According to FINRA, Fortune Financial Services, Inc. was censured and ordered to pay $612,172.66 plus interest totaling $25,183.21 in restitution to customers for supervisory failures involving unsuitable variable annuity recommendations. The firm must also retain an independent consultant to review its compliance systems.
The firm's supervisory system was not reasonably designed to identify unsuitable variable annuity exchanges. The firm used exception-reporting software to flag potentially problematic transactions, but configured the alerts in a way that did not identify inappropriate rates of exchanges by representatives or flag when customers had recently conducted exchanges within the preceding 36 months. Firm principals also failed to monitor for inappropriate exchange patterns when reviewing individual recommendations.
These supervisory failures allowed a representative to engage in a pattern of recommending variable annuity exchanges without considering the substantial surrender charges that resulted. Customers who purchased variable annuities and took short-term withdrawals—sometimes less than one year after purchase—incurred $612,172.66 in surrender charges. One variable annuity issuer terminated its relationship with the representative after finding he recommended early liquidations resulting in $108,000 in surrender fees, but despite this notification, the firm failed to investigate and continued to allow the representative to recommend exchanges to the same customers, who incurred additional surrender fees.
The case also revealed that the firm failed to supervise the representative's use of unapproved email accounts. The representative and his support staff used outside email addresses to send account applications and variable annuity exchange forms to customers, often sending blank or incomplete forms that the representative would complete after customers signed and returned them. The firm knew about this practice but failed to review or preserve these emails.
Variable annuities are complex insurance products with surrender charges that can last many years and significantly reduce customer returns if the annuity is liquidated early. Exchanging annuities frequently, especially within the surrender charge period, is typically unsuitable and generates commissions for the representative while imposing costs on customers. This case resulted in one of the more significant restitution orders, reflecting the harm caused to customers. Investors should be extremely cautious about recommendations to exchange annuities, particularly if done repeatedly, and should always understand the surrender charges and time horizons before purchasing these products.
