Advisor says SEC has no authority to regulate his insurance sales
A Massachusetts advisor is leaning into the state regulation of insurance as a defense against fraud allegations lodged by the Securities and Exchange Commission (SEC).
Jeffrey Cutter, who is also an insurance agent, filed a motion Friday to dismiss the SEC complaint.
“The Investment Advisers Act of 1940 does not apply to an alleged scheme to generate insurance-related compensation by a state licensed insurance agent, even if that agent is also associated with a registered investment adviser,” the motion to dismiss reads.
On March 17, the SEC filed charges against Cutter and his advisory firm, Cutter Financial Group for “recommending that their advisory clients invest in insurance products that paid Cutter a substantial up-front commission without adequately disclosing Cutter’s and CFG’s financial incentive to sell the products.”
Starting in 2014, Cutter generated more than $9.3 million in commissions from the sale of 580 annuities to his investment advisory clients, the SEC said.
SEC adding another ‘burden’
The Cutter complaint is of great concern to an industry that remains leery of federal regulators encroaching on the regulation of insurance.
Finseca is among those industry organizations filing an amicus brief with the court, said Marc Cadin, CEO of Finseca, a financial services trade association.
“When the SEC reaches out and tries to regulate fixed products, that’s just going to put an additional layer of regulatory burden on the profession,” he said. “What we’ve seen in states like New York, where there is not an effective regulatory regime, what we get is fewer life insurance policies in the hands of consumers, fewer annuities in the hands of consumers.
“There’s a well founded, regulatory structure for fixed products at the state level, and we simply don’t think that we need an additional layer of regulation.”
The industry has battled the SEC since 2008 over the regulation of fixed indexed annuities. That year, the agency published its Rule 151A, which regulated FIAs as securities.
That was followed by a years-long fight in which Rule 151A was vacated by the courts and a new law from Congress specifying more clearly what insurance and annuity products are exempt from securities laws.
Two different hats
Cutter, 55, began working as an investment advisor in 2005, court documents say, and first formed Cutter Financial Group a year later. In 2017, he registered CFG with the SEC as an investment advisor. As a licensed insurance agent, Cutter also owns Cutterinsure, Inc.
According to the SEC complaint, Cutter earned 7-8% commissions on annuity sales as an agent, compared to 1.5-2% fees while managing assets as a fiduciary advisor.
As of 2022, CFG claimed to manage approximately $215 million in client assets across 476 clients, court documents say, “most of whom were individual retail investors of retirement age.”
Cutter “typically recommends that his advisory clients invest one-third of their assets in an annuity that Cutter sells them and the other two-thirds of their assets in accounts managed by a third party,” the SEC complaint said. He called it the “three buckets” approach.
“While Cutter consistently advised his clients to invest using his ‘three bucket’ system, he failed to clearly explain how his own economic incentives differed for each ‘bucket,’” the complaint said.
Even if the advisor standard did apply, Cutter said, he did not violate any conflict of interest regulations.
“Defendants complied with SEC and insurance industry guidance when they disclosed
the conflict of interest inherent when personnel of a registered investment adviser are
separately licensed as insurance agents and sell commission-based insurance products
to investment advisory clients,” Cutter’s motion reads.
Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.
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