A top-selling broker at a broker-dealer owned by Ohio National Financial Services for years recommended an unsuitable investment strategy to clients involving variable annuities and whole life insurance policies that he characterized as “building your own bank” or “infinite banking,” according to the Financial Industry Regulatory Authority Inc.
On Friday, Finra penalized that broker-dealer, the O.N. Equity Sales Co., $1.3 million for failing to supervise the broker, who is not named in the Finra settlement. The penalty has two parts: The firm agreed to pay a fine of $275,000 and restitution to clients of $1 million, according to the settlement, which it agreed to without admitting or denying Finra’s findings.
The broker is no longer registered with the O.N. Equity Sales Co. and has entered into a separate settlement with Finra, according to the regulator.
Variable annuities pay brokers and advisers large commissions, and Finra has penalized firms in the past for compliance failures when switching clients from one variable annuity to another.
The Ohio National settlement involves the failure to supervise adequately a complex series of transactions involving variable annuities. First, the broker’s clients sold securities like mutual funds to close retirement accounts and then used that money to buy variable annuities. Clients then sold the annuities in order to build cash value in whole life insurance policies.
A spokesperson for Ohio National said the company declined to comment.
The Ohio National broker-dealer failed to detect that from 2014 to 2017, the sales rep recommended the liquidation of retirement funds to purchase high-fee variable annuities, followed by the withdrawal of funds from those annuities to purchase whole life insurance policies, according to Finra.
According to Finra, no one at the firm conducted a suitability analysis of the broker’s recommended investment strategy as a whole.
For example, the broker “routinely recommended his customers take withdrawals from their variable annuities shortly after they were purchased, causing them to incur significant surrender charges, tax penalties, and additional charges,” according to Finra.
The broker did not advise the Ohio National broker-dealer that he was routinely recommending early withdrawals from variable annuities, nor did the firm independently detect that he was doing so, according to Finra, resulting in the firm failing to supervise his recommendations.
Such transactions generate commissions for the rep and the broker-dealer. According to Finra, the broker’s 76 customers who purchased variable annuities and took short-term withdrawals incurred $371,000 in surrender charges. And the broker-dealer was paid $733,000 in gross commissions for the sale of these annuities.
Ohio National Financial Services Inc. has recently shed several of the many lawsuits it faced as a result of its 2018 move to halt trail commissions paid to brokers on variable annuity contracts with guaranteed minimum income benefit riders.
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