Advisor Group Firms, including Royal Alliance Increase Budgets for Legal and Regulatory Issues

Three Advisor Group broker-dealers—Royal Alliance Associates, SagePoint Financial, and FSC Securities Corp—recently increased their reserves for regulatory matters, setting more cash aside to deal with legal issues. Combined with Securities America and Woodbury Financial Services, the five Advisor Group firms increased their budgeted funds for future legal and regulatory issues by approximately $4.4 million.

Certain high-risk products are directly tied to firms' increasing legal costs. For instance, Triad Advisors in 2020 reported increased legal issues related to sales of GPB Capital private placements.

In February 2021, the SEC charged GPB Capital Holdings and Ascendant Capital with running a Ponzi-like fraudulent scheme that raised over $1.7 billion and defrauded 17,000 retail investors.

For its part, Royal Alliance Associates (RAA) absorbed a $400,000 FINRA fine in 2020 for failing to supervise stockbrokers Kimberly Pine Pitts and Gary John Basralian, who stole $3.8 million from several customers.

In November 2020, the SEC fined Royal Alliance an additional $500,000 for policy failures related to unsuitable investments in volatility-linked exchange-traded products, such as the iPath S&P 500 VIX Short-Term Futures ETN known as VXX, which in its heyday traded at over $100,000. As of March 11, 2021, VXX trades at $15-per-share, a loss of over 99.9%.

The timing of setting aside more money for legal costs is perhaps compounded by a fiscally troublesome pandemic. Coronavirus decimated not just the Spring 2020 stock market, but exposed unsuitable risk and fraud associated with products improperly recommended to conservative-and-moderate minded investors, such as structured inverse/leveraged products, reverse convertibles, exchange-traded notes, and other complex securities.