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Regulation and Compliance > Federal Regulation > SEC

RIA Fined for Charging 81 Clients Without Providing Services

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What You Need to Know

  • The clients allegedly stopped receiving advisory services after their original advisors left the firm.
  • The firm also allegedly failed to disclose conflicts of interest it had with a portfolio management company it recommended to clients.

The Securities and Exchange Commission has ordered a Michigan RIA and its two principal executives to pay a total of $946,774 to settle charges that, between July 2015 and April 2021, they breached their fiduciary duties to provide advisory services to 81 clients whose original investment advisor representatives left the firm.

The SEC on Sept. 16 announced settled charges against the RIA Regal Investment Advisors and executives John A. Kailunas II and Brian D. Yarch, who the SEC alleged also failed to disclose conflicts of interest arising from compensation received from an affiliated portfolio manager.

“Since at least July 2015, Regal has failed to fully and fairly disclose to its advisory clients its financial interest” in Durand Capital Partners, a portfolio management company whose services Regal recommended to some clients and the associated conflicts of interest, according to the SEC’s order.

Kailunas, the firm’s founder and CEO, and Yarch did not immediately respond to requests for comment on Wednesday.

Without admitting or denying the SEC’s findings, Regal agreed to pay disgorgement of $595,899, prejudgment interest of $100,875 and a civil penalty of $150,000. Pursuant to the order, Regal agreed to distribute the funds to the harmed clients, the SEC said.

Also without admitting or denying the findings, Kailunas and Yarch agreed to pay penalties of $50,000 each, and Yarch agreed to be barred from acting in a chief compliance officer capacity, with the right to apply to act as a CCO again after three years, the SEC said.

Regal, Kailunas and Yarch also agreed to cease-and-desist orders and to be censured, the SEC said.

Kailunas, 57, of East Grand Rapids, Michigan, also serves as a financial advisor at Regal and owns an 80% stake in the firm, according to the SEC.

Yarch, 44, of Grand Rapids, is currently listed only as a financial advisor on the firm’s website, and owns an 18% stake in the firm, the SEC said.

As stated in the SEC order, in many instances, Regal failed to notify clients that their IARs had left Regal and been replaced by Kailunas and Yarch, and some clients were not contacted by anyone at Regal after that change took place.

The order also found that Regal failed to adopt and implement written policies and procedures regarding its handling of account transitions of departing IARs, review and management of client accounts, and disclosure of all conflicts of interest.

The SEC alleged that, as a result of their actions, Regal, Kailunas and Yarch violated the Investment Advisers Act of 1940, and that Regal violated, and Yarch caused Regal’s violations of, the Advisers Act.