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Regulation and Compliance > Federal Regulation > SEC

Advisor Fights SEC in Annuity Switching Case

By Jeff Berman

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The Massachusetts advisor who was charged by the Securities and Exchange Commission in March with defrauding clients as part of an annuity replacement scheme requested that the case be dismissed, arguing that, among other things, he was acting as an insurance agent and not an advisor, which means he didn’t violate the Investment Advisers Act of 1940.

In a complaint filed March 17 in U.S. District Court for the District of Massachusetts, the SEC alleged Jeffrey Cutter, 55, and his firm, Cutter Financial Group, recommended their advisory clients invest in fixed indexed annuities that paid Cutter a significant upfront commission without adequately disclosing his and CFG’s financial incentive to sell those products.

The complaint also alleged that Cutter recommended some clients surrender fixed indexed annuities the client already owned, including fixed indexed annuities he had sold the clients previously.

The scheme allegedly caused the clients to incur a total of $640,000 in surrender charges between 2018 and 2022.

But, in a motion to dismiss the case filed July 14, Cutter’s attorneys argued that the ’40 Act “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 defense attorneys also additionally argued that:

  • Since the Advisers Act does not apply, the court lacks federal subject matter jurisdiction over the amended complaint.
  • The defendants complied with SEC and insurance industry guidance when they disclosed there was a conflict of interest inherent when personnel of an RIA are separately licensed as insurance agents and sell commission-based insurance products to investment advisory clients.
  • The amended complaint’s “conclusory allegations fail to raise a plausible inference that Defendants intentionally or negligently engaged in any fraudulent activities.”
  • The alleged Advisors Act violations based on conduct before October 2017 were “impossible because CFG had no clients before it began operating” as an RIA, and because Cutter was a representative of two unrelated RIA firms and not responsible for those firms’ disclosure obligations or their policies and procedures.
  • Certain SEC claims under Advisers Act Sections 206(2) and 206(4) for conduct before 2017 are barred by the statute of limitations.
  • The SEC “fails to adequately allege that CFGs policies and procedures were unreasonable or that CFG or Cutter violated its policies.”

The defendants’ motion to dismiss the case was first reported by InsuranceNewsNet.

Photo: Shutterstock

Jeff Berman

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