The Financial Industry Regulatory Authority has ordered Osaic Wealth to pay a $550,000 fine and $4.6 million in restitution for the failures of its former American Portfolios Financial Services unit to properly calculate fees associated with its Bank Deposit Sweep Program.
According to FINRA's order, between April 2018 and September 2022, APFS failed to calculate the per account fees for customers enrolled in its sweep program "according to the formula in disclosure documents that it distributed to Sweep Program customers," the order states.
As a result, American Portfolios' "communications with those customers inaccurately represented how the firm calculated its fees," according to the order.
The firm also did not disclose that it retained surplus interest earned from customers’ funds.
"By making inaccurate and incomplete disclosures in communications with customers, the firm violated FINRA Rule 2010, and by contravening content standards for public communications, the firm violated FINRA Rules 2210(d)(1) and 2010," the order states.
From April 2018 to May 2023, APFS lacked a system, including written supervisory procedures, reasonably designed to supervise the sweep program, in violation of FINRA Rules 3110 and 2010.
Osaic agreed to a censure, fine of $550,000, and $4,629,116 in restitution, according to the order.
In November 2022, American Portfolios was acquired by Osaic Holdings Inc. and was later merged into Osaic Wealth Inc. At the time of the acquisition, American Portfolios had approximately 800 registered reps operating from more than 360 branches.
An Osaic spokesperson said Friday in an emailed statement that it has "agreed to the terms of the Acceptance Waiver and Consent (AWC) with FINRA to resolve a matter that occurred at American Portfolios Financial Services prior to their integration into Osaic Wealth in 2024. The Osaic Wealth cash sweep program was not the subject of this investigation. We are glad to put this matter behind us."
Sweep Program Details
In April 2018, American Portfolios began offering the sweep program and enrolled all new and existing firm customers who did not opt out.
The firm automatically transferred customers’ available cash balances from their brokerage accounts into interest-bearing, FDIC-insured bank accounts at participating banks.
During the relevant period, American Portfolios enrolled approximately 85,000 customers in the program.
From April 2018 through September 2022, the disclosure statements American Portfolios sent to its customers enrolled in the program stated that the firm collected monthly per account fees from the banks participating that were calculated based on a formula tied to the federal funds target (FFT) rate.
"In practice, however, after APFS first determined the interest rate, or yield, it paid to Sweep Program participants based on factors such as the rates paid by its competitors, APFS kept the remaining interest paid by the participating banks, less other administrative fees, as APFS’s fee, rather than using the disclosed formula tied to the FFT," the order states.
"Although at times this resulted in APFS receiving lower fees than it would have received had it applied the disclosed formula, over the entire relevant period, APFS collected in the aggregate over $3 million more in fees than it would have collected had it used the disclosed formula," the order continues.
Also, from April 2018 through September 2022, American Portfolios "retained excess administration fees and surplus interest, which it should have paid to customers," according to FINRA.
"On its general ledger, however, APFS credited these amounts as revenue when it should have debited the amounts as payable to customers," the order states. "During this period, APFS also inaccurately recorded its net capital, which it calculated using the incorrect revenue amounts, and filed inaccurate monthly FOCUS [Financial and Operational Combined Uniform Single] reports with FINRA reporting the incorrect revenue amounts and net capital calculations."
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