O.N. Investment Management, the RIA subsidiary of Cincinnati-based independent brokerage The O.N. Equity Sales Company (Onesco) and insurer Ohio National, breached its fiduciary duty to clients by receiving “third-party compensation from client investments without fully and fairly disclosing associated conflicts of interest,” according to a Jan. 11 order from the SEC. The firm agreed to pay restitution, interest and a penalty totaling $1.24 million to settle the regulator’s allegations relating to 12b-1 fees, cash sweeps and no-transaction fee funds.
The payment represents a fraction of the roughly $140 million that wealth managers agreed to pay since 2019 as part of the SEC voluntary share-class disclosure program. Those cases targeted firms that the regulator accused of collecting 12b-1 service, distribution or recordkeeping fees of 25 to 100 basis points from custodians and fund companies without explaining it to the clients paying higher expenses for their mutual funds. Onesco joined Avantax and Centaurus Financial among the handful of firms that didn’t self-report potential violations to the SEC under the program and later reached settlements that added fines on top of restitution.
Despite brokerage executives’ criticism of the program as a form of rulemaking by enforcement, the 100 or so cases “probably just scratch the surface” when it comes to industry conflicts, said Arbitration Insight’s Louis Straney, a former regulator who often serves as an expert witness.
“When you’re advising and managing money under the ’40 Act, you always have to act in the best interest of the client,” Straney said. “If you can get equal satisfaction of the investment objectives and risk tolerance in the lower-priced product, you should use the lower-priced product. … Unfortunately, I think it happens all too frequently.”
Onesco didn’t admit or deny the SEC’s allegations as part of settling the case, though it agreed to a censure and a series of undertakings over the next two months to notify the affected clients receiving restitution and put policies in place to prevent violations of the Advisers Act. The brokerage firm’s parent, which is best known as an annuity issuer and life and disability insurance firm, generated $2.2 billion in revenue in 2020, according to its annual report. As the No. 33 firm on Financial Planning’s IBD Elite rankings, its wealth management arm produced $70.9 million that year. Representatives for Onesco declined to comment on the SEC case.
The alleged violations date back to 2014, though the SEC order noted that Onesco’s RIA began rebating 12b-1 fees to clients in March 2017. In addition to receiving the 12b-1 fees without giving adequate disclosure, Onesco’s RIA collected revenue sharing payments tied to the no-transaction fee funds and the cash sweeps in money market products the firm’s advisors recommended to clients without making those incentives clear in its Form ADV and other disclosures, according to the regulator. Investigators also accused the firm of failing the required duty of care standards for advisory clients.
“By causing certain advisory clients to invest in certain mutual fund share classes when share classes of the same funds were available to the clients that presented a more favorable value under the particular circumstances in place at the time of the transactions, [O.N. Investment Management] violated its duty to seek best execution for those transactions,” the order said.
Under the settlement, Onesco’s RIA will pay disgorgement of $866,257, prejudgment interest of $162,396 and a penalty of $210,000. In Onesco’s last regulatory case in April, the firm agreed to pay $1.3 million in restitution, interest and a fine after FINRA accused the brokerage of failing to supervise a registered representative who recommended that clients use an unsuitable strategy calling for them to liquidate their retirement savings to buy variable annuities, then withdraw part of the holdings to purchase whole life insurance policies.
Regardless of any individual case, the extra disclosures in Form ADV as a result of the 12b-1 cases and additional explanations in the new Form CRS required by the SEC’s Regulation Best Interest won’t “cure the misconduct” at issue on their own, Straney said.
“The SEC and FINRA and other regulators have made an effort to inform the public,” he said. “The investors are going to rely on the advisor. It starts with them to disclose all material facts. You can have all the regulations you want, but, when it comes down to it, the advisor is key.”Previous