SEC charges advisor with failing to disclose annuity commissions

The SEC has charged an investment advisor with failing to adequately disclose commissions and other payments he earned for recommending annuity purchases, a move that could signal stepped-up scrutiny of insurance products.

The Securities and Exchange Commission filed a lawsuit Friday in a Boston federal court against Jeffrey Cutter, accusing him of steering clients into fixed index annuities over other investment options because Cutter pocketed hefty commissions and received free marketing services from an organization that helped him pitch annuities.

The SEC said Cutter received an up-front commission of approximately 7% on the annuity’s total value for sales that occurred between at least 2014 and 2022, generating at least $9.3 million in commissions from the sale of 580 annuities to investment advisory clients.

The SEC also alleged that Cutter persuaded some clients to exchange annuities they held for new ones in order to generate more commission revenue for himself. Replacing clients’ annuities produced at least $974,497 in commissions and forced some clients to pay surrender charges.

In addition, Cutter received more than $1.1 million from marketing firms for his efforts to sell annuities.

The SEC alleged that Cutter failed to disclose his conflicts of interest in recommending the annuity sales, violating his fiduciary duty to his clients.

The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and civil penalties against Cutter, who founded Cutter Financial Group in 2017.

“Time after time, Cutter switched clients out of annuity contracts he had previously sold them into new annuity contracts without adequately disclosing his financial incentive to recommend these switches, including the substantial up-front commissions he received from the insurance company and other third parties,” the SEC states in its complaint. “To perpetrate his scheme, Cutter made false statements to the insurance companies to effectuate the switches and generate a new round of commissions for himself.”

Cutter’s attorney, Ian Roffman, denied the SEC’s charges. Roffman said CFG has always disclosed to customers that it sells insurance products and receives compensation for the transactions. The firm follows insurance industry standard practices for sales and disclosures.

“The SEC is flat out wrong on the facts and the law,” Roffman, a partner at Nutter McClennen & Fish, said in a statement. “This case is about trying to hold CFG to a standard above and beyond what is required of the industry in terms of disclosure. It’s ultimately using CFG, a small family-run business, as a means to get a toehold into regulating the insurance industry.”

Cutter lives in Falmouth, Massachusetts. He and his wife own CFG as well as CutterInsure Inc., a corporate affiliate through which he sells insurance products to advisory clients. Cutter is a licensed insurance agent in Massachusetts.

The SEC case against Cutter shows that the agency is taking a closer look at the sales of insurance products that act like investments, said Leibel Sternbach, owner of Yields for You, a registered investment advisory firm.

“The difference between an investment vehicle and an insurance contract is getting murky,” Sternbach said. “Be prepared to treat any insurance sale as investment advice, not as an outside business activity. You’re held to the same fiduciary responsibilities. The lawsuit is proof [the SEC is] really going after annuities. They want really specific disclosures.”