SEC's lawsuit is a stretch to regulate insurance, lawyer says

An SEC case against a Massachusetts advisor has big implications for the regulator’s oversight of insurance products, a law firm cautioned in a brief filed Monday with the federal court.

Earlier this year, the Securities and Exchange Commission brought a complaint against investment advisory firm Cutter Financial Group and its owner Jeffrey Cutter, accusing them of failing to disclose commissions and churning annuities products. Cutter, who is also an insurance agent, allegedly steered clients to fixed index annuities while not disclosing the commissions he received from those products. The SEC also accused him of pushing clients toward new annuity contracts to generate additional commissions.

Between 2014 and 2022, Cutter received more than $9 million in commissions associated with 580 annuity contracts sold to investment advisory clients, according to the SEC. A lawyer representing the defendants earlier told InvestmentNews that the regulator is wrong about the facts and the law.

But the fact that the SEC is pursuing the case, rather than a state insurance commissioner, is problematic, said Nick Morgan, a partner at law firm Paul Hastings.

“The SEC has for decades been trying to get jurisdiction over these insurance products, and it has passed rules that have been struck down, and has sought congressional authority to do it and been unsuccessful,” Morgan said. “If they’re successful, the investors will have fewer choices when it comes to engaging in purchases of these products.”

A nonprofit Morgan co-founded, Investor Choice Advocates Network, filed the amicus brief with the court. That group, which encouraged the court to dismiss the case, is represented by Paul Hastings.

Morgan said he sees a parallel in the SEC’s proposed custody rule, which would significantly expand advisors' responsibilities for their clients’ non-securities assets.

“The fact that defendants operate subject to two independent regulatory regimes does not mean that that either regulatory body may claim jurisdiction over every transaction on which the defendants provided advice,” the brief submitted by Investor Choice Advocates Network read. “Some investors may elect to receive advice and assistance in connection with insurance product transactions from intermediaries registered as insurance agents but not to the regulatory obligation imposed on “investment advisers” under the Investment Advisers Act of 1940. The SEC’s allegations in this case, if permitted to stand, would improperly reduce or foreclose that option for investors.”

Although the SEC does not have jurisdiction over fixed annuities, it does regulate variable annuities, which include insurance-packaged mutual funds as their underlying holdings. Fixed indexed annuities are another matter — those products track the performance of indexes to credit contract holders’ accounts. The SEC’s position is that it has jurisdiction over indexed annuities that are securities, which usually have prospectuses for investors.

The SEC declined to comment on the brief filed with the court. An industry group representing annuity providers, the Insured Retirement Institute, did not comment on the case.

However, the ambiguity over whether indexed annuities are securities is misguided, Morgan’s group wrote.

“Congress and the courts have repeatedly rejected the notion that fixed index annuities are securities within the scope of the federal securities laws,” the brief read. “Congress has certainly given the SEC no reason to believe it should be regulating FIAs or insurance products generally.”