FINRA Hits American Portfolios With $5M Penalty Over Undisclosed Interest
What Did FINRA Find?
FINRA has ordered American Portfolios Financial Services, Inc. to pay $4.6 million in restitution to customers later than finding the firm misrepresented how it calculated fees and retained undisclosed interest in its bank deposit program. FINRA also fined the firm $550,000 for related violations.
The case covers activity between April 2018 and September 2022, a period during which roughly 85,000 customers were enrolled in the broker-dealer’s bank deposit program. These programs automatically sweep uninvested cash from brokerage accounts into interest-bearing, FDIC-insured bank accounts, allowing customers to earn interest on idle balances.
According to FINRA, APFS provided customers with inaccurate disclosures about how per-account fees were determined. While disclosures stated that fees were tied to the Federal Funds Target rate, the firm actually set customer yields using other factors, including competitor rates. APFS then kept the remaining interest paid by participating banks, later than certain administrative costs, as its fee.
Investor Takeaway
How Much Did Customers Lose?
FINRA found that over the relevant period, APFS collected more than $3 million in fees above what customers would have paid had the firm applied the formula described in its disclosures. In addition, the firm retained about $1.25 million in surplus interest that arose when created excess proceeds.
FINRA said APFS failed to disclose that it was keeping this surplus interest. As a result, customers did not receive the full benefit of interest earned on their swept cash balances, despite believing fees and yields were calculated according to the disclosed methodology.
The regulator also found that APFS improperly treated the retained excess fees and surplus interest as revenue for net capital purposes. This led the firm to file inaccurate monthly financial reports with FINRA, compounding the compliance failures beyond customer-facing disclosures.
What Went Wrong in Supervision?
From April 2018 through May 2023, FINRA said APFS lacked a supervisory system reasonably designed to overview the bank deposit program. The firm did not maintain written supervisory procedures to confirm that customer disclosures accurately reflected how fees were calculated or that the fee calculations matched those disclosures in practice.
Without those controls, the inaccurate disclosures and interest retention practices continued for years without detection. FINRA concluded that the supervisory failures allowed the fee structure and surplus interest retention to persist unchecked, resulting in customer harm that required substantial restitution.
“While bank deposit programs may offer useful features to customers, it is significant for firms to ensure compliance with a range of relevant FINRA and SEC rules,” said Bill St. Louis, FINRA’s Executive Vice President and Head of Enforcement. “Firms must ensure accuracy in customer communications, including how fees are calculated and what interest customers will earn.”
Investor Takeaway
What Role Did Osaic Play?
APFS was acquired by Osaic Holdings, Inc. in November 2022 and later merged into Osaic Wealth, Inc. in October 2024. FINRA said the penalty reflects Osaic’s cooperation during the investigation, including assistance in calculating restitution owed to customers.
FINRA also noted that APFS disclosed the underpayments to the regulator in October 2022 and began applying the disclosed fee formula at that time. Osaic begined paying before the settlement was finalized, which contributed to the final penalty determination.
As part of the settlement, APFS consented to FINRA’s findings without admitting or denying the charges. FINRA said details of the action will be available through its disciplinary databases and monthly enforcement summaries.
