O.N. Equity Sales Fined $1.3M Over Broker’s Unsuitable Investing Strategy
Ohio National Financial Services Broker-Dealer Accused of Failing to Properly Supervise
The Financial Industry Regulatory Authority (FINRA) announced that brokerage firm O.N. Equity Sales Co., an Ohio National Financial Services brokerage firm, must pay a $1.3M penalty for not adequately supervising a former broker who is accused of recommending an unsuitable investment strategy to customers.
The strategy involved whole life insurance policies and variable annuities (VAs). The former O.N. Equity Sales broker is no longer with the firm. He arrived at a separate settlement with the self-regulatory organization (SRO).
If you are someone who worked with an O.N. Equity Sales stockbroker and you are wondering if your losses may be due to negligence or fraud, contact our investment fraud attorneys at Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com).
Here, SSEK Law Firm Partner and Attorney Kirk Smith explains what unsuitability is:
Ex-O.N. Equity Sales Broker Touted Strategy as “Building Your Own Bank”
According to the settlement with FINRA, O.N. Equity Sales did not properly supervise a series of variable annuities transactions involving its former broker. This included 76 customers selling securities, usually mutual funds, to shut down their retirement accounts, and then using the funds to purchase VAs.
The clients would then sell the variable annuities to grow cash value in whole life insurance policies. The broker reportedly described this strategy as “infinite banking” or building your own bank.”
Not only that, but the ex-O.N. Equity Sales broker recommended that customers buy the “same variable annuities with the same income riders and similar asset allocations” regardless of their investing profile, risk tolerance level, liquidity needs, and investing time horizon. This appears to have been a one-size-fits-all approach rather than considering each customer’s suitability and investing needs.
Short-Term Withdrawals from Variable Annuities Caused Customers to Incur Significant Fees
To bow out of the variable annuities so soon after buying them inevitably caused customers to pay tax penalties, surrender charges, and other charges. Also, this type of transaction tends to earn a registered representative and their brokerage firm commissions.
As a result, the former O.N. Equity Sales broker’s customers that bought the variable annuities and opted for short-term withdrawals ended up paying $371K in surrender charges while the firm earned $733K in gross commissions from the annuity sales.
The ex-O.N. Equity Sales broker reportedly engaged in this unsuitable strategy from 2014 to 2017, during which time the firm failed to detect this, even though red flags were raised. This included variable annuity issuers contacting the broker-dealer directly to let them know that customers were making short-term withdrawals and being charged the surrender fees. O.N. Equity Sales purportedly did not act to properly investigate these inquiries.
The brokerage firm also did not conduct a suitable analysis of this VA strategy to determine its overall suitability. Meanwhile, the former O.N. Equity Sales broker failed to notify the firm that he was regularly recommending this strategy.
Of the $1.3M penalty imposed by FINRA, $275K is a fine, and $1M is restitution for harmed customers. O.N. Equity Sales settled but without denying or admitting to the SRO’s findings.
Unsuitable Investing Strategies
It is important that a broker only recommends and executes an investing strategy if it is suitable for a customer. Unfortunately, unsuitability continues to be a leading reason why investors lose money.
Not only can brokers be held accountable for unsuitably recommending an investment, but also the firm can be held liable for not properly supervising their employees’ activities to ensure that nothing fraudulent or negligent is occurring in customers’ accounts.
Contact our broker fraud attorneys at SSEK Law Firm today to discuss whether you have grounds for an unsuitability claim. Call (800) 259-9010 today.