FINRA puts kibosh on David Lerner's sales of proprietary products

David Lerner Associates, the long-time purveyor of high-risk, house-managed alternative investments, will not be selling any more proprietary investments for at least two years, according to a settlement this week with the Financial Industry Regulatory Authority (FINRA). 

This FINRA settlement with David Lerner Associates involves 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.

After two years, the firm can begin selling such products again if it meets a variety of compliance thresholds mandated in its settlement.

For decades, the bulk of the retail brokerage industry has moved away from selling expensive, proprietary funds managed by an affiliate because of the hazards for conflicts of interest when recommending such products.

“The regulatory issues the firm faced going back between six and ten years have been settled and are behind it,” a David Lerner Associates spokesperson wrote in an email. “Investors currently holding the investments at issue have net, unrealized profits and are currently receiving approximately 7% in annual distributions.”

Meanwhile, in a separate but related matter, Daniel Lerner, the son of the founder of the firm, was suspended from the securities industry for two months and fined $5,000.

“In March 2019, [Daniel] Lerner recommended that a customer invest in an illiquid, proprietary limited partnership without having a reasonable basis to believe that the investment was suitable for the customer based on her investment profile,” according to his settlement with FINRA.

FINRA in 2022 said it was investigating Daniel Lerner, a senior executive with the firm at the time, over the sale of proprietary investment funds to clients and whether his investment recommendations were suitable.

FINRA problems

Based on Long Island, David Lerner Associates is a longtime purveyor of municipal bonds and REITs and has had problems with FINRA in the past.

In 2013, FINRA hit David Lerner Associates with millions in penalties for alleged unfair sales practices and excessive markups, ordered the firm to pay $12 million in restitution to clients who bought shares of a nontraded real estate investment trust 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.

FINRA does not name the proprietary energy funds at issue in the industry sales violations.

But the firm marketed Energy 11 LP, which was formed in 2013 by Glade Knight and David McKenney of the Apple REIT companies, along with Anthony Keating and Michael Mallick, according to the company.

It raised $374 million from investors over two years starting in 2015. The firm charged a 6% sales commission to clients, according to filings with the SEC.

Financial advisors right now typically charge an annual fee to clients of less than 1%, or about 80 basis points, to manage customers' funds.