The SEC is examining LPL Financial's approach to handling clients' uninvested cash, which it sweeps into bank accounts with minimal interest yields. This scrutiny has prompted lawsuits from several retail investors who claim that LPL breaches its fiduciary duty by paying too little interest on cash in sweep accounts. Other financial firms face similar challenges and inquiries from the SEC.
LPL recently disclosed in its 10-Q filing that, in August, the SEC requested more details about its cash management practices for advisory accounts. While LPL has not provided extensive specifics, the firm indicated it is cooperating fully and that the inquiry appears to be industry-wide, suggesting that the SEC may be exploring common practices across the financial sector.
Representatives from both LPL and the SEC declined to comment on the situation.
According to Wolfe Research analyst Steven Chubak, LPL's disclosure aligns with what many in the industry expected. Chubak notes that LPL’s approach to managing sweep deposit rates appears in line with standard practices, as the company even reduced sweep deposit rates in September, following the SEC's August inquiry and a recent Federal Reserve rate cut.
Chubak further remarks that LPL’s documentation on its cash sweep program complies with SEC requirements for disclosure, surveillance, and conflict-of-interest management. He maintains an "Outperform" rating on LPL stock, with a price target of $338.
On Tuesday, LPL's stock showed minimal reaction, rising about 1% midday, with shares up 21% this year—mirroring the S&P 500's performance.
For years, brokerage firms have moved clients' uninvested cash into low-interest sweep accounts, a practice that often enhances company profits. However, with the rise in interest rates starting in 2022, customers began shifting uninvested funds into higher-yield alternatives like money-market funds, a trend known as "cash sorting."
This past summer, a wave of lawsuits was filed in federal courts against LPL, Morgan Stanley, and other firms over sweep account practices. Plaintiffs argue these companies breach their fiduciary obligations by offering subpar returns on cash holdings.
In one lawsuit, investor Daniel Peters alleges that LPL forces clients into its cash sweep programs, claiming these programs are designed to capture the majority of interest earnings for LPL while providing clients only a modest share of returns. Peters’ complaint, filed on July 17 in federal court in San Diego, argues that LPL’s sweep program prioritizes company profits over client needs, often resulting in net losses for clients’ cash holdings.
LPL denies the allegations in the Peters case and other similar lawsuits, asserting in its 10-Q that it plans to “vigorously defend” itself.
In response to rising rates and potential reputational risks, some firms like Morgan Stanley and Wells Fargo have raised interest rates on certain clients’ uninvested cash. These adjustments initially raised concerns among analysts and shareholders about the potential for declining net interest income if more firms adopt similar policies.
