Barclays Is Sanctioned By The FCA and The SEC

Barclays took a double hit from regulators yesterday. First the Financial Conduct Authority in the UK fined Barclays Bank Plc, about £38 million for putting £16.5 billion of client assets at risk. Then the SEC imposed a $15 million penalty on Barclays Capital Inc. In the Matter of Barclays Capital Inc., Adm. Proc. File No. 3-16154 (September 23, 2014). Both sanctions are based on inadequate procedures.

The FCA’s action follows 16 instances in which the regulator or its predecessor imposed sanction on the firm relating to client assets or client money. This action is predicated on what the FCA called a “significant weakness” in the systems and controls in Barclay’s investment banking division between November 2007 and January 2012. FCA rules require firms to protect client assets if a firm becomes insolvent. Barclays failed to properly apply these rules when opening 95 accounts in 21 countries. As a result the firm did not establish the appropriate legal arrangements with these companies. The failings also resulted in assets being listed at times under Barclay’s name rather than that of the client. The fine imposed reflects the violations and the firm’s regulatory history. It is also the largest imposed by the FCA or its predecessor for client asset breaches.

The SEC’s action centers on the failure of Barclay’s to properly enhance its internal procedures after acquiring Lehman Brothers Inc. advisory business in September 2008. Prior to that time Barclays operations in the United States were comprised largely of broker-dealer functions. After the September 2008 acquisition the firm created what is now called the Barclay’s Wealth and Investment Management, Americas division. Despite the growth of the advisory business, Barclays Wealth failed to build the appropriate infrastructure. That contributed to deficiencies which include:

• Engaging in principal transactions without making the required written disclosures and obtaining consent in violation of Advisers Act Section 207(3). As a result the firm received compensation of $2,853,119.62 which, along with interest, has been credited to the impacted clients.

• Commissions and fees were charged and earned revenue that was inconsistent with its disclosures to certain advisory fees. This occurred from September 2008 through December 2011 and violated Advisers Act Section 206(2).

• The custody rule was violated. Rule 206(b)-2 under the Advisors Act requires that Barclays ensure customer funds and securities are subject to verification by an annual surprise examination by an independent public accountant. The firm had inadequate procedures which caused it not to identify more than 800 advisory accounts to the independent accountant.

• The firm failed to adopt and implement written policies and procedures designed to prevent violations of the Advisers Act. Although the firm had written compliance policies and procedures they had deficiencies and weaknesses.

• Barclays also failed to make and keep certain books and records as required by Section 204(a) of the Advisers Act and violated Section 207 of that act by making materially inaccurate disclosures in it Form ADV.

To resolve the proceeding the firm agreed to implement a series of remedial measures. The Barclays reimbursed or credited affected clients about $3.8 million, including interest. It also developed and implemented an action plan in consultation with outside experts. Finally, the firm consented to the entry of a cease and desist order based on Advisers Act Sections 204(a), 206(2), 206(3), 206(4) and 207 and to a censure. Barclays also agreed to pay a penalty of $15 million.