Commonwealth files Finra arbitration, lawsuit against Ohio National for 'unlawful' VA scheme

This is the first known arbitration filed against the insurer for its decision on variable annuity commissions

Nov 15, 2018 @ 1:57 pm

By Greg Iacurci

Commonwealth Financial Network has brought both a lawsuit and Finra arbitration against Ohio National Life Insurance Co. for the alleged "unlawful scheme" orchestrated by the insurer involving variable annuity compensation.

Ohio National shocked broker-dealers and insurers when it announced in late September that it would be terminating its selling agreements with brokerage firms and ceasing payment of brokers' trail commissions associated with the sale of certain Ohio National variable annuities.

Advisers said the move, set to take effect Dec. 12, was unprecedented in the annuity industry.

Ohio National is currently facing two other lawsuits in federal district court tied to the same issue. One was filed by independent broker-dealer Veritas Independent Partners, and the other by Lance Browning, a broker with LPL Financial. A hybrid adviser, Margaret Benison, is also a plaintiff in the Commonwealth lawsuit.

The action Commonwealth filed with the Financial Industry Regulatory Authority Inc., the brokerage industry's regulator, is the first known arbitration linked to Ohio National's decision around variable annuity compensation. The filing isn't publicly available, but Jim Adelman, Commonwealth's general counsel, acknowledged the action in an emailed statement.

(More: Ohio National offers buyouts, ends commission trails amid jumbled regulatory oversight of VAs)

Mr. Adelman and the plaintiffs' attorney, Steven Manchel, declined further comment.

Ohio National spokeswoman Angela Meehan declined to comment.

Commonwealth and Ms. Benison, the adviser, allege the insurer initiated an "unlawful scheme" to get rid of unprofitable variable annuities sold with a guaranteed minimum income benefit rider, according to the text of the lawsuit, filed Nov. 5 in Massachusetts district court. These riders guarantee a certain level of income to clients in retirement.

The first part of that scheme, plaintiffs allege, was an offer earlier this year for clients to exchange their variable annuity for a different product, which encouraged brokers to facilitate the exchange by indicating they would be paid again for the exchange.

Plaintiffs claim this offer was largely unsuccessful, leading Ohio National to take a different strategy by refusing to pay brokers' trail commissions.

"Having failed to entice the clients (and their Representatives) with the 'carrot,' Ohio National next decided to try and stop the financial bleeding caused by the GMIB Annuities by using a 'stick,'" according to the lawsuit, Commonwealth Equity Services et al v. The Ohio National Life Insurance Co. et al.

This strategy would help Ohio National on two front, plaintiffs allege — by saving the insurer money on commission payments, and "driving a wedge" between plaintiffs and clients, leading more clients to surrender their variable annuities.

Plaintiffs are suing to maintain the status quo while the legal dispute is resolved in Finra arbitration, alleging, among other things, breach of contract and unjust enrichment.

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