David Lerner Associates, the long-time purveyor of high-risk, house-managed alternative investments, this week settled charges with the Securities and Exchange Commission related to the firm’s failure to comply with Regulation Best Interest in two areas and related to excess costs to clients.
According to the settlement, which was released Wednesday, the cost of David Lerner’s Reg BI shortcomings is $201,600: disgorgement of $126,500; interest of $15,100; and a civil penalty of $60,000.
David Lerner’s first failure to comply with Reg BI was related to mutual fund sales from 2020 to 2024 that caused $230,000 in extra upfront costs and charges to clients. In the second area, from 2020 to this April, the firm failed to implement policies and procedures to implement Reg BI.
Reg BI prohibits brokerages and registered representatives from putting their financial interests ahead of their clients’ interests and requires that they disclose and mitigate conflicts of interest. The measure went into force in June 2020, after being approved by the SEC a year earlier.
“The Reg BI issues the firm faced five to six years ago have been resolved and are now in the past,” a company spokesperson wrote in an email. “David Lerner Associates remains focused on acting in investors’ best interests at all times and operating in full compliance with all applicable regulatory requirements when providing personal and professional investment counseling to help clients with their investment decisions.”
According to the SEC, in the first instance of botching its Reg BI obligations, Davd Lerner’s brokers made at least 253 recommendations to retail customers to sell Class A mutual fund shares held for less than one year and nearly simultaneously buy Class A mutual fund shares in a different fund family.
Those transactions imposed new upfront sales charges on the clients, known as switches in the retail brokerage industry.
Based on Long Island, David Lerner Associates is a longtime purveyor of municipal bonds and REITs and has had problems with regulators, particularly FINRA, in the past.
In 2013, FINRA hit David Lerner Associates with millions in penalties for alleged unfair sales practices and excessive markups, ordering the firm to pay $12 million in restitution to clients who bought shares of a nontraded REIT known as Apple REIT 10.
FINRA at the time also fined David Lerner Associates more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations. The firm's founder and owner, David Lerner, was also suspended from the securities industry at the time.
And in another settlement last year involving the firm’s sales of energy limited partnerships, FINRA claimed the firm’s brokers made unsuitable sales recommendations to 200 customers to buy the limited partnerships from 2015 to 2019. Davd Lerner Associates also agreed to pay $1 million in restitution to clients to settle the matter.
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