What Advisors, BDs Should Do About Ohio National’s End of Trailing Commissions

Securities attorney Jim Eccleston of Eccleston Law, who represents financial advisors, explains that “broker-dealers must be able to rely on the integrity of a contract, in this case the promise by Ohio National to continue to pay trailing commissions as long as the policy remains in effect, and the good faith and fair dealing of the contra-party to any contract, which necessarily requires that the party will continue to honor its promise by offering and maintaining the insurance policy, regardless of its profitability.”

Eccleston continues, “If a broker-dealer cannot rely on that integrity, or has doubts as to whether it can rely on that integrity, then as part of its product due diligence process the firm has no alternative but to reject any and all product offering by that party. If firms do not reject all such product offerings, firms face a major risk that their customers will seek to hold firms liable (either in individual lawsuits or in class actions) for failing to reject such product offerings and selling those products to them.”

“In short, firms would fail to meet the ‘reasonable basis suitability’ standard in recommending and selling such products. Lack of such suitability would also be of interest to FINRA Enforcement,” he says.

While it is currently broker-dealers that are taking legal action against Ohio National, advisors also need to ensure that they will be paid their trails due.

Eccleston elaborates that “litigation winnings by broker-dealers may not trickle down to the advisor level. Because advisor trails may be lost in the litigation and arbitration shuffle, advisors should retain their own counsel to monitor those actions and object to any settlements not resulting in compensation to them.”

Further, he states, “Whereas any class action settlement will need to be published to the class with a subsequent court fairness and approval hearing, thereby giving advisors and their counsel an opportunity to evaluate and object to any proposed class action settlement, non-class actions and arbitration actions will not offer that review and approval protection to advisors.”

“Moreover, advisors with large amounts of trail revenue at stake would be well served to file their own litigation actions to ensure payment through their own legal counsel,” the attorney says.

To frame the Ohio National debacle in terms that Californians can relate to, Ohio National is a fire with the litigation against it acting as counter back-fires, so that the hot embers from Ohio National won’t start fires at other insurance companies with similar motives.

As more firms and advisors take legal action against Ohio National, let’s hope that this is an isolated occurrence and not a trend.