Merrill Lynch has asked a federal court to toss a proposed class action lawsuit that alleges a sweep feature in Merrill Edge Self Directed Investing accounts pays “paltry” yields.

On the contrary, “without this feature, uninvested cash would earn no interest,” Merrill Lynch’s lawyers argue in a brief filed last month.

The sweep feature “allows clients to earn interest while they consider investment options,” the wirehouse’s lawyers argue.

The legal battle over the Merrill Edge sweep feature could prove a pivotal one for broker-dealers with banks and bank-owned wirehouses because most of them reap significant revenues from such automated functions.

Sarah Valelly, the investor who filed the proposed class action lawsuit, alleges she ultimately transferred more than $1 million in cash to three Merrill Edge accounts and an account at the wirehouse’s parent Bank of America, but never earned more than 0.14% on the money.

Merrill Lynch engaged in unjust enrichment and deceptive trade practices against her and other investors in her situation, Valelly claims.

Valelly’s lawsuit focuses specifically on the Merrill Lynch units’ alleged failure to secure prior written affirmative consent from investors like Valelly to have their cash swept into low-yield accounts and on their websites’ account registration procedures which “intentionally or inadvertently omit and obfuscate disclosures.”

A spokesman for Merrill Lynch’s parent company Bank of America declined to comment for this article, but the wirehouse previously denied Valelly’s allegations.


In its recently-filed brief, Merrill Lynch lawyers argue: “As with any account setup process, Ms. Valelly accepted terms and conditions when she opened her accounts. The terms and conditions explained that Merrill Lynch ‘sweeps’ funds that have not yet been invested into a Bank of America deposit account to earn interest at rates depending on the particular sweep program for the account type.”

In self-directed investment accounts like Ms. Valelly’s, “the decision whether, when, and how to invest cash holdings is entirely up to the client, without advice from Merrill Lynch,” the Merrill Lynch lawyers argue.

Valelly’s claims “fail as a legal matter,” the Merrill Lynch lawyers argue.

The claims should be tossed because “she entered into actual contracts with Merrill Lynch,” and therefore is precluded from making the “quasi-contract” claims that she does, the lawyers argue.

Online or clickwrap contracts — as used for the Merrill Edge accounts — have long been accepted by courts as forming binding contracts, the Merrill Lynch lawyers argue.

“She claims that sweep-related terms and conditions presented during the account-opening process were contained in hyperlinked documents or were not visible without scrolling and should therefore be disregarded. But that theory would invalidate countless online contracts relying on the same approach and is legally incorrect,” the lawyers add.

Valelly has also not “adequately” supported her allegation that the interest rate she earned was “unreasonable,” according to the wirehouse’s lawyers.