[Photo:  by Rex Features/ The Guardian]

By Howard Haykin

In May, Barclays Capital agreed to pay over $97 million in restitution, prejudgment interest and penalties to settle SEC charges that the firm had overcharged clients for advisory fees or mutual fund sales charges.

BACKGROUND.    NYC-based Barclays Capital, had been a registered B/D since 1989; from September 2008 to December 2015, Barclays Capital also was an RIA. Barclays Capital is owned by Barclays Group U.S., a wholly-owned subsidiary of U.K.-based Barclays Bank.

• Barclays Capital conducts a securities and commodities brokerage business, primarily for institutional clients.
• While it was a dually-registered BD/RIA, Barclays Capital’s wealth management division – referred to as Wealth and Investment Management, Americas, or “WIMA” – provided high net worth and corporate clients with brokerage and investment management services.
• Barclays Capital provided advisory services for a fee generally based on a percentage of assets under management (“AUM”) through several advisory programs, including separately managed account wrap fee programs.
• In December 2015, Barclays Capital sold WIMA and withdrew its registration as an RIA.

SEC FINDINGS.    Over a 5-1/2 year period, from September 2010 through December 2015, Barclays Capital, then a dually-registered investment adviser and broker-dealer, overcharged certain advisory clients of its wealth and investment management business by almost $50 million in advisory fees.

Staff Attrition Opens Crack to Due Diligence Failures.  Barclays Capital’s Manager Research and Selection group (MRS) generally was responsible for manager research, due diligence and monitoring. But early on, warnings about staff attrition went largely unheeded by WIMA senior management. At some point a 5-person staff dropped to only 3 or 4 staff members and, at times, only 2 staff members were handling the oversight functions. Shortcuts were taken at the outset, and over time, complete oversight responsibilities were dropped completely.

Wrap Fee Programs.  From September 2010 through December 2014, Barclays Capital falsely represented to advisory clients that it was performing ongoing due diligence and monitoring of certain 3rd-party managers who managed advisory clients’ assets using certain investment strategies, when Barclays Capital was not performing such due diligence. As a result, Barclays Capital improperly charged 2,050 client accounts around $48 million in fees for these promised services.

Underperforming Investments.  During the time that Barclays Capital failed to conduct its ongoing due diligence, certain underperforming 3rd-party investment managers and Select or Quant Select investment strategies went undetected, causing certain advisory clients to lose approximately $3.5 million.

Erroneous Computations.  From January 2011 through March 2015, Barclays Capital charged 22,138 client accounts excess fees of around $2 million. The overcharges occurred, in part, because the firm used inaccurate valuations for assets under management and because errors were made in manual computations.

Mutual Fund Fees.  From at least January 2010 through December 2015, Barclays Capital disadvantaged certain retirement plan and charitable organization brokerage customers by recommending and selling them more expensive mutual fund share classes when such customers were eligible to purchase less expensive share classes. Barclays Capital, in turn, received receive greater compensation when those customers purchased the more expensive share classes. All told, Barclays Capital failed to provide available sales charge waivers in at least 144 transactions involving 56 Eligible Customer accounts, leading to $110,000 in wrongful sales charges.

[Click here for SEC Order.]