In a partial legal victory for LPL Financial, a federal judge has dismissed key portions of an investor lawsuit challenging the firm's cash sweep practices, though several claims will proceed.
On June 30, U.S. District Judge Todd W. Robinson ruled that investors failed to identify any contractual language obligating LPL to act in clients’ “best interest” when enrolling them in cash sweep programs. As a result, the court dismissed claims of breach of contract and breach of fiduciary duty. However, the judge allowed claims of unjust enrichment and breach of the implied covenant of good faith and fair dealing to move forward and granted plaintiffs the opportunity to amend their original complaint.
The lawsuit, filed in federal court in San Diego by investors Daniel Peters, Douglas K. Nevitt, and Carol White, is among several actions against broker-dealers over their cash sweep programs—vehicles that have quietly become a major source of revenue for firms, often at the expense of investors earning negligible returns on idle cash.
The plaintiffs are seeking class-action status and allege that LPL, acting as their agent, unjustly profited by paying clients minimal interest while retaining the bulk of the yield generated from partner banks.
LPL, which oversees more than $1.8 trillion in assets and supports a network of 30,000 advisors, differs from many broker-dealers in that it does not operate a bank. Instead, it sweeps uninvested client cash into FDIC-insured accounts at third-party banks. While promoted as a liquidity tool rather than a long-term investment solution, the mechanics of the program have come under scrutiny as interest rates have climbed sharply in recent years.
According to court filings, when Peters opened his account in August 2022, LPL clients with less than $300,000 in cash received an annualized interest rate of just 0.34%, while LPL was earning 2.91% from its banking partners. The plaintiffs claim this “drastic underpayment” highlights how LPL prioritized its own profits over clients’ returns.
“Rather than offer a fair and reasonable rate, LPL captured billions in spread revenue during a period of rising rates,” the amended complaint alleges. “The firm violated its fiduciary and contractual obligations by enriching itself at the expense of its clients.”
LPL has denied the allegations, stating in a January 13 court filing that it fully disclosed its sweep practices, including potential conflicts and rate details. It also noted that its advisory fees are structured with the expectation of retaining revenue from the cash sweep program—revenue that allows it to keep other client fees lower.
Judge Robinson sided with LPL on several fronts, noting that the firm made no contractual promise to mitigate conflicts or pay “reasonable” interest on sweep accounts. He also found that fiduciary duties under the Investment Advisers Act and Regulation Best Interest do not extend to cash sweep decisions and, critically, do not provide a private right of action.
Still, the judge did find merit in the investors’ claim that LPL may have breached the implied covenant of good faith and fair dealing. He cited evidence that a reasonable client might have expected that as LPL’s earnings from banks increased—reaching 2.91%—some of that upside would be passed on. Instead, the firm’s payout rate dropped to 0.20% by the time litigation began, while its yield from banking partners rose to 3.32%.
That disconnect, according to the court, raises legitimate questions about whether LPL acted in good faith. The judge also found ambiguity in the firm’s account agreements regarding how interest and fees were calculated—grounds to allow unjust enrichment claims to proceed.
LPL declined to comment on the litigation. Attorneys for the plaintiffs did not respond to requests for comment.
The decision adds a layer of complexity for wealth managers using cash sweep programs. Advisors should be aware of the potential legal and reputational risks associated with sweep practices—especially when clients aren’t earning interest that keeps pace with rising rates. As investor awareness grows and litigation increases, clear communication and transparency around sweep mechanics, interest rates, and the firm’s role in the process will become more important.
With interest rates remaining elevated, the spread between what firms earn on client cash and what they pay out continues to attract scrutiny. Advisors may want to proactively evaluate sweep options and consider alternatives for clients holding significant cash balances—particularly those in fee-based accounts.
The plaintiffs now face a decision: continue with their remaining claims or amend their complaint to bolster the dismissed counts. Either way, the case serves as a reminder for RIAs and broker-dealers alike: in the current rate environment, the management—and monetization—of client cash is under the microscope.
