Investment Adviser & Affiliated Insurance Agency Trigger SEC Disgorgement Lawsuit Over Undisclosed Commissions
The Securities and Exchange Commission (SEC) has filed a civil action in the United States District Court in Boston against Jeffrey Cutter (Cutter) and Cutter Financial Group (CFG) of Falmouth. The complaint alleges violations of the investment adviser act in not disclosing conflicts of interest in their placement of fixed index annuities through their affiliated Insurance Agency, Cutterinsure, Inc. The SEC seeks injunctive relief, disgorgement of “ill-gotten gains,” and civil penalties.
Allegations of churning annuities for commission in violation of fiduciary duties
The Commission alleges that between 2014 and 2022, Cutter generated at least $9,340,302 in commissions from the sale of 580 annuities to his investment advisory clients. The Commission’s complaint alleges Cutter engaged in a pattern of deception designed to steer his investment advisory clients into fixed index annuities placed through Cutterinsure over other investment options. The complaint alleges Cutter concealed his motive to obtain unwarranted insurance commissions, by breaching his fiduciary duties as an investment adviser. Beginning in October 2017, Cutter used his registered investment company, CFG, to switch investment clients out of annuity contracts he had previously sold into new annuity contracts. The SEC alleges that he did not adequately disclose his financial incentive to recommend these switches, including the substantial, up-front commissions he received from the insurance company and other third parties.
To further the alleged scheme, Cutter made false statements to insurance companies to effectuate annuity switches and generate a new round of commissions for himself. In doing so, Cutter and CFG allegedly breached their fiduciary duties by placing their own interests ahead of their client’s interests, failing to disclose all material conflicts of interest, and obtaining clients’ informed consent to those conflicts before proceeding.
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 selling annuities to his clients.
The SEC charges that Cutter and CFG violated their fiduciary duty of loyalty to their advisory clients by engaging in activities that garnered them undisclosed commissions from uninformed clients.
Cutter Financial Group was founded in 2017 to offer investment advice
Cutter Financial Group is an investment management firm founded in 2017 by Jeffrey Cutter, a licensed insurance agent, and investment adviser. The company is headquartered in Falmouth, with additional offices in Duxbury and Mansfield. Cutter Financial Group offers investment management advice, and insurance products, primarily fixed index annuities, through its affiliated insurance agency, CutterInsurance, Inc.Alleged Conflicts of Interest
The SEC complaint alleges that Cutter and CFG failed to adequately disclose their compensation arrangements, which incentivized them to recommend certain investments over others. Specifically, the SEC points to undisclosed commissions that Cutter received from selling annuities and benefits provided by third-party marketing firms. These conflicts of interest were further complicated by Cutter’s dual role as an insurance agent and investment adviser.
According to the SEC, Cutter failed to disclose important information regarding their compensation arrangements, including commissions from annuity sales and other incentives. This lack of disclosure allegedly misled clients and violated the fiduciary duties that they owed to their clients.
The complaint’s examples of CFG and Cutter allegedly breaching their fiduciary duty to clients
In one section, the SEC complaint provides specific examples of how CFG and Cutter allegedly breached their fiduciary duties and caused losses to seven clients, identified only as Clients A through G.
Client A
For instance, Client A, who became a CFG advisory client in 2015, was sold an annuity with an income rider by Cutter, who did not disclose the commission he received from the sale. In 2020, despite a note in Client A’s file that her surrender charge was too high for a replacement annuity, Cutter convinced her to switch to an annuity without an income rider. According to the complaint, Cutter falsely recorded in Client A’s file that she no longer needed the rider, and the new annuity had a higher surrender charge than the original one. Cutterinsurance received a commission of $23,857 for the switch, which Cutter did not disclose to Client A.
Clients B & C
Clients B and C, who were charged an annual advisory fee of 1.75% of their assets under management, purchased three annuities with a total principal amount of $385,000 from Cutter in January and February 2016. Cutter received $29,200 in commissions from these annuity sales. In May 2019, less than four years into the 2016 annuity contracts, Cutter advised Clients B and C to cash out their annuities to purchase two new ones for a total principal amount of $400,440. As a result, they incurred surrender charges of $32,468, relinquished the 15% bonuses, and extended the surrender period to twelve years, six years beyond when their original surrender periods expired. The undisclosed commission on the annuity exchange amounted to $28,032.
