Cases & Investigations
E*TRADE Securities LLC and Morgan Stanley Smith Barney LLC
Type: Current Cases
Defendant(s): E*TRADE Securities LLC and Morgan Stanley Smith Barney LLC
Court: United States District Court for the District of New Jersey
In 2023, MSSB assumed custody, clearing, and investment advisory services from E*TRADE, now known as E*TRADE from Morgan Stanley. Wolf Popper LLP serves as counsel for Plaintiffs and the Putative Classes of E*TRADE and E*TRADE from Morgan Stanley retirement accountholders.
E*TRADE engages in a conflicted transaction by sweeping investor cash to its affiliated banks, Morgan Stanley Bank, N.A., and Morgan Stanley Private Bank, N.A. The E*TRADE RSDA Program Client Relationship Agreement, in effect until approximately September 2023, promised a “reasonable rate of interest as contemplated by ERISA Section 408(b)(4) and the regulations under Code Section 4975(d)(4).” From September 2023 onward, E*TRADE from Morgan Stanley mandated retirement account holders to accept terms outlined in any of three IRA Disclosures, dependent on the specific account type. The IRA Disclosures explicitly state that sweep deposits will “bear a reasonable rate of interest.”
However, instead of adhering to contractual obligations to pay a “reasonable” rate of interest on customers’ retirement cash, E*TRADE defaulted retirement customers into low yielding “sweep accounts,” which from 2018 onwards maintained unreasonably low interest rates. In contrast to prevailing market trends, rates at E*TRADE remained stagnant, with interest rates as of January 31, 2024 at 0.01% for balances up to $499,999, 0.05% for balances between $500,000 and $999,999, and 0.15% for balances of $1,000,000 and above. As of January 30, 2024, the Federal Funds target rate set by the Federal Reserve (and intended to guide rates at U.S. banks) is at 5.25 to 5.50%.
The profitability of this practice is overwhelmingly apparent for E*TRADE’s affiliate banks and allows Morgan Stanley to generate interest income by sweeping billions of dollars from E*TRADE as “nearly free money for Morgan Stanley to generate interest income.” Barron’s April 8, 2023 article “Inside Morgan Stanley’s Success—and What’s Ahead” (see Barons Article Link) (last viewed January 30, 2024). Conversely, brokerages like Fidelity Investments and R.W. Baird, which avoid sweeping cash to affiliated banks, negotiate interest rates independently, leading to consistently higher interest rates compared to E*TRADE and other brokerages that engage in affiliated bank sweeps.
Given the alleged breach of contractual obligations by E*TRADE and MSSB to provide retirement accountholders with “a reasonable rate of interest” on retirement cash assets, accountholders across the country have missed out on interest payments E*TRADE should have paid them. This represents the difference between the reasonable market rate, to be determined by the trier of fact, and the interest actually earned on cash accounts.
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