The National Association of Securities Dealers said Monday it has censured and fined brokerage firm David Lerner Associates.$100,000 for holding sales contests to promote its proprietary mutual funds and selected variable annuity and variable life insurance products.
The Long Island-based firm, conducted six sales contests between Sept. 25, 2000 and March 21, 2003 and offered or awarded various prizes to the winning broker-dealer representatives, including trips to vacation resorts in Puerto Rico, the Bahamas, Las Vegas and New England.
Other prizes that were offered were consumer electronics equipment, such as large-screen television sets, digital cameras and DVD players. The estimated value of the contest awards totaled $700,000, the NASD said in a press release.
Two of the contests violated NASD rules because they offered credit only for sales of David Lerners own proprietary mutual funds. Four other contests were a no-no because the firms proprietary mutual funds or selected variable products received favorable treatment due to the contest.
"The sales contests engaged in by the firm increase the potential for investors to be steered into investments that are in the representatives financial interests instead of the best interests of the customers," said Mary Schapiro, NASDs vice chairman and president of regulatory policy and oversight.
"Our rules are designed to prevent the conflicts of interest that arise when brokers are encouraged to recommend investments based on lucrative awards paid by their employers, rather than on the merits of the investments and the needs of their customers."
The NASD also charged the company and its Vice President of Compliance, Daniel Chafetz, with "supervisory violations" for failing to have the tight systems in place to detect and prevent the sales contest violations.
In addition, NASD charged the firm and its Vice President of Sales, John Dempsey, Sr., with failing to adequately oversee the firms sales force to prevent the abuse. The NASD censured Chafetz and Dempsey and fined each $10,000 for their supervisory violations. Still, the firm did not admit any wrongdoing in the case.