He said he thinks the SEC was aggressive with Regal because its two principles were involved. In addition to the partners agreeing to pay $945,000 to settle charges that included charging client fees for advisory services that were never rendered, Yarch was barred from serving as a compliance officer for any financial company for three years.
Regal did not respond to a request for comment by the time of publication.
The SEC’s case against Regal offers insight into what what firms should try to correct if they aren’t living up to the letter of their client agreement with orphan clients.
The regulator alleged that between July 2015 and 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 to reassign orphaned clients to Kailunas and Yarch, who were, respectively, the CEO with an 80% stake in the firm and chief compliance officer with an 18% stake. Such clients were considered “house accounts,” 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.
The firm’s Form ADV, however, promised that Regal clients 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,” the SEC said.
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 their orphaned 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 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 to not charge 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.
Regal also 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.