Regal Investment Advisors of Kentwood, Mich., and its top partners have agreed to pay about $945,000 to settle allegation of compliance violations, including charging client fees for advisory services that were never rendered, according to an SEC filing yesterday.
In addition, the agreement bars the registered investment advisor’s chief compliance officer, Brian Yarch, from acting in that capacity for any financial company for three years, after which he can apply for reinstatement.
John Kailunas and Yarch, the two primary owners of Regal Investment Advisors, which holds more than $1.9 billion in assets under management, agreed to the findings, remedial sanctions and a cease-and-desist order after the SEC charged them with failing to provide advisory services to certain clients after their investment advisor representatives left Regal and with failing to disclose conflicts of interest arising from compensation received from an affiliated portfolio manager.
The filing set out the financial remedy to the above violations as follows: Kailunas and Yarch will each pay civil penalties of $50,000; and Regal will pay disgorgement of $595,900, prejudgment interest of more than $100,000 and a civil penalty of $150,000. Costs for distributing these monies to the affected clients will be paid by Regal in addition to the remedy.
According to the filing, from July 2015 to April 2021, Regal improperly charged $85,432 in advisory fees to client accounts, yet did not provide advisory services after the assigned advisors left the firm. It was standard practice at Regal that in such situations, those clients would be reassigned to Kailunas and Yarch (who were, respectively, the CEO with an 80% stake in the firm and chief compliance officer with an 18% stake), and considered “house accounts,” the filing said. Also, Regal failed to disclose to its clients that it had financial and managerial interests in Durand Capital Partners, a portfolio management company recommended to Regal clients by Regal advisors, the SEC said.
The SEC filing also asserts that Regal failed to adopt and implement written policies and procedures to deal with the management of house accounts and the disclosure of conflicts of interest.
Regal’s client-service program offered clients three options for their money management: an assigned advisor could manage the portfolio, the advisor could recommend a model portfolio managed by Regal, or the advisor could recommend a model portfolio managed by one of several third parties. For those last two options, the Regal advisor would be responsible for the initial recommendation based on the client’s investment profile and for ongoing review of the account, the SEC said. According to the filing, the firm’s Form ADV corroborated that Regal gave assurances to clients that they would receive “continuous and focused investment advice,” that the accounts “are reviewed regularly by your account representative,” and that the reviews would “ensure that the advisory services provided to you and the portfolio mix is consistent with your current investment needs and objectives.”
When it came to billing, client charges consisted of two components, according to the SEC. First, an advisory fee for account management that was shared with the assigned advisor, and second, a portfolio management fee for selection of securities in the account, which was shared with either the advisor, Regal, or the third party, depending on who was responsible for portfolio management.
From July 2015 to April 2021, Regal allegedly classified about 250 accounts as house accounts, and Kailunas and Yarch received compensation from the advisory fees charged on them, the SEC said. Some of those clients received varying levels of advisory services, but 81 clients received none at all, yet Regal continued to charge advisory fees on all accounts regardless of the level of service, the SEC said, adding that many clients weren’t notified their original advisor had left the firm and that Kailunas and Yarch had taken over their accounts.
Even though Regal did adopt a notification policy in November 2019 that required it to notify clients who remained at the firm for 90 days following the departure of their advisor and not to charge the advisory fees during that 90-day transition period, the filing says the policy was applied haphazardly, with at least three departures going unnotified—one for six months, one for 11 months and one for a year after the advisors left.