Cetera Hit With Class Action Lawsuit Over Cash Sweep Program
From the desk of Jim Eccleston at Eccleston Law
A proposed class action lawsuit has accused Cetera Financial Group and Cetera Investment Services of improperly profiting from customer cash held in the firms' FlexInsured Account Program, according to a report by ThinkAdvisor.
The lawsuit, filed in the U.S. District Court for the Southern District of California, alleges that Cetera breached fiduciary and contractual duties by sweeping customer cash into FDIC-insured deposit accounts that paid relatively low interest rates while retaining substantial revenue generated through those deposits.
According to the complaint, Cetera directed eligible customer cash into the FlexInsured Account Program as the default sweep option despite acknowledging in its disclosures that the program generally paid lower rates than money market mutual funds. The plaintiffs allege that Cetera selected the sweep program because it generated greater revenue for the firm.
As reported by ThinkAdvisor, the lawsuit further claims that Cetera failed to adequately disclose conflicts of interest associated with the program, including revenue-sharing arrangements with participating banks and the extent of the compensation the firms allegedly received.
The complaint focuses heavily on the period beginning in March 2022, when rising interest rates increased the earnings potential of uninvested cash. The plaintiffs contend that while interest rates climbed, Cetera continued paying customers comparatively low yields and retained a significant share of the income generated from customer deposits.
According to the lawsuit, Cetera characterized portions of its compensation as administrative fees. The plaintiffs, however, allege that the participating banks generated substantially higher returns by lending or investing customer deposits and shared a portion of those profits with Cetera.
As ThinkAdvisor notes, the lawsuit compares Cetera's sweep rates with those offered by other brokerage firms during the same period. The complaint cites examples involving Fidelity, Vanguard, and R.W. Baird, alleging that those firms offered significantly higher yields on customer cash balances while some Cetera customers received interest rates as low as 0.06 percent.
The plaintiffs contend that Cetera's sweep program deprived customers of reasonable returns during a period of rising interest rates while allowing the firms and participating banks to benefit from the spread between what customers received and what the deposits allegedly earned elsewhere.
The case remains pending. ThinkAdvisor reports that the allegations set forth in the complaint have not been proven, and no court has determined liability.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
Tags: eccleston, eccleston law, cetera financial group, class action lawsuit, cash sweep program, securities litigation, flexinsured account program
