Osaic is paying more than $5 million over accusations that one of its subsidiaries had improperly calculated interest earned on clients’ uninvested cash held in “sweeps” accounts.
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Earlier this month, the independent broker-dealer agreed to pay the Financial Industry Regulatory Authority $5.1 million to resolve allegations over how its subsidiary American Portfolios Financial Services had handled clients’ uninvested cash.
Osaic, formerly Advisor Group, bought American Portfolios in 2022 and has since consolidated it and seven other previously separate broker-dealers under its own brand. FINRA’s allegations against American Portfolios concern a practice known in the industry as “cash sweeps.” This involves firms taking the uninvested cash investors have in brokerage or advisory accounts and moving it to affiliated or unaffiliated banks, where it can be lent out or invested for a return.
Recent lawsuits against Morgan Stanley, Wells Fargo, Merrill, Raymond James and others generally accuse these firms of keeping the lion’s share of the resulting proceeds and letting too little flow back to clients. In the case of American Portfolios, the brokerage is alleged to have not been forthright about how it was calculating fees charged on its sweeps accounts.
The allegations against American Portfolios
From April 2018 to September 2022, according to FINRA, American Portfolios told roughly 85,000 clients that its sweeps fees were tied to the federal funds target rate, or the range of interest rates set by the Federal Reserve to influence borrowing costs throughout the U.S. economy. In reality, though, American Portfolios decided how much of its sweeps earnings it would share with clients by first looking at what its competitors were paying.
It then kept the remaining amount, according to FINRA.
“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,” FINRA said.
FINRA said American Portfolios also did not tell its clients it was collecting additional money when rising borrowing costs for a time made its sweeps practices even more lucrative. Many recent lawsuits over sweeps policies note that wealth managers had not increased payments to clients even as higher interest rates meant they could secure higher returns through sweeps.
FINRA accused American Portfolios of collecting $1.25 million in “surplus interest.” The $5.1 million settlement against the firm consists of $4.6 million in restitution to alleged victims, as well as a $500,000 penalty. FINRA also accused American Portfolios of not having a supervisory system or written procedures designed to ensure the firm was accurately explaining its sweeps and fee calculations to clients.
“Firms must ensure accuracy in customer communications, including how fees are calculated and what interest customers will earn,” Bill St. Louis, the head of FINRA enforcement, said in a statement. “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.”
The response from Osaic
An Osaic spokesperson noted that FINRA’s accusations revolve around activities alleged to occur before American Portfolios was fully integrated into Osaic in 2024.
“The Osaic Wealth cash sweep program was not the subject of this investigation,” the spokesperson said. “We are glad to put this matter behind us.”
FINRA noted that Osaic cooperated in its investigation, even bringing in an outside consultant to help calculate how much restitution was owed to the alleged victims. That restitution money was paid out by August of this year, according to FINRA.
Previous case with American Portfolios Advisors
This isn’t the first time this year that a firm under the American Portfolios brand has had a run in with regulators. In July, the Securities and Exchange Commission slapped a $1.75 million penalty on American Portfolios Advisors over allegations that it had improperly collected advisory fees on alternative investments held in clients’ portfolios. Until its closing in October 2024, American Portfolios Advisors was an RIA affiliated with American Portfolios Financial Services.
Also as part of the SEC’s allegations, American Portfolios Advisors was accused of not adequately disclosing to clients that American Portfolios Financial Services was charging them markups on certain transactions and fees. American Portfolios Advisors had instead attributed the charges to an outside clearing broker, which goes unnamed in the SEC’s complaint.
The SEC further accused American Portfolios executives of illegally backdating documents during a compliance examination of the firm. Beyond its $1.75 million penalty, American Portfolios also paid $4.5 million, plus more than $842,000 in interest, in restitution to its clients in late 2023 and early 2024.
