SEC: Barclays Charged Excessive Fees In Wrap Fee Program
The Commission has brought a series of actions against investment advisers tied to wrap fee programs. Typically, the actions alleged either that clients were not told the magnitude of fees when an adviser “traded away” or that excessive fees were charged. The action by the agency against Barclays Capital, Inc., it the latest in this series of actions, alleging that wrap fee clients were overcharged. In the Matter of Barclays Capital Inc., Adm. Proc. File No. 3-17978 (May 10, 2017).
Barclays was a registered investment adviser and broker-dealer. During the period here – generally 2010 to the end of 2014 – the firm served as an adviser to clients in its wrap fee programs. While the firm had multiple programs with different objectives, generally they used third-party managers or sub-advisers. Those persons were, according to Barclays, evaluated and monitored – due diligence was conducted to ensure that client accounts were properly maintained. This was detailed in Forms ADV.
Despite representations in its filings, client agreements, brochures and market materials, the firm failed to perform the initial due diligence and ongoing monitoring as represented. The materials describing the due diligence and monitoring were thus materially false and misleading – effectively clients paid for services not recieved.
Over a four year period beginning in January 2011 the firm also charged fees and received revenue that was inconsistent with its disclosures regarding advisory fees. Barclays represented to clients that it would calculate its investment advisory fees based on the average of the three month-end values of each account’s assets in the billing quarter. During the period, however, the firm overcharged 22,138 advisory accounts, resulting in over $2 million in excess fees. The excess fees resulted from inadequate controls, errors from manual processes and workarounds and inadequate oversight. Indeed, from 2010 through mid-2013 the firm did not have policies or procedures in place to ensure that the representations made to its wrap fee clients were accurate. And, from early 2013 through the end of 2014 the firm failed to implement its policies and procedures.
Finally, during the same period the firm did not have adequate procedures and systems to ensure that certain mutual fund clients received fee waivers or less expensive shares for which they were eligible. Mutual funds often offer share classes that have different sales or load charges and, in certain instances reduced or no charges under certain circumstances. Many funds provide waivers in certain instances. The fees charged impact not just the return to the client but also the broker-dealer’s revenue. Here Barclays’s clients in certain instances purchased more expensive shares than those to which they were entitled – they were overcharged.
The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(2), 206(4) and 207. In resolving the matter the firm agreed to certain undertakings, including the payment of over $3.5 million to certain wrap fee clients whose investments underperformed and who paid excess fees. The firm also consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. In addition, the firm will pay disgorgement of $49,785,417, prejudgment interest and a penalty of $30 million.