Merrill Sued for “Paltry” Sweep-account Interest Rates
A woman who last year had more than $1 million of cash in three Merrill Edge accounts earning 0.14% and a Bank of America checking account paying 0.06% has filed a class-action lawsuit alleging unjust enrichment and deceptive trade practices over Merrill Lynch’s cash sweep programs.
“Merrill’s [direct deposit] sweep accounts pay investors a paltry 0.05% to 0.14% annual percentage yield,” Sarah Valelly charged in the complaint filed on Tuesday in federal court in New York’s southern district.
The lawsuit accuses Merrill Lynch, Pierce, Fenner & Smith, the broker-dealer for Merrill Wealth and Merrill Edge customers, of hiding disclosure about sweep options in difficult-to-read account opening documents and of shifting cash from brokerage accounts without the “prior written affirmative consent” required by Securities and Exchange Commission, Financial Industry Regulatory Authority and New York Stock Exchange rules and regulations.
Valelly, who opened brokerage accounts in August 2017 at a Merrill Edge office in Boston, filed the lawsuit on behalf of three classes of Merrill customers: brokerage account investors whose cash was defaulted into Merrill’s direct deposit sweep account since March 2014; retirement account investors whose client relationship agreements allegedly require them to be paid “reasonable rates”; and customers who were advised by an “account representative” to deposit more than $25,000 into a Bank of America, N.A. low-interest deposit or checking account for at least 30 days.
“It is both a meritorious case and one that should be brought,” said Robert C. Finkel, a plaintiff’s lawyer at Wolf Popper LLP in New York, which represents Valelly and the putative class members. “The way they promote the sweep program I consider deceptive, and there are more forthright companies like Fidelity and Vanguard that pay market rates of interest. If nothing else, we hope the lawsuit will cause Merrill to come into compliance with regulations and increase their interest rates.”
Merrill Lynch “disputes the allegations in the complaint and intends to vigorously defend the case,” said company spokesman William Halldin.
The plaintiffs have an uphill battle, said Peter Crane, president of Crane Data, which publishes a newsletter on money-market fund returns.
“The ultimate defense is that brokerages can say they are not holding their customers hostage,” he said, noting that he knows of no similar lawsuits. “They send you a checkbook for these accounts, for God’s sake, and you can move your money. Brokerage sweep and bank checking accounts are normally set up for convenience, not yield.”
The lawsuit asserts that a Merrill Edge “Financial Solutions Advisor” who worked out of a shared BofA bank branch location, recommended in May 2018 that Valelly deposit $675,621 received from the sale of her parent’s house into a checking account earning .06%.
She had about $350,000 at the time in three Merrill accounts yielding 0.14%, and he could have recommended consolidating the cash balances into a Merrill “preferred deposit” account paying 2.07%, according to the lawsuit.
Valelly kept her low-rate Merrill and bank accounts until this March, when a Merrill assistant vice president in Philadelphia contacted her to question “why the rep in Boston did not recommend our Preferred Deposit,’” according to the lawsuit.
The difference between the interest that was earned on her four accounts and the approximate 2.0% she could have earned with prevailing market rates from August 2017 through March 2019 was approximately $22,400, it said.
The complaint seeks damages reflecting the difference, double or treble damages plus lawyers’ fees under the Massachusetts Consumer Protection Law and a declaration that the “SEC’s suitability and best-interest standards apply with respect to recommendations of cash deposits by Merrill account representatives into BANA accounts.”
The suit accuses Merrill of using densely packed, small-type, “redundant and voluminous” PDF files in account-opening procedures that “intentionally or inadvertently omit and obfuscate disclosures on sweep accounts so that customers do not and cannot give their ‘prior written affirmative consent’ to the investment of their assets.”
The procedures violate a 2005 NYSE information memo requiring disclosure of conflicts of interest involving cash sweeps as well as a 2014 SEC rule amendment requiring written consent “in order to form a binding contract with customers for use of their cash,” the lawsuit said.
Merrill last year ended its policy of sweeping cash from brokerage accounts into higher-paying money-market funds, directing it instead to BofA accounts. Brokers who want to assuage rate-sensitive customers now have to manually direct cash into money-market funds.