The Securities and Exchange Commission announced a settlement on Wednesday with David Lerner Associates, a Long Island-based broker-dealer, over violations of Regulation Best Interest. The firm agreed to pay $201,600, comprising $126,500 in disgorgement, $15,100 in interest, and a $60,000 civil penalty.
According to the SEC, from 2020 through 2024, David Lerner representatives recommended at least 253 transactions where clients sold Class A mutual fund shares held for less than a year and almost simultaneously purchased Class A shares of a different fund family. These so-called switches generated $230,000 in additional upfront sales charges for clients, directly contradicting Reg BI's requirement to prioritize client interests.
Regulation Best Interest, which took effect in June 2020, mandates that brokers and their firms act in the best interest of retail customers when making recommendations, disclosing and mitigating conflicts of interest. The SEC also found that from 2020 until this April, the firm lacked adequate policies and procedures to implement Reg BI compliance.
David Lerner Associates has a history of regulatory scrutiny. In 2013, FINRA ordered the firm to pay $12 million in restitution to clients who purchased shares of Apple REIT 10, a nontraded real estate investment trust, citing unfair sales practices and excessive markups. FINRA also fined the firm over $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations, and suspended founder David Lerner from the securities industry.
More recently, in 2023, FINRA alleged that from 2015 to 2019, David Lerner brokers made unsuitable recommendations to 200 customers to buy energy limited partnerships. The firm agreed to pay $1 million in restitution to settle those claims.
The firm's spokesperson stated that the Reg BI issues from five to six years ago have been resolved and are now in the past, emphasizing the firm's commitment to acting in investors' best interests and full regulatory compliance.
This case underscores the ongoing enforcement of Reg BI, which remains a key focus for regulators. For advisors, it highlights the importance of robust compliance systems, especially when handling complex products like alternative investments. The SEC's action serves as a reminder that even established firms face consequences for lapses in client protection.
As the regulatory landscape evolves, firms may look to models like Bluespring Wealth's dedicated RIA entity to centralize compliance. Meanwhile, the aging of 401(k) menus is emerging as the next compliance flashpoint, and recent FINRA arbitration awards, such as UBS ordered to pay $1.2 million, show the stakes for misconduct.
