Morgan Stanley has announced that the Securities and Exchange Commission (SEC) has concluded its investigation into the firm's cash sweep practices without recommending enforcement action.
The disclosure was made in the firm’s latest quarterly report filed on May 5. This development marks the resolution of one of several legal and regulatory challenges Morgan Stanley has faced related to how it manages uninvested cash in brokerage accounts.
The SEC had launched the investigation following scrutiny over Morgan Stanley’s long-standing practice of sweeping idle brokerage cash into affiliated bank deposit programs that offer relatively low yields.
While these programs have been standard across the brokerage industry for years, they came under renewed regulatory and investor scrutiny as interest rates rose significantly starting in 2022. As yields on money market funds and high-yield savings accounts climbed above 4%, clients became increasingly aware of the opportunity costs tied to traditional sweep programs.
Although the federal investigation has ended, Morgan Stanley continues to face inquiries at the state level. The firm disclosed in its filing that it is responding to requests from a state securities regulator concerning brokerage cash balances directed into its affiliated deposit program. Additionally, the firm is still contending with at least one private lawsuit from a retail investor alleging harm from its sweep account practices.
These developments come as investors and regulators pay closer attention to how firms manage cash, particularly in brokerage accounts that are not subject to the fiduciary standards applicable to advisory accounts. The differential treatment has prompted criticism, especially as cash becomes a more meaningful component of client portfolios amid persistent market volatility and rising rates.
In response to this shifting environment and growing regulatory pressure, Morgan Stanley adjusted the interest paid on uninvested cash held in some advisory accounts in mid-2024. That move was seen by some industry observers as an attempt to narrow the disparity between the treatment of advisory and brokerage assets, even as litigation and state-level reviews continued.
The broader industry has also come under fire. In recent years, investors filed multiple lawsuits targeting major brokerage firms—among them, Morgan Stanley, LPL Financial, and Ameriprise Financial—alleging breach of fiduciary duty related to the handling of cash sweep programs in brokerage accounts.
These cases have generally centered on claims that firms failed to act in clients’ best interests by steering cash into low-yielding options without providing sufficient disclosure or exploring more competitive alternatives.
Regulatory actions have accompanied the litigation. In January 2025, Merrill Lynch and two Wells Fargo subsidiaries agreed to pay a combined $60 million to settle SEC charges alleging that their automatic sweep programs were not designed in clients’ best interests.
The SEC found that both firms defaulted client cash into low-interest options without evaluating potentially better alternatives, in violation of Regulation Best Interest (Reg BI) standards. The enforcement actions were announced during the final weeks of the Biden administration.
The SEC’s scrutiny of sweep programs reflects the growing importance of cash management as a core advisory issue. For wealth advisors and RIAs, the recent wave of investigations and lawsuits underscores the need to proactively evaluate how uninvested client assets are handled. While brokerage platforms may not be held to fiduciary standards, reputational risk and competitive dynamics are driving firms to revisit longstanding practices.
In a higher-rate environment, advisors are increasingly emphasizing cash optimization strategies—whether through higher-yielding money market funds, short-duration fixed income, or FDIC-insured deposit alternatives. The pressure on traditional sweep arrangements is especially acute for firms that rely heavily on net interest margin from affiliated deposit programs, as clients seek better returns on liquidity.
For firms like Morgan Stanley, resolving regulatory inquiries without enforcement action provides temporary relief, but the broader scrutiny of cash management practices is unlikely to subside. The continued litigation and state-level investigations suggest that legal and reputational risks remain, particularly as advisors and clients weigh how firms align sweep practices with their stated commitment to best-interest standards.
Going forward, wealth managers may face a growing imperative to segment sweep strategies more deliberately across brokerage and advisory channels, tailoring solutions to align with regulatory expectations and evolving client preferences. As client awareness grows and alternative cash vehicles become more accessible, the firms that take a proactive stance in updating their cash management infrastructure could gain a competitive edge.
Meanwhile, RIAs not tied to bank-affiliated sweep models may find an opportunity to differentiate by offering cash strategies that prioritize yield, transparency, and flexibility.
With the SEC’s attention increasingly focused on the intersection of interest rate policy and investor protections, advisors should anticipate that cash—once a passive element of portfolio construction—will remain a central concern for both compliance and client engagement in the years ahead.
