More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
The Financial Industry Regulatory Authority (FINRA) said Monday that it had suspended David Lerner, founder of David Lerner Associates, and ordered the firm to pay approximately $12 million in restitution to customers who purchased shares in Apple REIT Ten and those who were charged excessive markups.
DLA, as the sole distributor of the Apple REITs, a nontraded $2 billion real estate investment trust (REIT), FINRA said that the Syosset, N.Y.-based DLA solicited “thousands of customers, targeting unsophisticated investors and the elderly, selling the illiquid REIT without performing adequate due diligence” to determine whether it was suitable for them. To sell Apple REIT Ten, DLA also used “misleading marketing materials that presented performance results for the closed Apple REITs without disclosing to customers that income from those REITs was insufficient to support the distributions to unit owners,” FINRA says.
FINRA says it also fined DLA more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) it sold over a 30-month period, and for related supervisory violations.
In addition, FINRA fined Lerner, also DLA’s president and CEO, $250,000, and suspended him for one year from the securities industry, followed by a two-year suspension from acting as a principal. “David Lerner personally made false claims regarding the investment returns, market values, and performance and prospects of the Apple REITs at numerous DLA investment seminars and in letters to customers,” FINRA states. “To encourage sales of Apple REIT Ten and discourage redemptions of shares of the closed REITs, he characterized the Apple REITs as, for example, a ‘fabulous cash cow’ or a ‘gold mine,’ and he made unfounded predictions regarding a merger and public listing of the closed Apple REITs, which he inappropriately claimed would result in a ‘windfall’ to investors.”
FINRA also sanctioned DLA’s head trader, William Mason, $200,000, and suspended him for six months from the securities industry for his role in charging excessive muni and CMO markups. The sanctions resolve a May 2011 complaint (amended in December 2011) as well as an earlier action in which a FINRA hearing panel found that the firm and Mason charged excessive muni and CMO markups.
Susan Axelrod, executive vice president of member regulation sales practice, said in a statement that this case “stands for the proposition that senior officers of firms, even at the CEO level, will be held accountable for systemic, detrimental harm to customers. Protection of the investing public remains the most important goal of the examination and enforcement teams throughout the country.”
Brad Bennett, executive vice president and chief of enforcement, said in the same statement that “David Lerner and his firm targeted unsophisticated and elderly customers, grossly failing to comply with basic standards of suitability in selling Apple REIT Ten to thousands of customers. Firms must conduct a thorough suitability analysis before selling products, and make accurate disclosure of risks and features at the point of sale, especially with alternative investments such as non-traded REITs.”
FINRA said it also required DLA to retain independent consultants to review and propose changes to its supervisory systems and training on both sales of nontraded REITs and pricing of CMOs and municipal bonds. In addition, “DLA agreed to revise its advertising procedures, including videotaping sales seminars attended by 50 or more people for three years, and is required for one year to pre-file all advertisements and sales literature with FINRA at least 10 days prior to use.”
In concluding the settlement, DLA and David Lerner neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. The settlement will also result in a hearing panel decision against the firm and Mason related to excessive muni and CMO markups becoming final.