Bank Sweep / Money Market Interest Income — Revenue from Uninvested Client Cash
Recording interest income earned on uninvested client cash that is automatically swept to bank deposit accounts or money market funds — a significant and controversial revenue source for broker-dealers.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Sweep Interest Income Receivable (Monthly from Program Banks) | Asset (+) | 485,000.00 | - |
| Sweep / Cash Management Revenue (Interest Income on Client Uninvested Cash) | Revenue (+) | - | 485,000.00 |
💡 Accountant's Note
One of the most significant and controversial revenue sources for large broker-dealers and custodians is the 'cash sweep' — uninvested client cash is automatically deposited in affiliated bank accounts (Schwab Bank, TD Bank for Ameritrade/Schwab accounts) where the broker-dealer earns the net interest spread (difference between what it pays to the client and what it earns on the deposits). During 2022–2024 rising rates: Schwab earned $10B+ annually from its bank sweep program, paying clients 0.01–0.45% while earning 5%+ on deposits. The spread is enormous and largely invisible to clients. Revenue recognition: recognized monthly as interest income on the swept deposits. Accounting: for broker-dealers with affiliated banks — the bank earns the investment income; the broker-dealer receives a fee from the bank for the deposit referrals. This is a related-party transaction requiring market-rate analysis. The SEC's 2023 cash sweep investigation (alleging broker-dealers failed to seek best interest rates for clients) has created significant regulatory and legal exposure.
Practitioner & Systems Framework
💻 ERP Architecture
Sweep program accounting depends on structure: (1) AFFILIATED BANK SWEEP: the broker-dealer deposits client cash in its affiliated bank → the bank pays the broker-dealer a 'deposit referral fee' or interest → the broker-dealer passes a portion to the client. Revenue = the net interest retained by the broker-dealer (net of client payment). (2) THIRD-PARTY BANK SWEEP: the broker-dealer places client cash at multiple third-party banks → earns an administration fee from the banks. (3) MONEY MARKET FUND SWEEP: client cash is swept into money market funds → the broker-dealer may earn 12b-1 fees or revenue sharing from the fund family. The 2022-2023 Federal Reserve rate hike cycle dramatically increased sweep revenue at custodians — Schwab's bank sweep went from a modest revenue contributor to its largest business in under 18 months.
⚠️ Audit Flags
Sweep revenue audits and regulatory examinations test: (1) REG BI compliance — is the sweep program in the client's best interest or are clients being placed in below-market-rate programs for the broker-dealer's benefit? (2) Related-party transaction terms — for affiliated bank sweeps: is the deposit referral fee at arm's length? (3) Disclosure — is the sweep program's fee economics clearly disclosed in Form ADV Part 2A or in account agreements? (4) Client notice when rates change — when the broker-dealer changes sweep rates, is adequate notice provided?
📄 Required Documentation
Sweep program agreement (affiliated or third-party, interest rate formula, broker-dealer's net spread), monthly interest income statements from program banks, client sweep account balances, interest paid to clients (rate paid per account), net spread calculation, affiliated bank sweep arm's-length analysis, Form ADV Part 2A disclosure, SEC examination correspondence, and class action litigation assessment.
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