A Cautionary Tale: Cash Sweep Programs

 

A Cautionary Tale: Cash Sweep Programs

Recent enforcement actions by the Securities and Exchange Commission (SEC) have placed advisors' cash management programs under scrutiny. While previous attention was given to insufficient disclosures regarding revenue sharing in the SEC's Cash Sweep Program Initiative, a new concern has emerged regarding rising interest rates and fiduciary duty. Specifically, Wells Fargo and Merrill Lynch were cited for failing to establish and implement written policies and procedures governing their cash sweep programs. It was found that Wells Fargo Advisors and Merrill Lynch, or their affiliates, determined the interest rates offered in their bank deposit sweep programs (BDSPs). Consequently, during periods of rising interest rates, the yield differential between these BDSPs and alternative cash sweep vehicles reached nearly 4 percent.

“Cash sweep programs impact nearly all advisory clients, who often pay advisory fees on assets held in these accounts,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “These actions reinforce that advisory firms must have reasonably designed policies and procedures to consider their clients’ best interest when evaluating potential sweep options for cash held in advisory accounts and to ensure that cash held in an advisory account is properly managed by financial advisers consistent with a client’s investment profile.” 

This case highlights two key considerations for advisors: managing cash sweep vehicles and cash as an asset. Custodians often limit sweep options, which are meant for transactions—not investments. In a rising rate environment, alternatives like money market funds or CDs may better serve clients' cash holdings.

In most cases, custodians generate revenue from client assets held within sweep vehicles. While custodians are obligated to disclose this practice to clients, advisors also bear the responsibility of disclosing any revenue-sharing arrangements or incentives related to them. Failures related to this disclosure continue to be a widespread deficiency within the industry. For more information on the Cash Sweep Program Disclosure Initiative, you can review our When Revenue Becomes a Conflict Blog Post.

If your Firm is concerned about its policies and procedures surrounding bank deposit sweep programs or other cash management related positions, please contact AdvisorAssist today!

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