RIA Compliance Blog
On May 10, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease-and-Desist Proceedings (“Order”) against Barclays Capital Inc. (“Barclays Capital”). The Order alleges that Barclays Capital, in its capacity as a dually-registered investment adviser and broker-dealer, overcharged advisory clients in the course of its wealth and investment management business. In conjunction with the Order, Barclays Capital submitted an Offer of Settlement where it agreed to pay about $97 million, which includes disgorgement and a penalty.
According to the SEC’s Order, Barclays Capital was the adviser and fiduciary to its advisory clients for two wrap fee programs: the Select Advisors Program and the Accommodation Manager Program, both of which were launched in September 2010. Starting in September 2010 and ending around the close of 2014, Barclays Capital assured Select Advisors Program clients in both client agreements and in its brochure that “Barclays Capital performed initial due diligence and ongoing monitoring of third-party managers it recommended to manage its clients’ assets using specific investment strategies.” Likewise, beginning in May 2011 and ending in March 2013, Barclays Capital assured Accommodation Manager Program clients that it conducted limited due diligence and monitoring of Accommodation Manager Program strategies.
In reality, however, evidence showed that Barclays Capital was not conducting the level of due diligence that it told clients it would conduct in the brochures. For example the SEC found that beginning in September 2010 and ending in December 2014, Barclays Capital did not conduct initial due diligence and continuous monitoring of third-party managers and their investment strategies in regards to a number of strategies in the Select Advisors Program. The SEC also found that beginning in May 2011 and ending in March 2013, Barclays Capital did not conduct any limited ongoing due diligence and monitoring for the Accommodation Manager Program. Moreover, evidence showed that 2,050 client accounts were overcharged about $48 million for the promised due diligence and monitoring of the accounts. As a result, the SEC determined that Barclays had violated the Investment Advisers Act of 1940 (“Advisers Act”) by making material misrepresentations in its advisory agreements and brochures.
The SEC also found that from January 2011 to March 2015, Barclays Capital charged 22,138 advisory accounts $2,015,451 more than these accounts should have been charged. The causes of the overbilling included “inadequate controls around valuation of advisory client assets,” an advisory fee calculation methodology that relied on “manual processes and manual workarounds for specific processes, which led to human error,” and a shortage of “appropriate oversight over [Barclays Capital’s] account management and billing operations.”
Finally, the SEC alleged that Barclays Capital did not make required disclosures when recommending mutual fund share classes to clients. From January 2010 to December 2015, Barclays Capital allegedly had no sufficient procedures to guarantee that select mutual fund clients would obtain fee waivers or less costly share classes when they were eligible to do so. Because of this, 56 customer accounts that could have obtained mutual fund share classes that waived sales charges ended up purchasing mutual fund share classes with sales charges. The SEC alleged that Barclays Capital’s disclosures about the conflicts of interest related to the share classes were not adequate. Evidence also showed that about 19 retirement accounts ended up purchasing mutual fund share classes with sales charges when they were eligible to purchase lower cost retirement class shares.
Based on the SEC’s findings, which Barclays neither consented to nor denied, Barclays Capital consented to form a Fair Fund to refund advisory clients who were overbilled. The Fair Fund includes $49,785,417 in disgorgement plus interest of $13,752,242, as well as a $30 million civil penalty. Barclays Capital was also ordered to pay $3,504,285 to advisory clients who placed funds in third-party investment managers and third-party investment strategies that performed poorly and that Barclays Capital did not monitor. This money will also be used to reimburse clients who invested in more expensive mutual fund share classes when less expensive ones were available to them.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.