Kovack Advisors Kept Clients in Unsuitable Wrap Accounts: SEC

Kovack Advisors has agreed to settle Securities and Exchange Commission charges that it failed to review accounts of advisory clients in its wrap fee programs to determine whether such programs remained suitable and to adequately disclose certain fees to those clients.

The firm is required to pay a $700,000 civil money penalty along with $166,239 in disgorgement and $33,274 in prejudgment interest.

According to the SEC order, the clients at issue paid an all-inclusive fee for asset management, trade execution and other costs.

At various times beginning in at least 2015, and continuing through August 2018 when it stopped offering wrap accounts, KAI, according to the SEC, failed to:

• review these advisory accounts for inactivity as required under its internal policies and external disclosures, to determine whether wrap accounts remained in the best interest of clients that traded infrequently; and
• adequately disclose to these wrap clients that they would be charged, in addition to the wrap account fee, for trade execution by certain clearing brokers participating in KAI’s wrap program.

“As a result, certain KAI wrap clients remained in wrap accounts despite the lack of activity in their accounts, and/or paid transaction costs on top of the wrap account fee,” according to the agency.

KAI, the SEC said, also failed to adopt and implement written policies and procedures reasonably designed to prevent the aforementioned violations, and to conduct annual compliance reviews.

Kovack Advisors Inc. of Fort Lauderdale, Florida, advises retail, high net-worth and institutional clients. As of Dec. 31, 2021, KAI had assets under management of approximately $3.5 billion, which it managed on a discretionary basis, and $1 billion managed on a non-discretionary basis.

From at least 2015, KAI’s brochures and certain of its client account agreements provided that KAI would review its advisory accounts.