Aug 16 (Reuters) -

The spate of regulatory investigations into wealth managers' cash sweep

programs could hurt their credit ratings, Moody's warned on Thursday,

underscoring the threat to the high-margin business for firms like Morgan

Stanley ( MS ) and Wells Fargo ( WFC ).

WHY IT'S IMPORTANT

A potential ratings downgrade would increase the costs for wealth managers

at a time when worries about the economy are growing, with some forecasting a

downturn due to the tight monetary policy.

CONTEXT

Cash sweep programs allow wealth managers to move un-invested cash in

brokerage accounts to partner banks, enabling clients to earn returns on idle

funds.

However, these arrangements have led to disputes, as the interest paid

by partner banks is typically lower than what customers could earn through other

options, such as money market funds.

To prevent these conflicts, wealth managers have started giving clients

more choices. Customers can opt to park their un-invested money in tax-exempt

funds or other vehicles instead of moving it to their brokers' partner banks.

Morgan Stanley ( MS ), Wells Fargo ( WFC ) and Bank of America ( BAC ) have also raised the

interest rates they pay on some brokerage accounts.

Despite these efforts, regulatory investigations remain a concern. Wells

Fargo ( WFC ) and Morgan Stanley ( MS ) have disclosed their cash sweep programs are under

review from the SEC, while Bank of America ( BAC ) highlighted it as a potential risk

factor in its quarterly filing.

Moody's said that having multiple revenue streams will help mitigate

the risk for larger firms. However, private-equity owned wealth managers with

high debt burdens and less diversified business models are likely to be more

severely affected.

The investigations could squeeze margins across the industry by prompting

firms to increase the interest on brokerage accounts, the ratings agency added.