Banks’ quarterly filings with the Securities and Exchange Commission can serve as profound resources for stat geeks and researchers. More than anything, they tell time.
There are four quarters in a year. Four seasons, too. A deep dive into a 10-Q can tell you what season it is — but maybe not in the winter/summer sense.
Last August, for example, many leading banks gave their first estimates as to how much they’d have to pay into the Federal Deposit Insurance Corp.’s Deposit Insurance Fund. The timing made sense: That particular set of 10-Qs covered 2023’s second quarter — the first full three-month span since Signature and Silicon Valley Bank failed, necessitating that surviving banks cover the shortfall.
In other instances, analysts can compare a single bank’s 10-Q against the previous quarter’s for subtle changes in language. JPMorgan Chase, for example, indicated in its May quarterly filing that it was “responding to inquiries from civil government authorities regarding the handling of disputes related to transfers of funds through the Zelle Network,” and added that it was cooperating. However, in its next 10-Q, filed Friday, the bank not only named the agency that was doing the inquiring; JPMorgan also escalated the issue.
“The Firm is responding to inquiries from the Consumer Financial Protection Bureau (CFPB) regarding the transfers of funds through the Zelle Network. In connection with this, the CFPB Staff has informed the Firm that it is authorized to pursue a resolution of the inquiries or file an enforcement action. The Firm is evaluating next steps, including litigation.”
Observers can tell what season it is, too, by the number of banks that raise a particular issue at a given time. Take February 2023, when Wells Fargo, HSBC, and Societe Generale all flagged to investors that U.S. regulators were investigating their record-keeping with regard to use of off-channel communications for business purposes. HSBC would be hit with penalties three months later. Wells Fargo and SocGen, six.
So what season is it now? A look at Morgan Stanley and Wells Fargo’s most recent 10-Qs might indicate it’s the season of the cash sweep. For the uninitiated, a cash sweep happens when uninvested funds from brokerage or bank accounts are transferred into options that earn higher interest on the thought that investors would get a better return than if they simply held cash.
Morgan Stanley, in its quarterly filing Monday, told investors 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.”
Wells Fargo, however, may be the bellwether for cash sweep season. It indicated Friday that it’s “in resolution discussions with the SEC” on the matter. The bank first flagged the regulator’s probe – into which cash sweep options Wells offers its investment advisory clients when they open accounts – last October.
The SEC wants to know 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.
“You are talking about a big transfer of wealth from customer to brokerage firm,” Robert Finkel, a senior partner at Wolf Popper, told the Financial Times. The law firm sued Morgan Stanley in February on behalf of some of the bank’s customers.
“It is in the billions of dollars that we are talking about,” Finkel said.
Morgan Stanley declined to comment to the publication.
Wells Fargo, earlier this year, paid as little as 0.05% interest on some sweep accounts, but recently bumped up that rate — a move the bank estimated would cut the bank’s interest income by $350 million this year.
Wells, too, is facing legal action on the matter. Wealth management client Keith Bujold sued the bank last week, 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.”
Broker-dealer LPL Financial, meanwhile, acknowledged in its own quarterly filing Tuesday that it’s facing a class-action lawsuit, filed last month, over its cash sweep policy. The company pledged to defend itself “vigorously,” according to the quarterly filing.
LPL’s cash sweep offerings prioritize “security, liquidity and yield — in that order,” the broker-dealer said in a statement seen by the Financial Times, adding that it offered clients other investment options that were more suitable for longer-term investment.
