SEC counsel: Show court your guidelines on kickbacks – Insurance News

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

In March 2023, the SEC filed charges against Jeffrey Cutter and his advisory company, Cutter Financial Group, for “advising their advisory clients to invest in insurance products that paid Cutter a large upfront fee without properly disclosing Cutter’s and CFG’s financial incentives to sell the products.”

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

Cutter Financial Group “advised CFG’s clients of the existence of a potential conflict of interest, but the amended SEC complaint alleges that the defendants were also specifically required to disclose the amount of Mr. Cutter’s insurance commissions to their advisory clients who purchased insurance products,” Cutter’s attorneys wrote in a memorandum .

Katter’s legal team argues that the SEC “has not issued any written guidance on the central issue in this case: whether an insurance agent who is also affiliated with a registered investment adviser must disclose the amount of its fee for a fixed indexed annuity.”

The two sides have argued over the issue for months without resolution. Katter’s attorneys are asking a federal district court in Massachusetts to compel the SEC to provide guidance.

The motion for injunctive relief was assigned to Judge Donald L. Cabell.

Large commissions paid

According to court documents, Cutter began working as an investment adviser in 2005 and formed Cutter Financial Group a year later. In 2017, he registered CFG with the SEC as an investment adviser. As a licensed insurance agent, Cutter also owns Cutterinsure, Inc.

According to the SEC complaint, Cutter received 7-8% commissions on annuity sales as an agent, compared to 1.5-2% commissions while managing assets as a fiduciary adviser. According to the SEC, starting in 2014, Cutter earned more than $9.3 million in commissions from selling 580 annuities to his investment adviser clients.

As of 2022, CFG said it managed approximately $215 million in client assets at 476 clients, “the majority of which were individual retail investors of retirement age,” according to court filings.

Cutter “typically recommends that its advisory clients invest one-third of their assets in an annuity sold to them by Cutter and the other two-thirds of their assets in accounts managed by a third party,” the SEC complaint said. He called it the “three bucket” approach.

“While Cutter consistently advised his clients to invest using his ‘three buckets’ system, he failed to clearly explain how his own economic incentives differed for each ‘bucket,'” the complaint states.

Even if the consultant standard applied, Cutter said in court documents, it did not violate any conflict of interest provisions.

“Defendants followed SEC and insurance industry guidelines when making the disclosures
conflict of interest inherent in the personnel of the registered investment adviser
obtain a separate license as insurance agents and sell insurance products on a commission basis
clients providing investment advisory services,” Cutter said in an earlier statement.

In December, Judge Denise J. Casper denied Cutter’s motion to dismiss the case.

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