Massachusetts Commonwealth Secretary William Galvin is asking six leading brokers to provide information on whether they and their in-house or affiliate banks are failing to raise interest rates for clients whose funds are included in sweep accounts in response to the Federal Reserve’s recent rate hike.
Galvin noted that Massachusetts investors are likely to face higher mortgage and credit card rates due to the Fed’s 0.25% interest rate hike this week, with further hikes expected. follow later this year.
Consumers are also grappling with inflationary pressure, he said. Galvin wondered if banks were skimping on their customers by keeping interest rates low for cash deposits in a rising rate environment.
“(Consumers are) being hit by the double whammy of higher credit card and loan rates on the one hand and low interest rates on their bank accounts and other investments,” Galvin said. “It is simply unfair that consumers are being asked to pay more on credit cards and loans, while banks are pocketing the interest rate hikes that should be earned on money on deposit instead of money. ‘raise interest rates for people trying to keep their savings.’
The investigation focuses on swipe accounts, which brokerage firms use to hold investors’ funds before they are invested. Businesses are able to capitalize on these deposits and earn more than they pay to account holders. The six broker/dealers in the survey include TD Ameritrade (still operating as a separate broker/dealer following its $26 billion acquisition by Charles Schwab), Merrill Lynch, LPL Financial, Ameriprise, Securities America and SoFi.
The investigation started with these six b/ds because they have large sweep account offers. However, the investigation is ongoing and may be expanded to include more b/ds, according to a spokesperson for Galvin’s office.
In letters sent to the six brokers, Galvin’s office asked if, in response to the Federal Reserve’s hike, the b/ds planned to raise interest rates for customers in sweep account programs ( defined as “any cash sweep, money market mutual fund, bank deposit program or other financial program used to hold a client’s uninvested cash”), and also asked if they had any agreements with third parties responsible for these accounts to raise interest rates.
The Securities Division is also asking brokers to identify all sweep account programs available to Massachusetts brokerage clients, including whether they are FDIC insured and what types of accounts are eligible to enroll. . Galvin’s office has also instructed brokers to provide all Sweep account client disclosure materials regarding fees and commissions, interest rates, returns and dividends related to those Sweep accounts, as well as risks or conflicts associated with them. The Securities Division has asked b/ds to respond to their requests by the end of March 30.
Earlier this year, Galvin’s office accused Fidelity Brokerage Services of failing to properly review Massachusetts retail brokerage clients who were permitted to trade options and margin, even after exaggerating their experience and employment information. The Securities Division has also opened an investigation into several b/ds, arguing that their use of target date mutual funds left some retail investors in certain funds with surprising tax liabilities.