In the past six days, plaintiff lawyers have filed at least four more proposed class actions against wealth management firms, including Raymond James Financial, JPMorgan Chase and UBS Wealth Management USA, alleging that their cash sweep rates ripped off clients.
Those suits follow similar complaints filed in recent months against Ameriprise Financial, LPL Financial, Merrill Lynch parent Bank of America, Morgan Stanley and Wells Fargo. They all revolve around the same core allegation that the firms swept uninvested client cash to banks and funds to generate interest revenue while paying customers minimal rates as low as 25 basis points.
“This case concerns a simple ruse,” states a complaint filed against Raymond James on August 26 in Fort Myers, Florida. “Defendants implement a scheme whereby they use their clients’ cash balances to generate massive profits for themselves while shortchanging their clients.”
The cases are piggybacking on broader regulatory scrutiny of cash sweep rates this year.
All four wirehouses—Merrill, Morgan Stanley, UBS and Wells—have recently announced plans to increase the interest rates they pay clients whose cash is swept into their programs. Regional brokerages such as Raymond James and Ameriprise said their rates were already above market and that uninvested customer cash balances were minimal and essentially used as money in a checking account.
Morgan Stanley and Wells disclosed that the Securities and Exchange Commission is investigating each of their cash sweep programs, and Bank of America described the potential for regulatory risk for its program in a filing last month.
It is not yet clear whether any of the court cases will be successful. Two earlier cases that had been brought against Merrill Lynch and Charles Schwab were dismissed, although the Merrill plaintiffs have refiled. A Morgan Stanley executive who spoke on condition of anonymity said earlier this year that the firm’s legal department believed the cases were “tenuous.”
Nuanced distinctions exist among the most recently filed cases. The complaint filed against JPMorgan in federal court in Manhattan on August 23 focuses on the conflicts between the Wall Street banking giant and its brokerage unit.
The broker-dealer “failed to disclose and discuss these manifestly conflicted transactions, much less obtain informed consent from its customers and principals,” the complaint states.
The complaint filed against UBS also in a Manhattan federal court on August 22 leans into the implications of the SEC’s Regulation Best Interest, which took effect four years ago and calls for financial advisors in all channels to put clients’ interest first.
“UBS’s default placement of…the Class members’ cash into the Sweep Programs constitutes a ‘recommendation’ within the scope of Reg. BI, and as a result, UBS was required to act in the best interests of its client when making that recommendation,” the lawsuit states.
A spokesperson for JP Morgan declined to comment. Spokespeople for UBS and Raymond James did not respond immediately to requests for comment.
