FINRA Fines American Portfolios $4.6M Over Fee Overcharges

The Financial Industry Regulatory Authority (FINRA) announced on Tuesday, December 30, that it has ordered American Portfolios Financial Services, Inc. (APFS) to pay $4.6 million in restitution to customers impacted by the company’s inaccurate representation of how it calculated its fees and its retention of undisclosed, surplus interest.

According to the announcement, the firm failed to accurately calculate bank deposit program fees, and it also did not disclose the retention of surplus interest earned from customers’ funds. The fees and surplus interest were earned in the company’s bank deposit program between April 2018 and September 2022. 

In addition to having to pay $4.6 million to its customers, the company is also to pay a fine of $550,000 for the mentioned violations.

What Did APFS Do?

The regulator explained that banks offer deposit programs that allow broker-dealers to automatically transfer customers’ uninvested cash balances from their brokerage accounts into interest-bearing, Federal Deposit Insurance Corporation-insured bank accounts.

It said that these programs were designed to help customers earn interest on cash, rather than just have it sit idle. However, during the period at issue, APFS enrolled approximately 85,000 customers in the bank deposit program.

It then provided users with inaccurate disclosures about how it calculated per-account fees for customers enrolled in the bank deposit program between April 2018 and September 2022.

FINRA said that the firm did not use a formula tied to the Federal Funds Target rate, as stated in the disclosures. Instead, it first determined customer yields based on factors like the rates paid by its competitors and retained the remaining interest paid by the participating banks, less other administrative fees, as its fee.

During the mentioned period, APFS managed to collect over $3 million in aggregate fees beyond what the disclosed formula would have yielded, according to FINRA.

On top of that, the company also did not disclose that it retained surplus interest, which totaled approximately $1.25 million, when interest rate changes created excess proceeds. Lastly, the regulator said that the firm incorrectly credited the retained excess administrative fees an surplus interest as revenue in its net capital calculation, which led to the firm filing inaccurate monthly reports with the regulator.

Commenting on the matter, the Head of FINRA enforcement and Executive VP, Bill St. Louis, said: “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. 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.”