SEC spanks closed Osaic RIA for conflicts, over-charging clients on alternatives

The Securities and Exchange Commission (SEC) on Friday penalized American Portfolios Advisors $1.75 million for over-billing clients on alternative investments held in registered investment advisor accounts, as well as failing to inform clients of conflicts of interest related to compensation the firm earned from a clearing firm. 

The SEC charged that the violation at American Portfolios Advisors occurred from August 2020 to March 2023. American Portfolios Financial Services, an independent broker-dealer that also owned the RIA, was sold to Osaic, formerly Advisor Group, in 2022. 

American Portfolios Advisors closed last October; Osaic, a giant network of broker-dealers and RIAs, recently consolidated its broker-dealers and RIAs under one brand.

According to its most recent Form ADV, the firm had more than $13 billion in assets. "The conduct that is the subject of the order concerns practices that occurred prior to the acquisition of the advisor by Osaic Inc., and the order does not reference Osaic," a spokesperson wrote in an email.

In addition to the previously cited issues with charges and conflicts, the SEC claimed in its order that senior executives at American Portfolios Advisors backdated documents during an SEC compliance exam. The firm agreed to the SEC’s order without admission or denial of its findings.

The SEC, which regulates large RIAs, put the industry on alert in 2021 when it said investment advisors were charging clients more than they owe as a result of inaccurate fee calculations.

The agency at the time released a risk alert that outlined problems in how firms bill clients and disclose their fees.

The deficiencies, which often led to clients suffering financial harm, included overbilling of advisory fees, faulty determinations of break points, and incorrect charges to households. Advisers also failed to credit fees due to clients or charge them on a pro rata basis for account opening.

American Portfolios Advisors “breached its fiduciary duty to certain of its advisory clients by failing to fully and fairly disclose the nature and extent of conflicts of interest associated with certain compensation paid to [the RIA’s] affiliated broker-dealer by an unaffiliated clearing broker in connection with trade execution and account services, resulting in additional costs to clients,” according to the SEC.

The SEC claimed the firm did not disclose that its affiliated broker-dealer charged fee markups on various types of transaction and account service fees, and instead misleadingly indicated that the unaffiliated clearing broker determined the amounts of the fees billed to RIA clients.

The SEC also claimed that American Portfolios Advisors erroneously billed and collected advisory fees on alternative investment positions, although no fees were supposed to be assessed on those positions, according to the order. The firm also failed to refund a pro rata portion of prepaid quarterly advisory fees when clients terminated their accounts, as provided in the firm’s client agreements.