A federal judge refused to toss out annuity fraud charges filed by the Securities and Exchange Commission against a Massachusetts financial advisor.
U.S. District Judge Denise J. Casper denied a motion to dismiss filed by Jeffrey Cutter, who is also an insurance agent. Cutter argued that the Investment Advisers Act of 1940 did not apply to the allegations made by the SEC.
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.”
The case is being closely watched by industry trade associations who adamantly oppose further federal encroachment on state-regulated insurance. Casper is allowing the SEC’s case to continue.
“The Court concludes that the SEC’s claim under the Advisers Act is not so insubstantial and frivolous to warrant dismissing this case for lack of federal subject matter jurisdiction and will instead analyze the arguments regarding the scope of the Advisers Act,” she wrote in the Wednesday decision.
Lucrative annuity business
Cutter 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. 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.
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 in court documents, 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.
InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at email@example.com. Follow him on Twitter @INNJohnH.
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