Morgan Stanley Avoids SEC Enforcement in Cash Sweep Probe, but Industry Headwinds Linger

Morgan Stanley emerged unscathed from a year-long U.S. Securities and Exchange Commission (SEC) investigation into its cash sweep program, a pivotal moment for the wealth management giant. The SEC’s decision in May 2025 not to pursue enforcement actions marks a turning point for the firm, though the broader industry remains under intense scrutiny over similar practices.

The probe centered on how Morgan Stanley managed cash balances in its advisory accounts, scrutinizing compliance with the Investment Advisers Act of 1940. The Cash Sweep Program, which automatically transfers idle client funds into interest-bearing accounts or money market funds, has been a high-margin revenue generator for wealth managers. Yet regulators and plaintiffs have argued that such programs may prioritize bank profits over client returns, particularly when affiliate banks offer minimal interest rates.

The Regulatory Backdrop
The SEC’s investigation, initiated in April 2024, followed similar probes of rival institutions. In January 2025, Merrill Lynch and two Wells Fargo advisory firms settled charges over compliance failures in their cash sweep programs, agreeing to pay a combined $60 million in penalties. Neither firm admitted wrongdoing. Meanwhile, Morgan Stanley faced parallel scrutiny from state regulators, though the specific agency was undisclosed. State probes focused on brokerage accounts—subject to the SEC’s Regulation Best Interest—rather than advisory accounts, which face stricter fiduciary obligations.

Legal challenges further complicated the landscape. By mid-2024, Morgan Stanley disclosed two class-action lawsuits: one alleging breach of customer agreements by failing to provide reasonable interest rates on retirement account balances, and another accusing the firm of violating fiduciary duties by offering minimal returns across retirement, brokerage, and advisory accounts. A separate lawsuit targeted its E*Trade Securities unit.

Competitor Adjustments and Market Pressures
The industry-wide regulatory and litigation pressures have forced firms to recalibrate. Wells Fargo, for instance, raised sweep rates but still projected a $350 million revenue reduction in late 2024 due to higher interest rates. Morgan Stanley, by contrast, hiked its advisory account sweep rates to approximately 2% in February 2024—up from as low as 0.01%—citing “changing competitive dynamics.” This move aimed to balance client returns with profitability, though critics argue it came only after regulatory heat.

Not all firms followed suit. LPL Financial, a major independent broker-dealer, maintained its program unchanged, asserting its model differed from banks with affiliate banks.

Investment Implications
While Morgan Stanley’s SEC clearance removes a near-term overhang, the broader industry’s challenges persist. The SEC’s focus on conflicts of interest in cash sweep programs has already led to settlements, lawsuits, and operational adjustments. For investors, the key questions are: How will Morgan Stanley’s higher sweep rates affect its margins? And how might ongoing litigation and regulatory shifts impact the wealth management sector’s profitability?

Financial data underscores the stakes. Wells Fargo’s $350 million revenue hit highlights the vulnerability of firms tied to sweep programs during rising interest rate environments. Meanwhile, Morgan Stanley’s stock, which dipped slightly after the probe’s announcement in August 2024, has since rebounded as uncertainty faded—though it lags peers like JPMorgan in year-to-date performance.

Conclusion
The SEC’s decision spares Morgan Stanley immediate penalties, but the firm—and its peers—face an evolving regulatory and litigation landscape. With over $60 million already paid in settlements and dozens of lawsuits filed across the sector, the costs of noncompliance are mounting. For investors, Morgan Stanley’s 2% rate adjustment suggests a strategic pivot to balance client retention and profitability, yet the broader industry’s reliance on sweep programs remains a vulnerability.

The data paints a clear picture: Wealth management firms must now weigh the trade-offs between client-friendly returns and revenue stability. As the SEC continues its scrutiny—targeting institutions like AssetMark and the defunct First Republic Bank—the sector’s profitability hinges on transparency, compliance, and adapting to a more regulated environment. For Morgan Stanley, the SEC clearance is a relief, but the battle for investor and regulatory trust is far from over.