Merrill Lynch and two Wells Fargo advisory firms have agreed to pay a total of $60m in civil penalties to settle US Securities and Exchange Commission (SEC) charges over compliance failures.
According to the SEC, the companies failed to adopt and implement policies and procedures to prevent violations of the Advisers Act and the rules relating to cash sweep programs.
They offered bank deposit sweep programs (BDSPs) as the only cash sweep option for most advisory clients and received a significant financial benefit from client cash in the BDSPs.
Also, the firms set the interest rates for the BDSPs and during periods of rising interest rates, the yield differential between the BDSPs and other alternatives widened to nearly 4%.
SEC division of enforcement acting director Sanjay Wadhwa said: “Cash sweep programs impact nearly all advisory clients, who often pay advisory fees on assets held in these accounts.
“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.”
According to the SEC orders, Wells Fargo Advisors and Merrill Lynch did not adopt policies designed to protect clients’ interests when selecting cash sweep programme options.
The options include during periods of rising interest rates and concerning the duties of financial advisors in managing client cash in advisory accounts.
Wells Fargo Clearing Services, Wells Fargo Advisors Financial Network, and Merrill Lynch neither admitted nor denied the SEC’s findings.
However, they consented to the orders that found they violated the Advisers Act and agreed to be censured and ceased violating the charged provisions.
The penalties are divided such that Wells Fargo Clearing Services will pay $28m, Wells Fargo Advisors Financial Network will pay $7m, and Merrill Lynch will pay $25m.
The SEC’s investigations were conducted by John Mulhern from the Division of Enforcement’s Asset Management Unit, and Min Choi and Jonathan Shapiro from the Complex Financial Instruments Unit.
The investigations were assisted by David Mendel and James Carlson, under the supervision of Kimberly Frederick, Corey Schuster, and Reid Muoio.
