SEC accused of ‘overreach’ with complaint targeting annuity sales

A fraud case against a Massachusetts advisor has many in the annuity industry concerned about federal regulatory overreach.

On March 17, the Securities and Exchange Commission filed charges against Jeffrey 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.

“Cutter and CFG also failed to disclose the free marketing services and payments of more than $1.1 million that Cutter received from marketing firms in exchange for peddling annuities to his clients,” the SEC complaint reads. “In doing so, they abrogated their fiduciary duty of loyalty to make full and frank disclosure of all conflicts of interest to their advisory clients and to obtain their clients’ informed consent to these conflicts of interest.”

However, Cutter is both an insurance agent and a registered investment advisor. 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.

The issue is which hat was Cutter wearing for specific conversations about annuities, explained Justin Chretien of Carlton Fields. More importantly, annuity sellers are concerned that the SEC venturing too far into state-regulated ground. The McCarron Ferguson Act of 1945 essentially gave the regulation of insurance to the states, Chretien pointed out.

Chretien spoke last week during a session on annuity regulation at the Annuity Leadership Forum, held by the National Association for Fixed Annuities.

“I think it is an overreach by the SEC,” Chretien said.

Carlton Fields is expected to file a amicus brief taking a position on the issues, he added.

Annuity exchanges alleged

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.

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.

The SEC complaint highlights Cutter’s business dealings with “Client A.” An advisory client charged a 1.75% fee, Client A purchased a $350,000 annuity at Cutter’s recommendation in December 2015, the complaint reads. It included an income rider “based on Client A’s need for income when her former spouse’s pension payments ceased upon his death,” the complaint reads.

Cutter liquidated a portion of Client A’s securities holdings to fund the annuity purchase, but never forewarned Client A of the “substantial tax implications” of selling securities to purchase the annuity, the complaint reads.

‘Surrender too high’

By December 2020, Cutter was allegedly looking for a replacement annuity for Client A.

“A CFG administrative assistant noted in Client A’s file that her annuity could not be replaced because the ‘7.5% surrender [was] too high,’ meaning Client A stood to lose 7.5% of the accumulation value of the annuity if she surrendered her annuity to purchase a new one,” the complaint reads.

Nevertheless, Cutter persuaded Client A to replace her annuity with a new annuity costing $397,622. “This new annuity did not include an income rider, even though Client A continued to need income upon her prior spouse’s death,” the complaint reads.

“Cutter falsely made a note in Client A’s file that Client A no longer needed income from her annuity,” the complaint reads. “In truth, nothing had changed with respect to Client A’s financial circumstances.”

Client A incurred a surrender charge of $26,508 on the annuity replacement and reset the clock on a 12-year surrender period at a much-higher surrender charge, the complaint reads. Cutter received commissions of $23,857 and $4,970.28 from two separate companies, the complaint said, and never discussed his commission amounts or upfront nature with the client.

Cutter responds

In a reply and motion to dismiss the SEC complaint, Cutter claimed the Investment Advisers Act of 1940, which mandates strict standards for advisors, does not apply because he was wearing his agent hat for the annuity transactions.

Even if the advisor standard did apply, Cutter said, he did not violate any conflict of interest regulations.

“Defendants’ disclosure of their conflict of interest inherent in selling commission-based insurance products to investment advisory clients complied with SEC and insurance industry guidance about the content of those disclosures,” his response 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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