According to FINRA, American Portfolios Financial Services, Inc. (APFS) was ordered to pay $4.6 million in restitution to customers and fined $550,000 for inaccurately representing how it calculated fees in its bank deposit program and for retaining undisclosed surplus interest earned from customers' funds.
Bank deposit programs allow broker-dealers to automatically transfer customers' uninvested cash balances from brokerage accounts into interest-bearing, FDIC-insured bank accounts. These programs help customers earn interest on cash that might otherwise sit idle. During the relevant period, APFS enrolled approximately 85,000 customers in its bank deposit program.
From April 2018 through September 2022, APFS provided customers with inaccurate disclosures about how it calculated per-account fees for customers enrolled in the program. The firm's disclosures stated that fees would be calculated using a formula tied to the Federal Funds Target rate. However, the firm did not actually use this disclosed formula.
Instead, APFS first determined what customer yields to provide based on factors such as rates paid by its competitors, then retained the remaining interest paid by participating banks (less other administrative fees) as its fee. This methodology bore no relationship to the formula disclosed to customers. Over the entire relevant period, APFS collected more than $3 million in aggregate fees beyond what the disclosed formula would have yielded.
Additionally, APFS did not disclose that it retained surplus interest totaling approximately $1.25 million when interest rate changes created excess proceeds. When interest rates increased, participating banks paid higher interest on customer deposits. However, APFS did not always pass these increases through to customers, instead retaining the surplus as undisclosed additional revenue.
APFS also incorrectly credited the retained excess administrative fees and surplus interest as revenue in its net capital calculation, resulting in inaccurate monthly financial reports filed with FINRA. Net capital rules require broker-dealers to maintain minimum levels of liquid assets. Accurate net capital calculations are essential for FINRA to monitor firm financial condition and ensure firms can meet obligations to customers.
Beyond the inaccurate fee calculations and undisclosed interest retention, APFS failed to maintain adequate supervisory systems. From April 2018 to May 2023, the firm lacked systems reasonably designed to supervise the bank deposit program. APFS had no supervisory procedures to ensure customer disclosures accurately communicated material information about the program or that fees were calculated in accordance with disclosures.
APFS was acquired by Osaic Holdings, Inc. in November 2022 and merged into Osaic Wealth, Inc. in October 2024. The fine in this case reflects that Osaic provided substantial assistance in calculating appropriate restitution, that APFS disclosed the underpayments to FINRA in October 2022 and began applying the disclosed formula, and that Osaic began paying restitution before the settlement was finalized.
For investors, this case underscores the importance of understanding how firms are compensated for bank deposit programs and other cash sweep options. Investors should review disclosures carefully and ensure the yields they receive are consistent with what was promised.
