The U.S. Securities and Exchange Commission has censured David Lerner Associates Inc. for steering customers to mutual funds with extra fees.
The SEC ordered Lerner to disgorge $201,680 for violating “best interest” regulations, in a May 27 cease-and-desist order.
Lerner representatives “failed to exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with at least 253 recommendations to retail customers,” the SEC says, while imposing $230,088 in sales charges.
David Lerner Associates in based in Syosset, Nassau County, and runs a White Plains branch office in Greenburgh.
The firm consented to the sanctions without admitting to the SEC’s findings.
The SEC identified two types of violations: mutual fund switching with unnecessary fees, and inadequate written policies for protecting customers.
From June 2020 to September 2024, Lerner representatives urged customers to sell shares in mutual funds that had been held for less than a year, then buy shares in new funds from a different fund family.
Customers who had already paid upfront sales charges for the original funds incurred new sales charges. Whereas, a switch within the same fund family, within a year, typically does not impose a new fee.
Nearly 200 customers made 253 mutual fund switches that cost them $230,088 in new sales charges, according to the SEC. The firm pocketed 55% of the new fees and the representatives got 45%.
Lerner also failed to establish written policies and procedures to ensure that investment recommendations were in the customers best interests, the SEC says.
Representatives created customized investment proposals that typically listed three to five potential investments. Lerner claimed that the proposals were not recommendations. The SEC describes them as calls to action and says representatives were trained to persuade prospects and existing customers to make the investments.
From June 2020 to September 2024, Lerner representatives and branch managers approved about 2,500 customized investment proposals. Within 30 days of presenting them, hundreds of customers purchased listed investments totaling $78 million, generating about $2.5 million in fees.
The SEC says Lerner failed to guide representatives and branch managers in preparing proposals with a reasonable belief that the recommendations were in the customers’ best interests.
The cease and desist order does not identify specific representatives or branch offices where violations happened.
Last year, Daniel Todd Lerner, the son of the firm’s founder, who worked in the White Plains office, was sanctioned for recommending a high-risk investment to a 92-year-old retiree. And Lawrence Merl, another broker in the office, was ordered to return $153,476 in commissions for placing customers in risky investments.
