Cetera, other broker-dealers refuse to sign Ohio National contracts

Advisers wonder what the lack of a formal brokerage agreement means from a regulatory standpoint

Feb 15, 2019 @ 2:31 pm

By Greg Iacurci

A handful of broker-dealers, including Cetera Financial Group and NEXT Financial Group, have rebuffed Ohio National Financial Services Inc. by refusing to sign new agreements with the insurer, the latest twist in an ongoing dispute over variable annuity commissions.

Ohio National shocked the insurance and securities industries late last year when it terminated the active selling agreements in place between Ohio National and brokerage firms, a move that had the unprecedented effect of eliminating the trailing commissions advisers received for selling certain variable annuity products.

Ohio National has tried replacing these old contracts with a new one, called a "servicing agreement," but firms like Cetera and NEXT Financial have refused to sign them, according to people familiar with the matter.

The new contracts expressly excluded commission payments for the variable annuity products in question (those with a guaranteed minimum income benefit rider), according to a number of lawsuits filed against Ohio National by more than 10 broker-dealers. That means the agreement would essentially indemnify Ohio National for eliminating the commission payments, advisers said.

Not signing could put other annuity commissions at risk. The lawsuits hint that Ohio National won't pay commissions on non-GMIB annuities either until broker-dealers sign the new agreement. LPL Financial, for example, has signed the agreement, according to a person with knowledge of the matter.

In a recent interview, Rob Pettman, LPL's executive vice president of products and platform management, said LPL advisers had a "material" amount of trail commissions in non-GMIB annuities that could be put at risk by legal action against the insurer.

It appears Ohio National didn't solicit all firms to sign a new contract. Mutual Securities Inc., for example, which has more than 200 advisers, didn't receive one to sign, according to a person familiar with the matter.

Cetera, one of the largest independent broker-dealer networks, has roughly 8,800 total advisers among six brokerages, according to InvestmentNewsdata. NEXT Financial Group has roughly 540 advisers.

NEXT Financial, MSI and the six Cetera brokerages have all filed legal complaints against Ohio National to restore their annuity commissions. The firms declined to comment for this story.

Several other firms, including UBS Financial Services Inc., Commonwealth Financial Network and RBC Capital Markets, also have filed lawsuits. These firms didn't return requests for comment, and it's unclear whether they also have refused to sign the new agreements.

Further, Ohio National in January sent notices to several brokers indicating that the insurer was terminating their state insurance appointments with the company. This means some advisers may be interacting with clients without an active, formal brokerage agreement or insurance relationship — which alarms some practitioners, who question whether it's a violation of securities or insurance rules and say the situation is without precedent.

"Thousands of reps are in no man's land" from a regulatory standpoint, said one adviser, who requested anonymity. That's a scary prospect, the adviser said, for those continuing to perform variable annuity transactions for clients such as executing trades, since there's no agreement governing processes and liability.

"These are really huge issues, and they're not a problem until they're a problem," the adviser said.

The adviser also said Ohio National is continuing to share personally identifiable information about clients with these advisers, and questioned whether this is a violation of existing rules.

Ohio National spokeswoman Angela Meehan declined to comment, citing pending litigation.

A spokesperson with the Financial Industry Regulatory Authority Inc. said a breach of rules would depend on the facts and circumstances of each individual case. Robert Denhard, a spokesman for the Ohio Department of Insurance, indicated the same.

Mr. Denhard said the regulator is aware of Ohio National's changes and will continue to monitor the company to ensure compliance with state insurance law. He also gave some guidance around insurance appointments.

"Generally speaking, in order for an agent to need an appointment from an insurer, the law requires that the agent be both selling, soliciting or negotiating any product of that insurer and be compensated by that insurer," he said.

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