Navigating Cash Sweep Conflicts: A Key Consideration for Investors and Compliance Personnel
As investors face the challenges of higher inflation, interest rate hikes, and market volatility, their focus on yields offered by cash and short-term investment options is intensifying. With a renewed interest in cash management, it is an opportune time for compliance personnel to reevaluate conflicts and related disclosures for these products. Here are some practical tips for cash sweep conflicts disclosures.
Inventory and update conflicts: Compliance staff should review all cash sweep options, track default products, revenue received, indirect benefits, and differences in client returns. Regular evaluations are crucial, especially following changes to defaults, revenue sharing arrangements, interest rates, and yields.
Disclose all conflicts: While higher revenue from bank deposit sweep programs and lower client returns are common conflicts, it's essential to identify and disclose conflicts related to indirect financial benefits and the selection of higher-cost money market fund share classes.
Avoid relying solely on clearing brokers' generic disclosures: Clearing brokers may lack visibility into the specific cash sweep options offered by introducing brokers and advisory affiliates. Therefore, advisers should ensure their disclosures provide the necessary specificity regarding revenue sharing, bank deposit sweep programs-related incentives, and mutual fund share class selection.
Be explicit in disclosure language: Avoid using hypothetical language when describing direct or indirect financial benefits from revenue sharing. Clearly state when a conflict exists and specify the types or classes of clients, advice, or transactions to which it applies.
Given the SEC's increased focus on cash sweep conflicts, investment advisers and broker-dealers must proactively assess and disclose conflicts of interest associated with these products. Conducting periodic reviews.
This information comes from Kurt Gottschall, Partner at Haynes and Boone, LLP. whose article Managing Conflicts of Interest for Cash Sweep Products appeared in the May 2023 editions of Currents. To receive important information such as this and to review the risks and associated compliance and supervision suggestions, join NSCP today to receive NSCP Currents and stay up to date on issues such as this that matter most for the financial services industry. Members can access the full article here.
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