Ohio National offers buyouts, ends commission trails amid jumbled regulatory oversight of VAs

Jurisdiction is shared between the SEC, Finra and state insurance commissioners. Will any of them step in?

Nov 14, 2018 @ 2:21 pm

By Mark Schoeff Jr.

Ohio National Financial Services Inc. began offering buyouts this week to policyholders who have a variable annuity on which the firm will stop paying brokers next month.

In a letter to investors, however, the firm encouraged customers to "work with a trusted financial professional" to evaluate whether they should take the money in exchange for terminating their Oncore variable annuity that contains riders ensuring a guaranteed income and death benefit. Some of the policies contain only the income rider.

The buyout offer is good from Nov. 12 through Feb. 11. During that time — on Dec. 12 — Ohio National will end trail commissions for brokers who sold the product.

Brokers who decide to advise clients anyway on the buyouts could be vulnerable to suitability violations if investors later assert that the transaction wasn't good for them, according to Mark Cortazzo, senior partner at Macro Consulting Group.

The buyout is creating a potential new liability in a situation — the ending of servicing agreements with brokers — that already is unique, Mr. Cortazzo said.

"This is unprecedented, and a regulator should step in and halt this activity until the full impact of it on policyholders, [registered] representatives, broker-dealers and the industry can be assessed," he said. "This is not something the rules were built to address."

Regulatory oversight of variable annuities can be as complicated as the products themselves. Jurisdiction is shared between the Securities and Exchange Commission, the Financial Industry Regulatory Authority Inc. and state insurance commissioners.

A variable annuity is defined as a security because of its mutual fund component. The SEC has maintained primary oversight of the products, even while the Dodd-Frank financial reform law put fixed-indexed annuities under the aegis of state regulators.

Finra, which reports to the SEC, regulates registered representatives who sell variable annuities. State insurance commissioners are responsible for overseeing the insurance firms that create the products and the insurance agents who sell them.

When it comes to a buyout offer, that is considered a contractual matter between the insurance company and the policyholder, over which Finra does not have jurisdiction. But the regulator would monitor exchange activity and sales material associated with it.

Mr. Cortazzo worries that no regulator will step forward to address the Ohio National situation.

"This is in [a regulatory] no-man's land," he said. "I know the regulators want to do the right thing. I don't know if they know who should be doing it and how to do it."

The SEC and Finra declined to comment.

A spokesperson for the Ohio Department of Insurance said the agency is monitoring Ohio National to ensure it complies with Ohio insurance laws, but declined further comment.

Angela Meehan, an Ohio National spokeswoman, said the firm will continue to service and support all existing annuity and retirement plan contract owners. It also will give brokers access to customer and transactional data, allowing them to continue to help their clients.

"Our arrangements with individual broker-dealers or categories of broker-dealers may differ due to a range of factors," Ms. Meehan wrote in an email. "Regardless of the arrangement with us, we believe advisers do and will continue to act in the best interest of their clients."

An official at the Insured Retirement Institute, a trade association representing the retirement income industry, is confident regulators will combine to provide good oversight of variable annuities.

"They're all concerned with consumer protection issues," said Jason Berkowitz, vice president and counsel for regulatory affairs at IRI. "I would be surprised if the regulators point their fingers at each other and say, 'This is not my problem; it's his.' I'm not sure I've seen the existence of a regulatory gap here."

But a prominent critic of harmful annuity sales practices said regulators don't have an obligation to respond to Ohio National.

"We can't regulate commission payments through a private company. That's a slippery slope," said Stan Haithcock, owner of firm Stan the Annuity Man.

Mr. Haithcock argued that if Ohio National is going to pay a price, it must be meted out by brokers and insurance sales professionals who sue the firm or decide not to do business with it any longer. Ohio National announced in September it was quitting the annuity business.

"This is going to be solved in the courts and agent world," he said.

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