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 The cash will earn interest until it is used to purchase an investment or is withdrawn from the brokerage account.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.
As of March 2014, brokers were required to obtain written consent before enrolling an investor in a bank sweep program. Accounts opened prior to this date may have previously been enrolled without consent. Your brokerage statement should tell you if you are currently participating in a bank sweep program. If the statement is unclear, call your broker.
Bank sweep programs are mostly safe, as long as the cash balances per bank do not exceed the FDIC limits. A brokerage firm should provide a list of participating banks. It should also list other alternatives for uninvested cash and allow you to choose the option you feel is best for you. The SEC suggests visiting www.fdic.gov/edie/index.html to monitor FDIC coverage. The agency also suggests visiting http://research.fdic.gov/bankfind/ to view public information about the health of a participating bank.
Source: “Investor Bulletin: Bank Sweep Programs,” U.S. Securities and Exchange Commission, June 5, 2014.