Compliance Failures Cost Firm $15 Million

On September 23, 2014, the Securities and Exchange Commission ("SEC") charged Barclays Capital Inc. (“Barclays”), a global banking services firm, with “failing to maintain an adequate internal compliance system.”

After acquiring Lehman Brothers, a financial services firm that filed for bankruptcy in 2008, Barclays neglected to “enhance its compliance infrastructure to integrate and support the acquisition and rapid growth of the advisory business from Lehman.”  In order to prevent violations of the Investment Advisers Act of 1940, (“Advisers Act”) all advisory firms are required to create and implement written compliance policies and procedures reasonably designed to prevent violations of federal securities laws.

“When a firm acquires an advisory business, it must devote the attention and resources necessary to build a robust compliance system,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Barclays failed to establish this critical compliance foundation when it acquired Lehman’s advisory business, and as a result subjected its clients to a host of improper practices and inadequate disclosures.”

The SEC examination revealed that Barclay’s failure to implement effective policies and procedures after the acquisition resulted in other violations.

They include:

  • Engagement in more than 1,500 principal transactions with its advisory clients without proper disclosure or client consent;
  • Charging commissions and fees that were inconsistent with disclosures; and
  • Underreported assets under management by $754 million.

These violations resulted in client losses of $474,000.  “Barclays has since reimbursed or credited its affected clients approximately $3.8 million including interest.”

Although Barclays did not admit or deny the examinations findings, the company agreed to cease and desist such violative activities and pay a $15 million penalty.

More than ever before the SEC is looking at those internal controls, including policy and procedure development to address service offerings post-merger.  It is essential for advisory firms to customize protocols to match the needs of the business model.

Be sure to read the CCLS monthly Risk Management Updates for in-depth information regarding current regulatory compliance considerations.

For further information on this and other related subjects, please contact us at info@corecls.com or (619) 278-0020.

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