Securities Arbitration Lawyer Blog
FINRA has fined and censured the O.N. Equity Sales Company, Inc. (“ONESCO”) over the firm’s failure to supervise a broker’s recommendations involving the purchase and liquidation of variable annuities. ONESCO was fined $275,000 and ordered to pay $1 million in restitution to customers.
Variable annuities are complex products, commonly marketed and sold to retirees or individuals saving for retirement, that permit customers to choose among a variety of contract features and options. Typically, variable annuities assess surrender charges for customers taking early withdrawals beyond a specified percentage of the annuity’s account value. Customers can also incur tax penalties and additional charges for early withdrawals. As such, they are generally not appropriate for customers with a short-term investment horizon.
If you have lost money with ONESCO, contact FINRA arbitration lawyers Iorio Altamirano LLP for a free and confidential evaluation of your account.
FINRA Letter of Acceptance, Waiver, and Consent (“AWC”)
ONESCO and FINRA entered into a Letter of Acceptance, Waiver, and Consent (“AWC”) on April 30, 2021, over findings that from March 2014 through September 2017, ONESCO failed to establish and maintain a supervisory system, and failed to establish, maintain, and enforce written supervisory procedures, that were reasonably designed to supervise the sale of variable annuities.
During this time, a firm broker recommended an unsuitable investment strategy to 76 ONESCO customers who purchased variable annuities and took short-term withdrawals incurred $371,395 in surrender charges. ONESCO was paid $732,634 in gross commissions for the sale of these annuities. In sum, the broker recommended a series of transactions to his customers, involving the liquidation of retirement savings, the purchase of variable annuities, and the partial liquidation of those annuities.
The firm failed to detect that its broker recommended an unsuitable investment strategy involving the liquidation of retirement funds to purchase variable annuities followed by the short-term withdrawal of funds from those annuities to purchase whole life insurance policies.
The broker was one of the top producers at the firm, and in 2016 was recognized as the firm’s highest producer for variable annuities.
ONESCO is headquartered in Cincinnati, Ohio, and has 760 registered representatives in 334 branch offices. The firm is a broker-dealer that offers various investment products, including deferred variable annuities. It has been a member of FINRA (and formerly NASD) since December 1968.
ONESCO Failed to Reasonably Supervise its Broker’s Recommendations
The ONESCO broker’s variable annuity sales were submitted to a team of principals for suitability review. ONESCO’s reviewing principals were aware that the broker was recommending variable annuities, but they were not made aware of the other components of his recommended strategy, and no one at the firm conducted a suitability analysis of the broker’s recommended investment strategy as a whole.
ONESCO’s written procedures required that principals perform a suitability review for all variable annuity transactions. The policies also identified various “special circumstances” that the principals should consider when reviewing a transaction, including whether (1) the customer was under the age of 59 1/2; (2) the representative recommended the purchase of a bonus share class annuity; (3) the source of funds for the purchase was a qualified retirement plan; (4) the customer could incur surrender charges; or (5) a high concentration of the customer’s net worth was being invested in the variable annuity.
The firm did not provide any guidance to reviewing principals about what they should do if one or more of these factors was present, and it did not have any monitoring system to review for trends or patterns suggesting that representatives were disproportionately recommending transactions involving one or more of these special circumstances. As a result, reviewing principals failed to detect or take action when the broker’s recommended variable annuity sales met several of these special circumstances or revealed other red flags of possible unsuitability.
Moreover, the ONESCO broker routinely recommended his customers take withdrawals from their variable annuities shortly after they were purchased. The broker did not advise ONESCO that he was routinely recommending early withdrawals from variable annuities, nor did ONESCO independently detect he was doing so.
ONESCO failed to supervise these recommendations.
ONESCO Failed to Reasonably Investigate and Act Upon Red Flags
ONESCO’s procedures recognized that the short-term surrender of a variable annuity is a red flag. On three occasions, variable annuity issuers contacted ONESCO or its parent company and raised concerns about the surrender charges being incurred by the broker’s customers.
ONESCO failed to conduct a reasonable investigation in response to these inquiries:
In September 2015, an issuer requested that ONESCO explain why the broker’s customers were taking early withdrawals from their variable annuities and incurring surrender charges. In response, ONESCO accepted the broker’s explanation for the withdrawals, notwithstanding that many of those explanations were inaccurate, without verifying these explanations or reviewing the suitability of the broker’s “building your own bank” strategy. This issuer requested a second explanation for unusual withdrawals and surrender charges in February 2017. Again, the firm requested an explanation from the broker but took no additional supervisory steps and did not contact a single customer.
In June 2016, a second issuer asked ONESCO’s parent company about an unusual amount of withdrawals from the variable annuities of the broker’s customers. Although this inquiry was forwarded to ONESCO, the firm did not investigate these withdrawals and surrender charges or request an explanation from the broker. In April 2017, this issuer terminated the broker as an agent authorized to sell or service its products, including variable annuities. ONESCO did not investigate the circumstances leading to this termination. These inquiries identified specific customers who had incurred surrender charges within weeks, sometimes days, of purchasing their variable annuity. The June 2016 inquiry also identified withdrawals from variable annuities that were being sent to ONESCO’s parent company for payment on insurance premiums. Notwithstanding this information, the firm failed to investigate these customers’ early withdrawals. The firm’s inaction allowed the broker’s unsuitable recommendations to continue and additional customers to be harmed.
How to Recover Losses or Obtain a Free Consultation
If you have lost money with ONESCO, contact FINRA arbitration lawyers August Iorio and Jorge Altamirano of Iorio Altamirano LLP at august@ia-law.com, jorge@ia-law.com, or toll-free at (855) 430-4010 for a free and confidential evaluation of your account.
Iorio Altamirano LLP is a securities arbitration law firm based in New York, NY. We pursue FINRA arbitration claims nationwide on behalf of investors to recover financial losses arising out of wrongful conduct by financial advisors and brokerage firms.