Securities Regulation Daily Wrap Up, BROKER-DEALERS—New York-based broker-dealer consents to sanctions for willful violations of Regulation BI, (May 28, 2026)
Organizations Mentioned:David Lerner Associates, Inc.
By Rebecca E. Hoffman, J.D.
The respondent did not have policies in place as required under Reg BI for its “customized investment plans,” claiming they were not “recommendations.”
The SEC May 27 accepted an offer of settlement from David Lerner Associates, Inc. (DLA), agreeing to cease and desist and pay penalties for violations of Regulation Best Interest, arising from its recommendations that customers sell Class A mutual fund shares and immediately purchase Class A shares in another fund family, and its practice of providing bespoke investment plans without establishing written policies and procedures to ensure regulatory compliance (In re David Lerner Associates, Inc., Exchange Act No. 34-105556 (May 27, 2026)).
The SEC explained that Class A shares generally impose sales charges up front, and thus are best treated as long-term investments, but in at least 253 instances during the period from June 30, 2020 to September 15, 2024, registered representatives at DLA recommended mutual fund switch transactions to customers, involving selling shares held for less than a year and almost simultaneously purchasing shares in a different fund family, such that they incurred sales charges that offset any return.
Mutual fund share switch. DLA has a Reg BI policy that requires representatives to have a reasonable basis to believe that their recommendations do not put the firm’s financial interest before that of the customer, and to explain the reasons for a switch recommendation. However, the order said, “[n]one of the switch letters or notes for the 253 recommended mutual fund switch transactions that imposed new upfront sales charges show that the registered representatives, in making the recommendations, considered the availability of a same-family fund (which typically would not impose any new sales charge).” The new sales charges totaled over $230 thousand, which was partly paid to representatives and partly retained by the firm.
Consequently, DLA willfully violated the Reasonable Basis Prong of the regulation, which mandates the exercise of diligence and care, and the reasonable belief that at least some customers will benefit, in making recommendations.
Customized investment plans. In addition, the firm instituted a “Customized Investment Plan” (CIP) program in 2019. These plans were created for prospective and existing customers, and would base investment suggestions on each customer. DLA’s CIP policy required that information be collected about the investor’s risk tolerance and preferences. It also required certain disclosures, and that the branch manager review the CIP to ensure that the investment suggestions are appropriate for that client or prospective client. However, the policy did not require that managers ensure compliance with Reg BI. In turn, the firm’s Reg BI policy did not include instructions on keeping CIPs compliant.
During the relevant period, investment purchases from 2500 CIPs totaled about $78 million.
The SEC’s Division of Examinations noted DLA’s Reg BI deficiencies in a letter, but DLA did not change its policies. It made a few changes to the CIP template, such as replacing “We have prepared these suggested investments for your consideration” to “We have prepared these examples of potential investments for your consideration,” and adding “for illustrative purposes only.”
The SEC has said that a recommendation calls for compliance with Reg BI based on a number of considerations, including “whether the communication reasonably could be viewed as a call to action and reasonably would influence an investor to trade a particular security or group of securities” (quoting Regulation Best Interest: The Broker-Dealer Standard of Conduct, Exchange Act Release No. 86031 (June 5, 2019), internal citations omitted).
CIPs are recommendations, the SEC concluded, because they are individually tailored to the customer and would influence them to invest in a certain way, but the policies did not instruct representatives and managers as to how to comply with Reg BI. DLA willfully violated the Compliance Obligation of Reg BI in Exchange Act Rule 15l-1(a)(2)(iv), the SEC held.
DLA finally changed its policies so that they described CIPs as “recommendations” in April of 2026.
The parties agreed that DLA would cease and desist, be censured, pay disgorgement of $126,548.14, prejudgment interest of $15,132.56, and a civil money penalty of $60,000.
The release is No. 34-105556.
Companies: David Lerner Associates, Inc.
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