Advisor to SEC: show the court your guidance on commission payments

A Massachusetts financial advisor also licensed as an insurance agent is asking a judge to force the Securities and Exchange Commission to explain its stance on commission payments.

In March 2023, the SEC 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."

The case is being closely watched by industry trade associations who adamantly oppose further federal encroachment on state-regulated insurance.

Cutter Financial Group “disclosed the existence of the potential conflict of interest to CFG clients, but the SEC’s Amended Complaint alleges that Defendants were also specifically obligated to disclose the amount of Mr. Cutter’s insurance commissions to their advisory clients who bought insurance products,” Cutter’s attorneys write in a memorandum.

Cutter’s legal team claims that the SEC “has issued no written guidance on a central issue in the case: whether an insurance agent who is also associated with a registered investment advisor must disclose the amount of his or her commission on a fixed indexed annuity.”

The two sides have batted the issue back and forth for months without resolution. Cutter’s attorneys are asking the District of Massachusetts federal court to compel the SEC to respond with the guidance in question.

The motion to compel was referred to Judge Donald L. Cabell.

Big commissions paid

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," an earlier motion from Cutter reads.

In December, Judge Denise J. Casper rejected Cutter's motion to dismiss the case.

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