash sweeps policies and that regulators “did not intend to recommend an enforcement action against the Firm.” At the same time, Morgan Stanley said it continues to respond to inquiries about its sweeps policies from a state securities watchdog, which it did not name.
Wealth management firms’ cash sweeps practices have attracted a good deal of attention lately from both regulators and plaintiffs lawyers. A series of lawsuits filed against Morgan Stanley and many of its industry rivals has accused the firms of using sweeps to pad their bottom lines rather than further the interests of clients.
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Cash sweeps generally refers to brokerages’ practice of taking uninvested cash sitting in investors’ accounts and moving it over to affiliated or unaffiliated banks, where it can be lent out or reinvested for often high returns. The recent rash of lawsuits accuses the firms of keeping the lion’s share of the resulting revenue for themselves and allowing too little to flow back to customers.
Most of the lawsuits filed over firms’ sweeps policies are seeking class-action status and are now awaiting judges’ certifications. Regulators, meanwhile, have been moving forward with hefty penalties.
In January, the SEC hit Merrill with a $25 million penalty and Wells Fargo with a $35 million penalty over allegations that the firms hadn’t done enough to take clients’ interests into consideration with their sweeps policies. The SEC’s settlement noted that Merrill and Wells both could have placed investors in “cash alternative” products that sometimes paid at least 4 percentage points more than their sweeps accounts.
Morgan Stanley first disclosed in a regulatory filing in August 2024 that it was responding to SEC inquiries into its sweeps policies. It reported the unnamed state regulator’s probe in November.
