David Lerner Associates Suspended from Conducting New
Business in Variable Annuities, Variable Life Insurance
for 30 Days, Fined $400,000 for Violations of New York State,
Two Firm Principals Fined, Suspended for Supervision, Registration
Washington, D.C. — NASD announced March 8, 2006 that
it has fined Long Island, NY brokerage firm David Lerner
Associates, Inc. $400,000 and suspended the firm from engaging
in any new variable life insurance or variable annuity business
for 30 calendar days for engaging in replacement sales of
variable life insurance and variable annuities that violated
NASD and New York State rules.
NASD also fined and suspended two of the firm's principals.
Martin Lerner, the firm's Executive Vice President of Sales,
was suspended from acting in a supervisory capacity for
20 business days. Russell Moss, the firm's Assistant Vice
President and Director of Insurance Services, was suspended
in all capacities for 20 business days. Lerner and Moss
were each held jointly and severally liable for $25,000
of the fine against the firm.
NASD found that between November 1998 and February 2004,
David Lerner employees failed to comply with New York State
Insurance Department Regulation 60 in connection with variable
life insurance and variable annuity replacement sales. The
regulation is aimed at ensuring that investors have full
and clear information prior to making a decision to replace
an existing insurance policy or annuity contract, and at
reducing the opportunity for misrepresentations and incomplete
comparisons in replacement situations. The circumvention
of the New York State regulation also constitutes a violation
of NASD rules requiring compliance with just and equitable
principles of trade.
"New York's Regulation 60 is designed to protect investors
from unsuitable recommendations by brokers to replace variable
life and annuity contracts," said NASD Senior Vice
President and Acting Head of Enforcement James Shorris.
"It's intended to arm investors with the information
they need about the costs and other implications of making
such replacements before their decision is final. The firm's
routine circumvention of the regulation denied investors
the required opportunities to fully consider and understand
these important investment decisions."
Regulation 60 requires two separate interactions with a
customer before a replacement can be completed. In step
one, the customer is informed in writing - through a Definition
of Replacement form - that a replacement is being considered.
The customer must complete a Client Authorization form to
allow the firm to collect information about the customer's
existing life insurance policy or annuity contract, so that
the customer will be able to make a meaningful comparison.
Both forms must be signed and dated by the customer.
In step two, among other disclosures, the customer must
be provided with a Disclosure Statement setting forth information
comparing the old and new life insurance policies or annuity
contracts, including the primary reason(s) for recommending
the new policy or contract and the reason(s) why the existing
policy or contract can no longer meet the applicant's objectives.
The customer must sign and date an acknowledgement stating
that the customer received and read the completed Disclosure
Statement before signing the application for the new annuity
contract or life insurance policy.
NASD's investigation showed that David Lerner's employees
routinely circumvented the required Regulation 60 replacement
process. NASD found that at their initial meetings with
customers to discuss a potential variable life insurance
or variable annuity replacement sale, the firm's employees
routinely instructed customers to sign - but leave undated
- all of the required step one and step two Regulation 60
documents. Subsequently, the David Lerner employees would
forward the Regulation 60 documentation to an unregistered
David Lerner employee in the firm's main office in Syosset,
NY, who was responsible for processing all such paperwork.
That employee, with the knowledge of certain members of
David Lerner management, routinely completed the required
information on the pre-signed paperwork. This included filling
in the necessary "Agent's Statement" on the Disclosure
Statement, on which the representative was required to list
the primary reason(s) for recommending the new life insurance
policy or annuity contract and why the existing life insurance
policy or annuity contract could not meet the applicant's
objectives. That employee completed the required Agent's
Statement by consistently listing boilerplate information
without having any direct knowledge or understanding of
the reason for the proposed replacement in each particular
case. Additionally, that employee, with the knowledge of
certain members of the firm's management, routinely inserted
fictitious dates on the pre-signed Regulation 60 documentation
in order to create the false appearance that the required
two-step procedure had been followed. The employee reviewed,
completed, and processed all Regulation 60 documentation
without any principal of the firm ever reviewing the documentation
for compliance, as required by the regulation.
By having their clients during the initial meeting pre-sign
undated and incomplete Regulation 60 documentation, David
Lerner's sales force was in many instances able to effect
variable life or variable annuity replacement sales before
their clients ever received or reviewed the Regulation 60
documentation as completed by the unregistered employee
at the firm's Syosset headquarters.
NASD found that during the relevant period, David Lerner
effected at least 527 variable life insurance replacement
sales to New York State residents and generated total revenue
of more than $3,431,000 from those sales. The firm also
effected at least 259 variable annuity replacement sales
to New York State residents and generated total revenue
of more than $1,372,000 from those sales during the relevant
In addition to the Regulation 60 violations and related
books and records violations, NASD also charged the firm,
acting through Martin Lerner and Russell Moss, with failing
to supervise the firm's sales force with a view towards
preventing the Regulation 60 violations, as well as with
registration violations for permitting Moss to function
as a principal at the firm without being properly registered.
In concluding this settlement, David Lerner Associates,
Lerner and Moss neither admitted nor denied the charges,
but consented to the entry of NASD's findings.
David Lerner Associates was fined $115,000 last September
to settle charges of using misleading marketing materials
with the public, including radio advertising, client seminars
and other communications. In addition, the firm was ordered
not to conduct any public seminars for 30 days. Earlier,
NASD fined the firm $100,000 for running improper sales
contests to promote certain David Lerner proprietary mutual
funds and selected variable annuity and variable life insurance