Merrill Lynch lodged new arguments this week to persuade a federal court to toss a proposed class action lawsuit that alleges its sweep feature in Merrill Edge Self Directed Investing accounts pays “paltry” yields.
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 a 0.14% interest rate.
Merrill Lynch’s lawyers are arguing the terms and conditions clicked by Valelly online give them cover from the complaint.
Bank sweeps — or cash management services that sweep investor cash into broker-dealer firms’ affiliated or partner banks — are among Finra’s risk monitoring, surveillance and examination priorities this year.
Many broker-dealers with banks and bank-owned wirehouses reap significant revenues from such automated functions.
“Merrill Lynch used several means to ensure that the terms and conditions applicable to Ms. Valelly’s self-directed investment accounts, including terms related to the Sweep Program, were readily available to her during the online account opening process,” the wirehouse’s lawyers argue in the new brief.
“Three times, Ms. Valelly completed the online process by clicking “I ... hereby agree to these terms and conditions,” thereby forming legal and enforceable clickwrap agreements, Merrill Lynch’s lawyers argue.
“Nothing” that Valelly put forth in her lawsuit alters that conclusion, the wirehouse’s lawyers argue.
Instead, her arguments that hyperlinked terms are unenforceable “flies in the face of years of legal precedent governing online contracts,” the Merrill Lynch lawyers write. That notion of unenforceability of hyperlinked terms also defies industry guidance, they add.
If Valelly prevails, such a ruling would “invalidate countless online contracts,” the Merrill Lynch lawyers argue.
Previously, the Merrill Lynch lawyers argued that Valelly suffered no losses and, on the contrary, “without this feature,” her uninvested cash would have earned no interest.
In her lawsuit, Valelly alleges Merrill Lynch engaged in unjust enrichment and deceptive trade practices against her and other investors in her situation.
Her lawsuit alleges that Merrill Lynch fails to secure prior written affirmative consent from investors like herself and its online registrations “intentionally or inadvertently omit and obfuscate disclosures.”
Her lawyers filed in December a brief opposing Merrill Lynch’s request to have the court toss the lawsuit. In it, they argue: “Because Merrill uses customer cash without customer permission, it must compensate customers for the reasonable value of that cash at market interest rates,” which they identify as 2%.
The SEC’s regulations require brokerage firms to provide “meaningful disclosure” and do so “forthright[ly]” to obtain a customer’s “informed” and “prior written affirmative consent” before sweeping cash to an affiliated bank account, Valelly's lawyers argue.
The 149 mostly small-print pages that Valelly encountered on Merrill Lynch’s online platform hardly qualified as “forthright” or met the SEC’s applicable regulations for sweep account disclosures, according to her lawyers.
A Merrill Lynch spokesperson said the company declined to add a comment beyond the arguments in its briefs. Valelly’s lawyer did not return a request for comments for this story.