Client D
In another example, Client D, who became a CFG advisory client around 2016 and paid an annual fee of 1.75% of their assets under management, purchased an annuity from Cutter for $180,000 in May 2016, earning Cutter a commission of $12,600 that was not disclosed to the client. The annuity included an income rider for no extra fee and a 20% bonus if held for ten years before activating the income rider. In May 2021, Cutter advised Client D to replace their 2016 annuity with a new one worth approximately $220,000, earning a commission of $15,444 from the sale of the replacement annuity. As a result of the annuity replacement, Client D incurred a surrender charge of approximately $3,428 and lost the free income rider and 20% bonus associated with the 2016 annuity.
Client E
Client E, a retired salesman who became a CFG advisory client in 2014, was charged an annual advisory fee of 1.75% of assets under management. Cutter sold two annuities to Client E in 2015 and 2017, with income riders and a potential 15% bonus, and received commissions totaling $17,629 and $43,225 from these annuity sales, respectively, without disclosing them to the client. In 2019, Cutter advised Client E to cash out both annuities and purchase new ones, receiving a total of $54,539 in lump-sum commissions for the two switches, none of which was disclosed to the client. As a result, Client E incurred surrender penalties totaling $84,652 and lost the income riders on the earlier annuities.
Client F
In 2014, Cutter sold an annuity with an income rider to Client F, who became an advisory client of CFG after attending one of Cutter’s seminars on retirement and investments. In May 2019, Cutter recommended that Client F replace the annuity. However, it is alleged that Cutter misrepresented Client F’s financial situation and objectives in the paperwork provided to the insurance company to explain the switch. As a result, Client F incurred a surrender charge of around $21,000, while Cutter received commissions totaling at least $55,541 from both annuity purchases between 2014 and 2019.
Client G
In a similar case, Client G, who became an advisory client of CFG around 2015, allegedly expressed reluctance to tie up his money in annuities. However, Cutter allegedly pressured Client G to buy $855,000 worth of annuities, which was 32% of the client’s liquid assets. When Client G asked about the commission, Cutter initially represented that it was 1%. Later, Cutter disclosed that his commission was 1.85%. However, in reality, Cutter received an up-front commission of 6.5%, or $55,575. Client G claims that he would not have purchased the annuities had he known about Cutter’s up-front commission.
Undisclosed commission payments from field marketing organizations
Between 2014 and 2021, various field marketing organizations (FMOs) provided benefits to the Cutterinsure, Cutter, and CFG tied to their annuity sales.
The benefits included free marketing services and payments that were styled as expense reimbursements but which the SEC claimed were actually commissions from a different source. These cash and non-cash payments, according to the complaint, incentivized Cutter and CFG to recommend annuities over other investment options and created a conflict of interest that was not disclosed to their advisory clients, breaching their fiduciary duty of loyalty.
From 2016 to 2018, Cutterinsure used an FMO, which allegedly paid CFG more than $500,000 in commissions and rewards program payments.
This FMO paid Cutter a commission of 1% based on his annuity sales, on top of the 7% commission he received from the insurance company directly.
Cutter also received paid trips from this company for reaching certain annuity sales levels.
Starting in 2018, Cutterinsure used another FMO, which provided at least 1,567 hours of free marketing services valued at over $148,000 to Cutterinsure between October 2018 and August 2022.
This new FMO also paid Cutter an extra commission based on his sales of annuities to advisory clients, initially 1% and later approximately 1.5% based on his level of annuity sales.
The new FMO paid Jeffrey Cutter approximately $470,000 in commissions between 2019 and 2021.
The New FMO also paid CFG commissions ranging from $2,758 to $6,539 on replacement annuities sold to clients A to E. Although CFG was a fiduciary, it allegedly did not disclose these commissions to its clients.
Response from Jeffrey Cutter and Cutter Financial Group through counsel
According to the Cape Cod Times, in response to the SEC’s allegations, Cutter and CFG have defended their practices through their Boston attorney, Ian Roffman, asserting that they followed industry standards and always properly disclosed their insurance sales and commission practices. Attorney Roffman claimed that the annuity products recommended as replacements were suitable for the firm’s clients and had performed well.
Attorney Roffman also advised that his clients would litigate the SEC’s lawsuit case on a client-by-client basis, proving that the products were beneficial to each client.
Further court actions pending
The SEC’s complaint is seeking court orders to permanently enjoin Cutter and CFG, as well as their agents, servants, employees, attorneys, and other persons in active concert or participation with them (likely, Cutterinsure), from directly or indirectly engaging in the conduct described above in violation of the Advisers Act.
The SEC also seeks to have the federal court require Cutter and CFG “to disgorge all ill-gotten gains,” plus prejudgment interest, and to pay an appropriate civil penalty.
The SEC’s federal case is only at the complaint stage. Counsel for Cutter and CFG accepted service on the complaint on April 3, 2023, and Cutter and CFG have until May 23, 2023, to answer the complaint or file a motion to dismiss.
