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V. Exception for “Sweep” Activities

The GLB Act permits banks, without being considered a broker, to sweep “deposit funds into any no-load, open-end management investment company registered under the Investment Company Act of 1940 that holds itself out as a money market fund.”56 In light of the continuing and outdated restriction on banks paying interest on demand deposits, many banks have developed “sweep” programs in order to allow their customers a way to earn interest on their deposit balances held at a bank. These services are particularly important to small businesses, which generally can not hold other types of interest-paying accounts (such as negotiable order of withdrawal accounts) and often rely on their local banks for cash management services.

The Proposed Rules continue to provide that a money market fund will be considered a “no load” fund for purposes of the Sweeps Exception only if the fund does not charge a front-end or deferred sales load and does not charge a fee in excess of 25 basis points for sales related expenses or other shareholder services. While this definition of “no-load” is the one used by the NASD for advertising purposes, adopting this definition under the Sweeps Exception would disrupt the existing sweep programs of many banks. Moreover, the Commission’s interpretation may not provide any meaningful benefit to consumers. As the Commission recognizes, banks can raise the fees they directly charge their sweep customers if they are unable to fully recoup the costs associated with operating a sweeps program from the 25 basis point payments authorized by the Proposed Rules. So long as the total fees associated with a sweep program are properly disclosed to the customer—as is required under existing rules—we believe banks and their customers should be free to decide whether these fees are paid at the account level or through a fee levied by the fund in which the account’s assets are invested.

Accordingly, we encourage the Commission to define a “no-load” fund for purposes of the Sweep Exception as a fund that does not charge a front-end or deferred sales load. If the Commission chooses not to adopt such a definition, we believe the Commission should adopt an administrative exemption allowing banks to continue to provide their customers “sweep” services involving such a money market mutual fund.

Finally, we disagree with the Commission’s statement that the Sweeps Exception does not permit a bank to provide sweep services for deposits held at another bank.57 The Exception itself permits a bank to sweep “deposit funds” into a no-load money market mutual fund; the statute does not require that those deposit funds be held at the bank providing the sweep services. In order to provide their customers sweep services in a cost-effective manner, small banks may contract with a larger bank or an affiliated bank to provide these services to their customers and we no reason for the Proposed Rules to prevent this practice.

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56 See 15 U.S.C. § 78c(a)(4)(B)(v) (the “Sweeps Exception”).

57 See Adopting Release at 39,706.

Last Updated 10/08/2004

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