Firm Settles FINRA Charges for Cash Sweep Program Disclosure Failures

A firm settled FINRA charges for failing to provide to customers accurate disclosures on its cash sweep program and for related supervisory failures.

According to the AWC, the firm provided inaccurate information regarding how interest yields and fees were calculated. While the firm’s disclosures stated that fees were calculated based on a formula tied to the Federal Funds Target rate, the firm actually determined customer yields based on competitor rates and retained the remaining interest as profit. FINRA found that this practice resulted in the firm collecting over $3 million in excess fees and approximately $1.25 million in undisclosed "surplus interest." Furthermore, the firm sent outdated disclosure statements to customers in 2023 that listed inaccurate, higher yields than were actually paid.

In addition, FINRA found that the firm failed to establish a supervisory system, including written supervisory procedures, to ensure that the sweep program's "working group" adhered to the disclosure formulas. Because the firm impermissibly retained fees and interest that should have been paid to customers, the firm also failed to maintain accurate books and records. Consequently, the firm filed inaccurate FOCUS reports that mischaracterized amounts payable to customers as revenue.

FINRA concluded that the firm violated Exchange Act Section 17(a) ("Records and Reports") and Rules 17a-3 ("Records to be made by certain exchange members, brokers and dealers") and 17a-5 ("Reports to be made by certain brokers and dealers"), as well as FINRA Rules 2210 ("Communications with the Public"), 4511 ("General Requirements"), 3110 ("Supervision"), and 2010 ("Standards of Commercial Honor and Principles of Trade").

The firm agreed to (i) a censure, (ii) a $550,000 fine, and (iii) restitution of $4,629,115.80 plus interest.