The SEC is looking into allegations that several prominent Wall Street players have been cheating customers out of billions of dollars of interest payments.

The probe focuses on whether banks or brokers steered clients toward sweep accounts that paid little or no interest, and whether the companies’ financial advisers had a fiduciary duty to tell clients they could make higher returns by moving their cash into other accounts. The rates being offered by certain large banks to savers are far lower than the returns paid to banks based on short-term interest rates established by the Federal Reserve.

The emphasis is on sweep accounts, or the cash that gets swept into interest-bearing alternatives to generate income rather than sit as idle cash in customer accounts at brokerage firms and banks.

SEC probes and lawsuits

Wells Fargo disclosed that it is “in resolution discussions” with the SEC on the matter after having disclosed the agency’s probe last October.

Wells is also facing legal action on the matter. Wealth management client Keith Bujold sued the bank, claiming Wells’ brokerage unit “generates enormous income for itself at the expense of its customers who receive only a minimal return on their cash deposits.”

Morgan Stanley told investors in its recent quarterly filing that, since April, it “has been engaged with and is responding to requests for information from the Enforcement Division of the SEC regarding advisory account cash balances swept to affiliate bank deposit programs and compliance with the Investment Advisers Act of 1940.”

Allegations revolve around whether the firms have put their revenue ahead of their clients’ interests, profiting from the interest earned and shortchanging clients.

That bank faces a legal action too; the law firm Wolf Popper sued Morgan Stanley in February on behalf of some of the bank’s customers.

Bank of America also disclosed in its quarterly filing that it is facing scrutiny over the rates paid to customers on uninvested cash that is moved into interest-paying bank deposits.

And broker-dealer firm LPL Financial acknowledged in its quarterly filing that it is facing a class-action lawsuit, filed last month, over its cash sweep policy.

Finally, some clients of Ameriprise Financial are suing the company over its cash sweep accounts, alleging a breach of fiduciary duty due to low interest rates.

What’s the problem?

Wells Fargo pays between a 0.05% and .50% interest rate, but it depends on the account, the website says.

According to Bujold’s lawsuit, Wells Fargo’s cash program sweeps customers’ cash into accounts at affiliated and unaffiliated banks. The company “consults” with its affiliated banks to set a low interest rate for customers, and then “directs” the unaffiliated banks to pay the same low rate.

In all of the lawsuits noted above, allegations revolve around how the brokerages and banks have put their revenue ahead of their clients’ interests, profiting from the interest earned on client cash balances and shortchanging clients.

LP Financial said in a statement reported by the Financial Times that its cash sweep vehicles prioritized “security, liquidity and yield – in that order” and noted it offered other investment options that were suitable for longer investment horizons.