SEC Charges Pair of Wells Fargo Advisory Firms and Merrill Lynch with Compliance Failures Relating to Cash Sweep Programs

The Securities and Exchange Commission today announced settled charges against registered investment advisers Wells Fargo Clearing Services LLC and Wells Fargo Advisors Financial Network LLC (collectively Wells Fargo Advisors) and against Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) for failing to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder relating to the firms’ cash sweep programs. The firms agreed to settle the SEC’s charges and pay $60 million in total civil penalties. According to the SEC’s orders, Wells Fargo Advisors and Merrill Lynch offered bank deposit sweep programs (BDSPs) as the only cash sweep option for most advisory clients and received a significant financial benefit from advisory client cash in the BDSPs. The orders find that these firms or their affiliates set the interest rates offered in the BDSPs and that, during periods of rising interest rates, the yield differential between the BDSPs and other cash sweep alternatives at times grew to almost 4 percent. According to the orders, Wells Fargo Advisors and Merrill Lynch failed to adopt and implement reasonably designed policies and procedures (1) to consider the best interests of clients when evaluating and selecting which cash sweep program options to make available to clients, including during periods of rising interest rates, and (2) concerning the duties of financial advisors in managing client cash in advisory accounts. “Cash sweep programs impact nearly all advisory clients, who often pay advisory fees on assets held in these accounts,” said 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, Wells Fargo Clearing Services, Wells Fargo Advisors Financial Network, and Merrill Lynch consented to the entry of orders finding that they violated the Advisers Act and ordering them to be censured and to cease and desist from violating the charged provisions. Wells Fargo Clearing Services agreed to pay a civil penalty of $28 million; Wells Fargo Advisors Financial Network agreed to pay a civil penalty of $7 million; and Merrill Lynch agreed to pay a civil penalty of $25 million. The SEC’s investigations were conducted by John Mulhern of the Division of Enforcement’s Asset Management Unit and Min Choi and Jonathan Shapiro of the Division of Enforcement’s Complex Financial Instruments Unit, with assistance from David Mendel and James Carlson, under the supervision of Kimberly Frederick, Corey Schuster, and Reid Muoio.

The Securities and Exchange Commission today announced settled charges against registered investment advisers Wells Fargo Clearing Services LLC and Wells Fargo Advisors Financial Network LLC (collectively Wells Fargo Advisors) and against Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) for failing to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder relating to the firms’ cash sweep programs. The firms agreed to settle the SEC’s charges and pay $60 million in total civil penalties. According to the SEC’s orders, Wells Fargo Advisors and Merrill Lynch offered bank deposit sweep programs (BDSPs) as the only cash sweep option for most advisory clients and received a significant financial benefit from advisory client cash in the BDSPs. The orders find that these firms or their affiliates set the interest rates offered in the BDSPs and that, during periods of rising interest rates, the yield differential between the BDSPs and other cash sweep alternatives at times grew to almost 4 percent. According to the orders, Wells Fargo Advisors and Merrill Lynch failed to adopt and implement reasonably designed policies and procedures (1) to consider the best interests of clients when evaluating and selecting which cash sweep program options to make available to clients, including during periods of rising interest rates, and (2) concerning the duties of financial advisors in managing client cash in advisory accounts. “Cash sweep programs impact nearly all advisory clients, who often pay advisory fees on assets held in these accounts,” said 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, Wells Fargo Clearing Services, Wells Fargo Advisors Financial Network, and Merrill Lynch consented to the entry of orders finding that they violated the Advisers Act and ordering them to be censured and to cease and desist from violating the charged provisions. Wells Fargo Clearing Services agreed to pay a civil penalty of $28 million; Wells Fargo Advisors Financial Network agreed to pay a civil penalty of $7 million; and Merrill Lynch agreed to pay a civil penalty of $25 million. The SEC’s investigations were conducted by John Mulhern of the Division of Enforcement’s Asset Management Unit and Min Choi and Jonathan Shapiro of the Division of Enforcement’s Complex Financial Instruments Unit, with assistance from David Mendel and James Carlson, under the supervision of Kimberly Frederick, Corey Schuster, and Reid Muoio.