A recent FINRA settlement highlights the importance of accurate customer disclosures and robust supervisory systems, especially when it comes to bank deposit programs. From 2018 to 2022, one broker-dealer failed to properly disclose how fees were calculated, retained surplus interest without notification, and filed inaccurate reports with regulators, ultimately leading to $4.6 million in restitution and a $550,000 fine.

Misleading Fee Calculations and Undisclosed Revenue

The firm’s bank deposit program enrolled approximately 85,000 customers, offering interest-bearing FDIC-insured accounts for idle cash. However, instead of using the disclosed fee formula (based on the Federal Funds Target Rate), the firm set customer yields based on competitor rates and kept the remaining interest as its own fee. This undisclosed surplus, totaling more than $3 million, significantly exceeded what would have been collected under the disclosed formula.

In addition, when interest rate changes resulted in excess proceeds, the firm retained an additional $1.25 million in surplus interest, without informing customers.

Regulatory Filings and Supervision Failures

To make matters worse, these retained fees and interest were improperly reported as revenue in net capital filings, resulting in the firm submitting inaccurate monthly reports to FINRA.

From April 2018 to May 2023, the firm lacked any supervisory system or written procedures to confirm that disclosures reflected actual practices or that fees were calculated correctly. It wasn’t until the firm self-disclosed the issue in 2022 that fee calculations were corrected and restitution efforts began.

Compliance Takeaways

This case reinforces key lessons for compliance teams managing customer-facing programs:

  • Disclosure Oversight and Verification: Regularly audit customer disclosures to ensure fee calculations and interest retention are clearly and accurately explained.
  • Documentation and Audit Trails: Maintain clear records of all rate-setting and fee decisions to support internal reviews and external examinations.
  • Supervisory Systems for Fee-Based Programs: Establish controls to monitor how customer yields and firm fees are calculated, and ensure disclosures match actual practices.

Programs that seem operationally routine, like cash sweep or bank deposit offerings, can still carry significant regulatory risk when left unsupervised. This enforcement case shows how fee transparency and disclosure alignment must be a standing priority for compliance teams.