A class action lawsuit filed last week accused Morgan Stanley of breaching its fiduciary duty and violating Reg BI by failing to offer reasonable interest rates to its brokerage and advisory clients on their cash sweep account balances.
Rising interest rates since March 2022 have generated more than $8 billion for Morgan Stanley in 2023 alone on the spread between the 0.50% or less in interest it offered on its cash sweep accounts and the interest it earned investing that money for the benefit of the bank, according to the complaint filed by the estate of Bernard J. Sherlip.
While that “net interest income” was lucrative for the firm, the practice was detrimental to Morgan Stanley customers, the lawsuit claimed, and “in flagrant violation of its duties to its customers.”
When reached, a Morgan Stanley spokesperson declined to comment on the lawsuit.
This is the second time this year a Morgan Stanley business has been hit with a class-action lawsuit for allegedly paying low interest rates on cash sweep accounts. In March, a similar suit was filed against Morgan Stanley and its subsidiary, E*Trade.
The latest lawsuit charged Morgan Stanley with breach of contract, breach of fiduciary duty and unjust enrichment, and requested a jury trial. It was filed June 14 in the U.S. District Court for the Southern District of New York, and named Morgan Stanley, Morgan Stanley & Co., and Morgan Stanley Smith Barney as defendants.
Aside from the estate of Sherlip, a Connecticut doctor who died in March 2023, the lawsuit was filed on behalf of retail customers of Morgan Stanley who had cash deposits or balances in the firm’s bank deposit program, or an individual retirement plan, Roth IRA or SIMPLE IRA.
Reg BI, the SEC rule that says broker-dealers must act in their customers’ best interest, just as an RIA has a fiduciary responsibility, went into effect in June 2020, although it was not enforced until June 2022.
According to the lawsuit, Sherlip’s experience typified the experience faced by all Morgan Stanley customers in a similar position. The Connecticut doctor had maintained multiple accounts at the firm from November 2012 to August 2022, including retirement accounts, advisory accounts and retail investor accounts.
In all those accounts, Sherlip’s cash balances were swept into the firm’s cash sweep program. The Morgan Stanley cash sweep program paid between 0.01% for balances less than $250,000 to 0.15% for balance of $1 million and 0.50% for balances $5 million or greater, the lawsuit said. The same balances at Vanguard paid 4.7%, 4.7% and 2%, and at Fidelity 2.69%. And the prevailing interest rates on the Morgan Stanley money market fund was 4.83%, according to the lawsuit.
Depending on the account, the lawsuit claimed, Morgan Stanley owed Sherlip either a fiduciary duty (for the retirement and advisory accounts) or compliance with Reg BI (the brokerage accounts).
“Morgan Stanley breaches its fiduciary duties and its contracts with its customers and violates Reg. BI by (1) failing to make adequate disclosures to its customers; (2) failing to elevate its customers’ interests above its own; (3) failing to avoid or—at the very least disclose— its conflicts of interest with its customers; (4) failing to disclose to customers other viable options to customers that may benefit them; and (5) failing to demonstrate loyalty to its customers,” the lawsuit alleged.