The Financial Industry Regulatory Authority announced that it is penalizing American Portfolios Financial Services (APFS) due to overcollection of fees and retention of surplus interest.
In a news release, FINRA said it has ordered APFS to pay $4.6 million in restitution to customers who were affected when the firm inaccurately calculated bank deposit program fees and then retained undisclosed, surplus interest from customers’ funds. The fees and surplus interest were earned from customers’ funds in the firm’s bank deposit program between April 2018 and September 2022. The firm was also fined $550,000 for the violations.
FINRA noted that bank deposit programs allow broker-dealers to automatically transfer customers’ uninvested cash balances from their brokerage accounts into interest-bearing, FDIC-insured bank accounts. These programs are designed to help customers earn interest on cash that might otherwise sit idle. During the period at issue, APFS enrolled approximately 85,000 customers in its bank deposit program.
Over that time, “APFS provided customers with inaccurate disclosures about how it calculated per-account fees for customers enrolled in its bank deposit program”, according to FINRA. “Rather than using a formula tied to the Federal Funds Target rate, as stated in the disclosures, APFS first determined customer yields based on factors such as the rates paid by its competitors and retained the remaining interest paid by the participating banks, less other administrative fees, as its fee. Over the entire relevant period, APFS collected more than $3 million in aggregate fees beyond what the disclosed formula would have yielded.”
It was also determined that APFS did not disclose that it retained surplus interest of about $1.25 million when changes in interest rates created excess proceeds. Furthermore, FINRA stated that APFS incorrectly credited the retained excess administrative fees and surplus interest as revenue in its net capital calculation, which resulted in the firm filing inaccurate monthly reports with FINRA.
“While bank deposit programs may offer useful features to customers, it is important for firms to ensure compliance with a range of relevant FINRA and SEC rules,” said Bill St. Louis, Executive Vice President and Head of FINRA Enforcement at FINRA. “Firms must ensure accuracy in customer communications, including how fees are calculated and what interest customers will earn. When firms fail in that obligation—whether through inaccurate formulas, undisclosed interest retention or inadequate supervisory controls—customers can suffer real financial harm, as demonstrated by the substantial restitution required in this case.”
FINRA stated that from April 2018 to May 2023, APFS lacked a system reasonably designed to supervise the bank deposit program. The firm had no supervisory system to ensure that the customer disclosures accurately communicated all material information about the bank deposit program or that the firm calculated its fees in accordance with disclosures sent to its customers.
APFS was acquired by Osaic Holdings, Inc. in November 2022, and was merged into Osaic Wealth, Inc. two years later. FINRA said the fine it imposed reflected the fact Osaic provided substantial assistance in calculating the appropriate restitution, that APFS disclosed the underpayments to FINRA in October 2022 and began applying the disclosed formula to calculate its fee, and that Osaic began paying restitution to affected customers before the settlement in this matter was finalized.
APFS consented to the entry of FINRA’s findings, without admitting or denying the charges.
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