SEC Charges Investment Adviser and Two Officers with Breaching Fiduciary Duties to Clients

ADMINISTRATIVE PROCEEDING
File No. 3-20565

September 16, 2021 - The Securities and Exchange Commission today instituted settled charges against Michigan-based registered investment adviser Regal Investment Advisors LLC and two of its principals, John A. Kailunas, II, and Brian D. Yarch, for breaching their fiduciary duties to provide advisory services to certain advisory clients after their original investment adviser representatives left Regal. Regal, Kailunas and Yarch also failed disclose conflicts of interest arising from compensation received from an affiliated portfolio manager.

According to the SEC's order, between July 2015 and April 2021, Regal, Kailunas, and Yarch charged advisory fees to 81 client accounts, but did not provide advisory services to those accounts. As stated in the order, in many instances Regal failed to notify clients that their investment adviser representative had left Regal and been replaced by Kailunas and Yarch, and some clients were not contacted by anyone at Regal after this change took place. The order also finds that Regal, Kailunas, and Yarch had financial interests in, and received compensation from, a portfolio management company that Regal offered to its clients, but they failed to disclose this affiliation and the resulting conflicts of interest to clients. In addition, the order finds that Regal failed to adopt and implement written policies and procedures regarding its handling of account transitions of departing investment adviser representatives, review and management of client accounts, and disclosure of all conflicts of interest.

The SEC's order finds that Regal, Kailunas, and Yarch violated Section 206(2) of the Investment Advisers Act of 1940, and that Regal violated, and Yarch caused Regal's violations of, Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. 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, and to perform certain undertakings. Pursuant to the order, Regal will distribute the funds to harmed advisory clients. Also without admitting or denying the findings in the order, Kailunas and Yarch agreed to penalties of $50,000 each, and Yarch agreed to a limitation from acting in a chief compliance officer capacity, with the right to apply to act as a chief compliance officer after three years. Regal, Kailunas, and Yarch have also agreed to cease-and-desist orders and to be censured.

The SEC's investigation was conducted by Jerrold H. Kohn from the Chicago Regional Office and Michelle Muñoz Durk from the Asset Management Unit, with the assistance of Teresa Tyson, Susan Weis, and Vanessa Horton of the Chicago Regional Office, and supervised by Jeffrey A. Shank from the Asset Management Unit.