Morgan Stanley faces Reg BI lawsuit over interest in cash sweep accounts
Morgan Stanley is facing a class-action lawsuit alleging that it breached its fiduciary duty by offering unreasonably low interest rates on client cash sweep accounts.
The suit was filed by the estate of the late Dr. Bernard J. Sherlip, a Connecticut physician who passed away in March 2023, held multiple accounts with Morgan Stanley from November 2012 to August 2022.
The suit also names Morgan Stanley retail customers with cash deposits or balances in the firm’s bank deposit program, individual retirement accounts, Roth IRAs, or SIMPLE IRAs as co-plaintiffs.
The lawsuit, filed in the US District Court for the Southern District of New York, contends that the firm’s cash sweep program pays interest rates as low as 0.01 percent on uninvested cash, far below market rates. Under the program, client cash balances below $500,000 earn just 0.01 percent annually, whereas higher balances yield a maximum of 0.5 percent.
In comparison, other financial firms, such as Vanguard, Interactive Brokers, and Wealthfront, have been advertising significantly higher rates to attract customers. Vanguard’s Cash Plus Account currently offers 4.6 percent and provides FDIC coverage up to $1.25 million for individual accounts and $2.5 million for joint accounts.
“Morgan Stanley breaches its fiduciary duties and its contracts with its customers and violates Reg BI by failing to make adequate disclosures to its customers,” the lawsuit argues.
The disparity in interest rates has been a focal point of the lawsuit, emphasizing how much more customers could potentially earn elsewhere. Citing Reg BI, which requires broker-dealers to act in their customers’ best interests, the lawsuit contended that the firm should offer higher interest rates in its default
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