Financial institution Morgan Stanley will reportedly face no penalties from the SEC regarding cash sweeps.
Morgan Stanley Escapes SEC Penalties in Cash Sweep Probe, Faces Ongoing Investigations and Lawsuits
Morgan Stanley has managed to avoid any enforcement actions or penalties from the Securities and Exchange Commission (SEC) in relation to its cash sweep program, which was under investigation since last year. However, the firm has faced criticism and reputational damage over allegations of steering clients into low-yield cash sweep products.
The SEC closed its investigation in May 2025 without imposing any fines on Morgan Stanley. Yet, the firm has been under scrutiny for only increasing interest rates on cash sweeps after the probe became public. Morgan Stanley is still facing ongoing state-level investigations and class-action lawsuits alleging unfair interest practices related to these programs.
In contrast, other institutions like Wells Fargo Clearing Services, Wells Fargo’s FiNet, and Merrill Lynch have paid substantial civil penalties for their cash sweep practices. FINRA has also penalized other firms for supervisory lapses linked to cash sweeps.
The investigations into cash sweep programs across major wealth management firms have highlighted systemic regulatory compliance challenges. It is evident that firms must modernize their compliance systems to meet rising regulatory expectations.
Morgan Stanley's quarterly report disclosed on Monday that the SEC will not impose a penalty on the bank over its cash sweep program. The bank's spokespeople declined to comment on this week's disclosure. Morgan Stanley increased rates on cash sweeps in advisory accounts to around 2% in August.
The SEC's investigation focused on the potential misdirection of clients towards low-interest cash sweep accounts and the failure of financial advisers to inform clients about higher-yielding alternatives. Class-action lawsuits claim that Morgan Stanley or its E*Trade subsidiary failed to pay a reasonable interest rate on cash sweeps.
Morgan Stanley is also subject to probes unrelated to cash sweep programs, such as investigations by FINRA into its anti-money laundering (AML) client vetting processes, potentially leading to fines. The bank has not disclosed the details of the ongoing state investigation.
The settlements made by Wells Fargo, Bank of America’s Merrill Lynch, and LPL Financial were made in the waning days of the Biden administration. These institutions agreed to pay millions of dollars to settle SEC cash-sweep allegations.
In summary, while Morgan Stanley escaped direct SEC penalties for its cash sweep program, the regulatory and legal scrutiny reflects significant concerns about industry-wide cash handling practices and supervisory failures. The firm continues to face ongoing investigations and lawsuits, underscoring the need for improved compliance systems in the financial industry.
Investing in the business sector, Morgan Stanley managed to avoid SEC penalties in the Cash Sweep probe, but still faces ongoing investigations and lawsuits related to their interest practices, reputational damage, and supervisory lapses. Meanwhile, other institutions like Wells Fargo and Merrill Lynch have paid substantial fines for their cash sweep practices, highlighting the need for financial firms to improve their compliance systems to meet rising regulatory expectations.
