Jeffrey Cutter files appeal from guilty verdict on Advisors Act disclosures

Advisor Jeffrey Cutter is appealing the lone guilty verdict handed down last month in his trial in a Securities and Exchange Commission civil case.

On April 23, a Massachusetts jury determined that Cutter and Cutter Financial Group did not violate Section 206(1) of the Investment Advisers Act of 1940, but did find a violation of Section 206(2).

Section 206(2) bars advisors from engaging “in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client.”

“While CFG disclosed that it received commissions from insurance companies, the jury found CFG negligent in not also disclosing the specific upfront amount of those commissions for a limited number of clients,” Cutter’s legal team said in a news release.

On Wednesday, attorneys filed an appeal and a 41-page memorandum.

“Based on all the evidence presented to the jury, there is no legally sufficient basis for the jury to have found that Defendants acted negligently in their conflict-of-interest disclosures relating to selling FIAs,” the memo reads.

In March 2023, the SEC filed charges against Cutter and CFG 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.”

Cutter is also a licensed insurance agent, and the case attracted the attention of industry trade associations, which oppose any fiduciary regulation of agent insurance product sales.

Big commissions alleged

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. 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.

In its appeal, the Cutter team pointed to testimony from an SEC lead examiner during the seven-day trial.

• The SEC’s lead examiner “believes that CFG’s Form ADV disclosures regarding
  conflicts of interest were appropriate,” the memo states.
• The SEC’s lead examiner “confirmed the SEC issued no written guidance to investment advisers advising them to disclose annuity commission amounts or percentages, bonus programs or marketing services,” the memo states.
• The SEC’s lead examiner “never advised CFG to disclose the specific amount of its FIA commissions and he conceded that Mr. Cutter was willing to do whatever the SEC examiner asked of him,” the memo adds.

‘Does not govern’ insurance disclosures

Then the memo dove into the heart of the issue, as far as industry trade associations are concerned: the regulation of insurance product sales.

“The Advisers Act does not govern the extent of disclosure required in the sale of an insurance product,” the memo states. “And the McCarran-Ferguson Act precludes federal regulation of insurance in the absence of specific statutory authorization, which does not exist here.

“Finally, the SEC failed to provide fair notice to Defendants of the novel position it has taken in this case: that the details of the amount and timing of non-securities insurance commissions must be disclosed to advisory clients who buy insurance products.”

Cutter’s legal team is asking Judge Denise J. Casper to toss out the jury verdict and find for Cutter. In the alternative, they request a new trial.

During a recent “Inside the Beltway” webinar, Faegre Drinker Biddle & Reath partners Fred Reish and Brad Campbell spoke at length about the implications of the Cutter case and questioned how the SEC, moving forward, will treat registered advisors who also sell insurance-regulated annuities.

President Donald Trump nominated Paul S. Atkins to head the SEC and he was quietly confirmed April 9. Cutter’s case originated from the desk of Atkins’ predecessor, Gary Gensler, Campbell noted.

“Will there be a different view at the SEC, given that the new chair and others have made it clear that the SEC is against what they call ‘regulation by enforcement,’” he added.

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