An Ohio National Life Insurance subsidiary was fined $275,000 Friday after the Financial Industry Regulatory Authority said one of its top producers recommended unsuitable investment strategies to 76 customers involving variable annuities and whole life policies.

Finra is also requiring the subsidiary, the O.N. Equity Sales Company, or ONESCO, to give more than $1 million back to the customers.

According to Finra, ONESCO failed to supervise the registered rep, identified in a previous Finra complaint in November as Richard Michael Wesselt. The agency said that in 2016 he was the top variable annuities producer at the company.

Wesselt’s strategy, said the agency, was “predicated on persuading customers to liquidate their retirement accounts, which typically held a portfolio of mutual funds, to use the proceeds of that liquidation to purchase variable annuities, and then to liquidate the variable annuities in order to build cash value in whole life insurance policies.” Wesselt racked up $686,000 in commissions on the sales of the variable annuities, Finra said in November.

He called these strategies “building your bank” or “infinite banking.”

Wesselt usually put the clients in similar VA types, using the same riders and asset allocations, and failed to account for the personal financial situations of the clients—such as their employment, liquidity needs or risk tolerance, Finra said. The clients would then sell the VAs, ringing up charges, and pay premiums to whole life policies, with which they could make loans to themselves.

The strategy involved a number of steps: First, Wesselt asked the customers to liquidate retirement savings, including 401(k)s or IRAs. Next, he told the customers to buy variable annuities with the liquidated funds. The VAs he steered the customers to had several features: There were cash bonuses to the contracts, they had guaranteed withdrawal benefit riders and they had long surrender periods.

The specs increased the customers’ fees for buying the annuities, Finra said. Last, the rep encouraged the clients to take early withdrawals, which racked up surrender charges and lost them the benefits of the annuities. The large onetime withdrawals were recommended to fund premiums on whole life policies or to pay for big ticket items such as a home purchase.

According to the November complaint, one customer met with Wesselt in October 2014, when she was 59. She “sought Wesselt's advice regarding the purchase of an apartment and assisting a child with student loan repayment. Wesselt recommended that she purchase a variable annuity, using approximately $58,000 that she held in a 401(k).”

Wesselt made these recommendations between March 2014 and September 2017, Finra said, and ONESCO failed to adequately respond to the red flags sent up by issuers when the customers started racking up the surrender charges on their VAs.

“In September 2015,” said Finra’s complaint, an annuity issuer “requested that ONESCO explain why [Wesselt’s] customers were taking early withdrawals from their variable annuities and incurring surrender charges. In response, ONESCO accepted [Wesselt’s] explanation for the withdrawals, notwithstanding that many of those explanations were inaccurate, without verifying these explanations or reviewing the suitability of [the strategy].

“This issuer requested a second explanation for unusual withdrawals and surrender charges in February 2017. Again, [ONESCO] requested an explanation from [the representative], but took no additional supervisory steps and did not contact a single customer.”

Finra is asking the company to make $1,001,141.86 in restitution to the customers. The amounts being returned to them range from a few thousand to almost $115,000 repaid to one customer.

In 2019, Finra said ONESCO had also failed to supervise another rep named Joshua Ray Abernathy, who was accused of appropriating funds from 14 investors. Abernathy pleaded guilty in 2015 to mail fraud and unlawful money transactions in what the U.S. Attorney’s Office in the Eastern District of Virgina called a Ponzi scheme.

Ohio National dramatically exited the variable annuity business in 2018 and later said it would no longer pay its trailing commissions, a move that launched a brace of (mostly failed) lawsuits by other broker-dealers and reps against the company. One of those reps, an LPL broker named Lance Browning, said that the canceled trailing commissions from Ohio National made up a huge chunk of his business at some $89,000 per year. Observers such as S&P Global said at the time that the regulatory squeeze was likely one reason Ohio National was getting out of variable annuity underwriting.

Richard Wesselt agreed to be barred from affiliating with any Finra member in all capacities, according to the agency’s November letter of acceptance, waiver and consent.