Kestra Investment Services — previously known as NFP Advisor Services — has filed a lawsuit before the U.S. District Court for the Western District of Texas against three Ohio National entities — Ohio National Life Insurance Company, Ohio National Life Assurance Corporation and Ohio National Equities.
The suit is yet another legal challenge to Ohio National’s decision to terminate its agreement with broker-dealers for the sale of annuities and to stop paying corresponding trail commissions for variable annuities with the Guaranteed Minimum Income Benefit (GMIB) rider.
The Ohio National entities being sued by Kestra filed their response last week, arguing that Kestra failed to state a claim against them upon which relief could be sought.
Kestra said it does not comment on pending legal matters.
In its complaint, Kestra details that it transferred all premium payments made by Kestra customers for the Ohio National annuity products to Ohio National. Per the selling agreement, Kestra was to be compensated in the form of up-front and trail commissions until the annuity contract was “surrendered or annuitized.”
Kestra alleges that in 2017 Ohio National entities “determined that the GMIB contracts were unprofitable and began a series of efforts to convince GMIB contract owners to surrender their contracts in favor of alternative products.”
Unsuccessful in doing so, Kestra alleges that the Ohio National entities decided to terminate their selling agreements with broker-dealers.
The Ohio National entities deny these allegations in their response filed before the court.
Kestra attached to its complaint a copy of the termination letter it received on September 20, 2018.
Just a day after that letter, Kestra says it received another letter proposing a “servicing agreement” for Ohio National annuities contracts, even though the selling agreement would be terminated on December 12, 2018. It further said that Ohio National would continue to pay trailing commissions on group variable annuities but would cease to do so for individual variable annuity products.
Ohio National further singled out the variable annuity product with the GMIB rider that is at the heart of the entire matter.
“The Servicing Agreement also provides for a service fee to be paid to you for your clients with Ohio National individual annuity contracts, except for contracts which contain a Guaranteed Minimum Income Benefit rider,” the letter states.
The company further alleges Ohio National entities were so intent on getting out of their GMIB obligations that they proposed a buyout opportunity for such contracts at an “enhanced value.”
In its complaint, Kestra describes the purpose of this move by the Ohio National entities was to “make it harder and more expensive for Kestra to service the GMIB Contracts” in the hopes that it “would encourage Kestra to recommend that its customers accept the buyout offer and move into another product for which Kestra could be compensated.”
In their response to the complaint, the Ohio National entities have denied these allegations as well.
Kestra maintains that Ohio National has not paid trail commissions due to Kestra since last December and that refusal to pay constitutes “a material breach” of the selling agreement.
Again, the Ohio National entities deny this allegation in their response.
Kestra argues that trail commissions are deferred up-front commissions and it is just as entitled to the payment a few years into the contract as it was at the time the annuity was sold.
“If annuity issuers could unilaterally end the payment of trail commissions at their discretion, no broker-dealer would take that risk, and all commissions would be paid up-front as a maximum percentage of initial premium,” Kestra states in its complaint.
The Ohio National entities argue that “the controlling plain and unambiguous contractual language makes clear that termination of the Selling Agreement also terminated any obligation,“ on them to continue paying trail commissions for the annuity products in question.
But Kestra believes its position is also supported by the language in the selling agreement itself.
“The terms of compensation shall survive this Agreement unless the Agreement is terminated for cause by Ohio National provided that Kestra “remains a broker-dealer in good standing with” Finra and other state and federal regulatory agencies and that Kestra “remains the broker-dealer of record for the account.”
Kestra says it satisfied its obligations for all accounts for which it was the broker-dealer on record.
In their response, the Ohio National entities “deny that the quoted language supports Kestra’s position.
Kestra’s lawsuit is among the many brought by broker-dealers and representatives of broker-dealers against the Ohio National firms since their decision to cease trail commission payouts.