SEC Settles Charges Against Bank of America, Wells Fargo Units

The Securities and Exchange Commission (SEC) has reached settlements with units of Bank of America and Wells Fargo, totaling $60 million in civil penalties. The charges stem from failures 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. This article explores the specific compliance failures, the benefits derived from advisory clients' cash, and the interest rate discrepancies that led to these charges.

The SEC's orders found that Wells Fargo Advisors and Merrill Lynch offered bank deposit sweep programs (BDSPs) as the only cash sweep option for most advisory clients. This arrangement allowed the firms to receive a significant financial benefit from advisory client cash in the BDSPs. During periods of rising interest rates, the yield differential between the BDSPs and other cash sweep alternatives grew to almost 4 percent. This discrepancy in interest rates raised concerns about the firms' failure to consider the best interests of their clients when selecting cash sweep program options.

To consider clients' best interests, the firms should have implemented policies and procedures that evaluated and selected cash sweep program options based on clients' investment profiles, risk tolerance, and financial goals. This evaluation should have been conducted regularly, including during periods of changing interest rates. Additionally, the firms should have established procedures for managing client cash in advisory accounts, ensuring that it is properly allocated and invested according to clients' investment objectives and risk tolerance. Clear and transparent information about the available cash sweep options, their features, benefits, and associated fees or risks should have been provided to clients to enable them to make informed decisions.

The SEC's actions reinforce the importance of advisory firms having reasonably designed policies and procedures to consider their clients' best interests when evaluating potential sweep options for cash held in advisory accounts. This includes ensuring that cash held in an advisory account is properly managed by financial advisers consistent with a client's investment profile.

In conclusion, the settlements with Bank of America and Wells Fargo units serve as a reminder of the importance of regulatory compliance in the financial industry. By failing to implement adequate policies and procedures, these firms exposed themselves to significant financial penalties and damaged their reputations. As the SEC continues to monitor and enforce compliance with the Advisers Act and related rules, financial institutions must remain vigilant in their efforts to protect the interests of their clients and maintain the integrity of the market.