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New SEC Guidance for Broker-Dealers

New SEC guidance makes it easier for broker-dealers to offer cash sweep programs.
Monday, April 20, 2020

New SEC Guidance Makes it Easier for Broker-Dealers to Offer Cash Sweep Programs

Cash sweep accounts can provide broker-dealers a convenient way to support their clients and ensure they’re wisely managing the available cash in their brokerage accounts. 

Until recently, broker-dealers have faced net capital impacts when offering cash sweep services to their clients; however, recent guidance from the SEC Division of Trading and Markets will allow broker-dealers to operate cash sweep programs without creating a negative impact on their net capital. 

What is a Cash Sweep Program? 

Cash sweep programs allow investment clients to have their free credit balances swept to a bank, where their funds are insured under FDIC (Federal Deposit Insurance Corporation) guidelines. 

These programs allow brokers-dealers to offer their clients the convenience of earning interest on their available funds, when applicable, as well as ensuring their funds are insured. 

And, rather than having to personally manage transfers between institutions or accounts, the cash sweep program allows clients to easily sweep their funds back into their brokerage account when they’re ready to make an investment decision. 

How Can a Cash Sweep Program Impact Broker-Dealers? 

Under normal program guidelines, the broker-dealer manages the sweep between accounts and also manages the return of the funds to the client’s investment account when requested. However, there may be an operational lag between the client’s request and the completion of the transaction, because of the time required to process the money movement. 

When this happens, brokers may make the decision to pre-fund their clients’ accounts in order to offer a seamless process and more convenient access to funds. This pre-funding creates a receivable owed to the broker-dealer, and that receivable must be typically evaluated and deducted from net capital. 

How Does The New No-Action Guideline Impact Broker-Dealers? 

The new no-action guideline allows the broker-dealer to count the bank receivable as an allowable asset under Rule 15c3-1 to avoid the deduction from net capital and prevent a negative impact to the broker-dealer’s required capital ratio. 

The rule’s changes may also make it easier for broker-dealers to manage client account cash sweeps and to offer a higher level of security (via FDIC insurance) and earning power for their clients’ available funds. In addition, smaller broker-dealers may be better equipped under the no-action guideline to offer their clients competitive deposit rates through third-party bank partners. 

What Other Conditions Should Broker-Dealers Be Aware Of Regarding the New No-Action Guideline? 

Broker-dealers may apply the no-action guideline for one day following the creation of the net receivable. Their cash sweep accounts/program must also meet the guidelines below to qualify as an allowable asset: 

  • A net receivable must be created through pre-funding of a customer’s brokerage account as part of an FDIC insured bank Sweep Program transaction, as defined above. 
  • The net receivable arises from a receivable from an FDIC-insured bank for which a Sweep Program deposit account has been established.
  • The broker-dealer has a legally enforceable right to demand and receive payment of the receivable from that bank.
  • The customer/client does not have the ability to access the FDIC insured account directly and/or without going through the broker-dealer. 

This new program should positively impact regulatory burdens for broker-dealers providing cash sweep accounts; for the full text of the SEC’s no-action letter, visit their website. For more information on how Red Oak Compliance supports broker-dealers and their compliance needs, visit our Services page

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Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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