Brokerage Firm Fined, Principals Suspended by NASD For Bilking Consumers

NASD announced this month 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 time period.

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 products.

posted by Consumer Help Web Editorial Team at 11:46 AM |