After a seven-day trial, a jury has found that investment advisor Jeffrey Cutter and his advisory firm, Cutter Financial Group, failed to disclose to their clients significant upfront commissions, among other conflicts of interest, as part of an annuity replacement scheme.
A jury in the U.S. District Court for the District of Massachusetts deliberated for five hours, finding on Wednesday Cutter and his firm liable for violating Section 206(2) of the Investment Advisers Act of 1940, which prohibits “engag[ing] in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”
The jury found for Cutter, however, on claims the Securities and Exchange Commission alleged under Sections 206(1) and (4) of the Act, the anti-fraud provisions.
"The jury found that Cutter and his firm, who marketed his services to current and future retirees, failed to disclose to their clients significant upfront commissions, among other conflicts of interest," the SEC said.
On Wednesday, the acting director of the SEC's Division of Enforcement, Samuel Waldon, said the agency is “pleased with the jury verdict holding Jeffrey Cutter and Cutter Financial Group ... accountable for breaching their fiduciary duties to their clients. As the hard work of the SEC team demonstrates, we will continue to hold investment advisers responsible when they engage in wrongdoing.”
Cutter said in a statement that “the jury found what we have been saying for more than four years: that we did not intentionally or recklessly defraud any clients. The jury also found no violations of applicable SEC rules about compliance policies and procedures. These are claims that should never have been brought in the first place. It is very difficult for a small business to stand up to federal government regulators and prevail. But that’s what we did today.”
The SEC’s case, Cutter continued, focused on disclosures related to commission compensation structures.
"There were no allegations that client funds were misappropriated," the firm said in the statement. "CFG acknowledges that industry-based financial advisory disclosures can be complex."
To help clients "better navigate these structures, the firm will be launching educational and compliance initiatives, including an educational campaign to explain compensation structures in accessible terms," according to the firm's statement.
In a complaint filed March 17, 2023, the SEC alleged Cutter and his firm recommended their advisory clients invest in fixed indexed annuities that paid Cutter a large upfront commission without adequately disclosing his and CFG's financial incentive to sell those products.
The scheme allegedly caused the clients to incur a total of $640,000 in surrender charges between 2018 and 2022.
In July of that year, Cutter requested that the case be dismissed, arguing that, among other things, he was acting as an insurance agent and not as an investment advisor in these instances — and, thus, he did not violate the Investment Advisers Act of 1940.
The National Association for Fixed Annuities and Investor Choice Advocates Network filed amicus curiae briefs in the court in mid-2023 on Cutter's behalf.
Nicolas Morgan, founder of ICAN, told ThinkAdvisor Thursday that the jury verdict in the Cutter case "deserves careful examination, as it raises important questions about the boundaries of investment advisor regulation."
Said Morgan: "While investor protection is paramount, we must be wary of regulatory overreach that imposes unnecessary burdens on financial professionals legitimately serving their clients. What's concerning is that expanding registration requirements beyond what Congress intended ultimately creates higher costs and fewer choices for investors. ICAN will continue monitoring this case closely as it potentially moves through the appeals process, as the final outcome could have significant implications for how Americans access financial advice."
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