Brokers affiliated with
LPL Financial and Triad Advisors have lost separate lawsuits against Ohio National Life Insurance Co. that sought to overturn the insurer's decision to stop paying variable annuity commissions.
Concurrently, however, judges allowed similar lawsuits brought by broker-dealers Veritas Independent Partners and NEXT Financial Group Inc. to move forward, keeping hope alive for brokerage firms and their representatives seeking to recoup lost annuity payments.
About a year ago, Ohio National stunned the brokerage and insurance industries by announcing a first-of-its-kind move to stop paying trail commissions to brokers for certain variable annuities they'd sold to clients.
That policy, which took effect Dec. 12, prompted several broker-dealers and brokers to sue Ohio National for breach of contract.
A federal judge in Ohio dismissed class-action cases brought by two of those brokers — Lance Browning and Stephen Cook — on Oct. 2.
Mr. Browning, who claims he'll lose $89,000 a year as a result of the Ohio National policy, sought to represent a class of LPL brokers. Mr. Cook, a broker with Triad Advisors, sought to represent a class of all brokers impacted by the Ohio National commission decision.
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The two brokers had similar arguments — that Ohio National breached the terms of the selling agreement it inked with broker-dealers. The plaintiffs argued that, despite them not being party to the selling agreements, they were intended third-party beneficiaries. Ohio National said the brokers lacked standing to bring a claim since they were not party to the agreement.
Judge Susan J. Dlott of the U.S. district court for the Southern District of Ohio agreed with the insurer.
"Upon examination, Browning and other representatives were not the parties who were intended to receive the benefit of compensation under the selling agreement," Ms. Dlott said in the Oct. 2 ruling in Lance Browning v. Ohio National Life Insurance Co. et al.
Under terms of the selling agreements, the payment of commissions only flows between Ohio National and the broker-dealer, and didn't mandate that the brokerage firms remit annuity commissions to the actual brokers who had sold the annuities, Ms. Dlott said. Further,
Financial Industry Regulatory Authority Inc. rules prohibit brokers from receiving annuity compensation from the company that issued the policies, she said.
Ms. Dlott also was the judge who issued the ruling in Stephen Cook v. Ohio National Life Insurance Co. In both instances, she decided not to take the recommendation of magistrate judge Stephanie K. Bowman, who had earlier suggested that the court should deny Ohio National's motion to dismiss the cases.
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"We are pleased with Judge Dlott's dismissal of the Browning and Cook suits," said Lisa Doxsee, a spokeswoman for Ohio National. "We believe the Court has reached the right decision as the individual registered representatives who filed these suits are not parties to Ohio National's selling and servicing agreements."
Attorneys for Mr. Browning and Mr. Cook didn't respond to a request for comment.
However, Ms. Dlott ruled favorably in a class-action lawsuit brought by independent broker-dealer Veritas Independent Partners, which seeks restoration of annuity commissions on behalf of all similarly situated broker-dealers.
Ohio National said its obligation to pay trail commissions "ended as a matter of law" when it terminated its selling agreement. The judge denied Ohio National's motion to dismiss the lawsuit, ruling Oct. 2 that "defendants have not established as a matter of law that their obligation to pay trail commissions to Veritas ended in December 2018 when they terminated the selling agreement."
"It means the jury will decide if and how much the broker-dealers are owed," Geoffrey Moul, an attorney representing Veritas, said of the ruling. "Given that the Veritas case was brought as a class action, this could benefit all broker-dealers affected by ONL's decision."
Judge Alfred H. Bennett in the U.S. District Court for the Southern District of Texas issued a similar ruling Sep. 26 in favor of NEXT Financial Group. However, NEXT Financial isn't representing a class of broker-dealers, so that case's impact isn't as far-reaching.
Ms. Doxsee, the Ohio National spokeswoman, played down the importance of the Veritas and NEXT Financial decisions. She said they aren't rulings on the obligation to pay trail commissions but "are simply decisions to move the case into the discovery phase as part of the normal litigation process."
She also underscored the firm's belief that the insurer's obligation to continue paying trail commissions on the variable annuity contracts is "contingent on having a selling agreement in force."
