The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to help educate investors about bank sweep programs, which some broker-dealers offer to their customers as a way to manage cash in their brokerage accounts. This Investor Bulletin describes some of the potential risks associated with bank sweep programs and suggests questions you may want to consider asking your broker-dealer to help you decide how to best manage the cash in your brokerage account.
What is a bank sweep program?
Broker-dealers may offer you several options for managing your cash. One option, a bank sweep program, typically involves the automatic transfer (or “sweep”) of cash in the brokerage account into a deposit account at a bank that may or may not be affiliated with the broker-dealer. Other options include leaving cash in the brokerage account, or sweeping cash to one or more money market mutual funds. This investor alert focuses only on the first option: bank sweep programs.
The terms and conditions of bank sweep programs vary. The protections for cash at a bank primarily will derive from banking laws and regulations, including FDIC deposit insurance.
How do I know if I am participating in a bank sweep program?
You should review your brokerage account agreement and statement to determine if you are participating in a bank sweep program for your cash. Many bank sweep programs are the “default” option for managing cash in a brokerage account, so you may have agreed to participate in your broker-dealer’s bank sweep program when you opened your brokerage account. Beginning in March 2014, your broker-dealer must obtain your written consent to participate in a bank sweep program for any new account you open. Your brokerage account opening materials should explain how your broker-dealer’s bank sweep program works and your broker-dealer must give you 30 days written notice of any changes to the bank sweep program. If the description of the bank sweep program is not clear to you, you may want to consider asking your broker-dealer to explain how its bank sweep program works. You also may want to consider asking your broker-dealer about other options for your cash as well as the return offered, risks and costs of each option. If you decide to change your cash sweep option, ask your broker-dealer how to do that. Generally, you may liquidate your bank sweep account at any time and have the proceeds returned to you or placed in your brokerage account.
Does FDIC insurance cover the cash in bank sweep programs?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that protects the funds depositors place in banks and savings associations. FDIC insurance is backed by the full faith and credit of the United States Government. FDIC insurance covers all deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit. The standard insurance amount is $250,000 per depositor (i.e., per brokerage customer), per insured bank, for each account ownership category.
Cash swept into deposit accounts through bank sweep programs is covered by FDIC insurance up to the $250,000 limit per customer at each FDIC-Insured bank that participates in the bank sweep program. Thus, it is important to know how much of your cash your broker-dealer has swept into each FDIC-insured bank participating in your broker-dealer’s bank sweep program at any given time, because any cash in these accounts that exceeds the $250,000 limit will not be protected by FDIC insurance. You can determine how much cash is in your bank sweep accounts from your brokerage account statements or by contacting your brokerage firm.
You should also be aware that most broker-dealers place the responsibility on you to monitor your cash level so that you do not lose FDIC insurance coverage. You should review your cash balances at each bank that participates in your broker-dealer’s sweep program to ensure that no cash balance exceeds FDIC insurance coverage levels, or (if it does) that you are comfortable having uninsured cash at a participating bank. If offered by your broker-dealer, you may want to sign up for any alerts or other forms of notification about FDIC insurance coverage levels to enhance your ability to monitor the FDIC insurance protection of your cash.
For help with monitoring your FDIC coverage in your bank sweep accounts, you may use the FDIC’s Electronic Deposit Insurance Estimator (EDIE) which is available online at https://www.fdic.gov/edie/index.html. For more information on FDIC deposit insurance, please visit the FDIC’s website at http://www.fdic.gov/deposit/.
What relationship does my broker-dealer have with the deposit bank(s)?
Your broker-dealer may choose the bank(s) in its bank sweep program for various reasons. Broker-dealers may choose banks based on the amount of money the banks will pay the brokerage firms for swept funds, the banks’ affiliation with the brokerage firms, or some other business relationship between the banks and the brokerage firms. As a result, the bank may not have been chosen solely with your interests in mind. You may have a say in where your cash is deposited, and if you have concerns about the relationship between the bank and your broker-dealer, you may wish to investigate another option than the bank sweep program.
If you have more than $250,000 in cash in your broker-dealer’s bank sweep program, you may want to consider:
- Public Information about the health of the bank.
You may want to take advantage of the financial and other information available to consumers on FDIC’s website at http://research.fdic.gov/bankfind/. One relevant consideration when assessing the health of the bank may be the percentage of deposits derived from concentrated sources such as brokered deposits or one or more bank sweep arrangements.
- Your broker-dealer’s affiliation with the bank.
Your broker-dealer could choose not to limit or end a relationship with an affiliated bank that experiences financial difficulties, even if doing so would be in the best interests of broker-dealer’s customers.
Other factors you may want to consider when assessing your broker-dealer’s bank sweep program include:
- The compensation arrangement between the bank and your broker-dealer.
You may want to review bank sweep program details to understand how your broker-dealer, the bank(s), and any other administrators of the sweep program get paid for the sweep program. You can ask your broker-dealer representative to provide you with details of these compensation arrangements.
- The interest you are receiving on your cash, what alternatives are available to you, and the costs/benefits/risks of those alternatives.
Most broker-dealers keep a portion of the interest paid by the bank(s) as a fee for providing bank sweep services. This fee reduces the rate of interest you receive on your cash in the bank sweep program. You can check with your broker-dealer to determine if there are other cash management options available to you that may provide a higher rate of return for your cash. In determining the best option for your cash, please remember to carefully consider the costs, risks and benefits of each option.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.