A Primer on Bank Sweep Programs
A sweep program offered by a broker transfers uninvested cash into a bank account. It is typically not the only option available for uninvested cash, and the Securities and Exchange Commissionhas issued an Investor Bulletin to inform investors about the characteristics and risk of these programs.
The program is called a “sweep” because all available uninvested cash is automatically transferred. The cash will earn interest until it is used to purchase an investment or is withdrawn from the brokerage account.
The broker chooses which banks it partners with. The bank may be owned by the same corporation as the brokerage firm. A partnership or some other business relationship involving the payment of commissions or royalties from the bank to the broker may exist. This compensation can take the form of sharing of interest income, whereby the brokerage receives a portion of the interest paid on the cash sweep account.
Cash transferred to a deposit account through a bank sweep program is covered by the Federal Deposit Insurance Corporationup to $250,000 per account. Cash balances above this amount are not covered, though some brokers may sweep the overage to a different bank.
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