In strikingly similar orders, separate judges have dismissed parts of lawsuits brought by investors against LPL Financial and
The orders, which both found that neither Wells nor LPL had a fiduciary duty to at least some of their clients who had entrusted them with uninvested cash, allow the suits to proceed but under modified terms.
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No fiduciary duty with cash held in brokerage accounts
The now-partially dismissed suits against LPL Financial and
Similarly, the action against
The plaintiffs in that case alleged in part that
Firms caught up in these lawsuits have long maintained that their sweeps policies are meant to give clients a place to temporarily park cash before deciding how they want to invest it. Rather than the fiduciary duty, the brokerage accounts used by many clients are subject to Regulation Best Interest, a looser conduct standard that places greater emphasis on disclosing conflicts of interest.
"There is no default duty for a broker like
Similarly, the judge in the LPL Financial case found that LPL owed no fiduciary duty to investors holding money in its sweeps accounts. Judge Todd Robinson of the federal district court for Southern California found in an
Citing a previous case —
Breach-of-contract claim allowed with Wells, dismissed with LPL
The two judges did diverge on the key aspect of whether the plaintiffs in their respective cases could bring breach-of-contract claims. Chhabria found that the plaintiffs do have grounds to pursue their allegations that
In a disclosure to investors, the judge noted, Wells said, "While we have policies and procedures designed to pay a reasonable rate of interest based on prevailing interest rates at other or similar financial services firms, our rates are not always the highest interest rates available."
Chhabria noted that even though the Federal Reserve began raising its benchmark interest rate in 2022 in a bid to tame inflation, "
"While there is no expectation that
In the LPL case, Robinson dismissed a breach-of-contract claim, noting that the firm had pledged in writing to act in clients' interests only when it was making recommendations as a broker-dealer or an investment advisor.
"Consequently, LPL has breached this provision only if it recommended the Cash Sweep Programs to Plaintiffs as their broker-dealer or placed Plaintiffs' uninvested cash in the Cash Sweep Programs as their investment adviser," Robinson wrote.
Judge says plaintiffs have 'uphill battle'
Robinson did find grounds for allowing the plaintiffs in the LPL case to pursue their claims of breach of an implied covenant. In language similar to Chhabria's in the Wells case, Robinson wrote that the plaintiffs suing LPL most likely had good reason to believe LPL would raise its sweeps rates to mirror increases in the Fed's target and bank deposit rates.
Robinson said the plaintiffs have an "uphill battle" ahead of them, but that it may have been reasonable for them "to believe that, as 'the amount Banks are willing to pay' increased, the interest that LPL passed along to them would increase in turn."
"But the opposite occurred," Robinson added, "even though the interest rates paid by other brokerages who swept client cash balances into unaffiliated banks generally rose to track the movement of the market."
Lawyers for the plaintiffs in the two cases did not return requests for comment. A
Plaintiff lawyers haven't been the only ones subjecting firms' cash sweeps to scrutiny. In January,
Around the same time, Morgan Stanley's cash sweeps were also being looked into by the SEC.
Investors vote with their feet, go to money markets
Much of the criticism of firms' sweeps policies has centered on the fact that clients could have easily secured higher returns by investing money in other ways. In the periods cited in many of the recent lawsuits, many high-yield savings accounts and money market funds were paying around 5% interest on cash.
Peter Crane, the president of the money-market tracker
That's happened even as the average yield paid by money markets has fallen to just over 4%. The average return on sweeps accounts holding $100,000, meanwhile, is about 0.4%, Crane said.
Even though money market yields are expected to continue trending downward, the amount of money held in the funds hit a record high of $7.45 trillion this week, he said.
"Investors obviously don't need a lawsuit to tell them money funds are yielding 10 times what sweeps are," Crane said.
Judges set deadlines for plaintiffs to submit amended complaints
So far, most of the court cases questioning firms' cash-sweeps policies are waiting for their presiding judges to certify them as class actions, which would allow investors with similar allegations to join. In the now-partially dismissed suit against
While finding the LPL plaintiffs had grounds for pursuing allegations of breach of an implied covenant, Judge Robinson also said they had shown reason for a claim of unjust enrichment against the firm. Chhabria, by contrast, dismissed an accusation of unjust enrichment against
"Here, even though the parties dispute the meaning of express terms of the contracts, both parties agree that the contracts are valid and enforceable and cover the relationship between
The judges also rebuked the plaintiffs' attempts to hold both firms' parent companies liable. Judge Chhabria also rebuked the
"FiNet," he added, "is dismissed for lack of standing because no plaintiff had an account with FiNet and no plaintiff pled any relationship with FiNet."