What You Need to Know
- An advisor was charged by the SEC in March with defrauding clients as part of an annuity replacement scheme.
- The scheme allegedly caused clients to incur a total of $640,000 in surrender charges between 2018 and 2022.
- In July, advisor Jeffrey Cutter requested that the case be dismissed, arguing that, among other things, he was acting as an insurance agent and not an advisor in these instances.
The National Association for Fixed Annuities and Investor Choice Advocates Network have filed amicus curiae briefs in the U.S. District Court for the District of Massachusetts on behalf of the advisor who was charged by the Securities and Exchange Commission in March with defrauding clients as part of an annuity replacement scheme.
The SEC declined to comment Friday on the arguments made in the two amicus curiae briefs.
In a complaint filed March 17, the SEC alleged Jeffrey Cutter and his firm, Cutter Financial Group, recommended their advisory clients invest in fixed indexed annuities that paid Cutter a significant upfront commission without adequately disclosing his and CFG’s financial incentive to sell those products.
The scheme allegedly caused the clients to incur a total of $640,000 in surrender charges between 2018 and 2022.
In July, Jeffrey Cutter requested that the case be dismissed, arguing that, among other things, he was acting as an insurance agent and not as an investment advisor in these instances, which means he didn’t violate the Investment Advisers Act of 1940.
NAFA filed its brief in support of Cutter on Wednesday, stating that the amended complaint against him should be dismissed for several reasons, including the same main issue raised by Cutter.
NAFA said in its brief that the Advisers Act “does not confer upon the SEC the power to regulate indexed annuities transactions.”
It noted: “No provision of the Advisers Act permits the SEC, directly or indirectly, to regulate the business of insurance, much less sales or replacements of indexed annuities.”
Insurance is instead regulated by the states, NAFA argued.
The SEC “relies on a flawed reading” of the Advisers Act that is “inconsistent with the general framework of the federal securities laws and the analytical approach of federal courts to insurance and securities matters,” NAFA stated in its brief.
ICAN made the same basic argument in its brief filed on Monday. “By the SEC’s own admission, this case is about insurance products, not securities,” according to ICAN’s brief.
The brief added: “To be sure, defendant Cutter Financial Group … is registered with the SEC as an investment adviser, and the SEC alleges that this “dual registration” capacity provides it with “jurisdiction to bring these claims.”
But the brief went on to say the defendants argued in their motion to dismiss the amended complaint that the SEC’s allegations failed to establish jurisdiction.
The SEC’s position could inflict harm “on the very people it purports to be protecting: investors,” the brief said. “The fact that Defendants operate subject to two independent regulatory regimes does not mean that either regulatory body may claim jurisdiction over every transaction on which the Defendants provided advice.”
The brief went on to argue: “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.”
However, the brief argued: “The SEC’s allegations in this case, if permitted to stand, would improperly reduce or foreclose that option for investors.”
Separately, Nicolas Morgan, a partner in the litigation department at law firm Paul Hastings’s Los Angeles office, said: “By the SEC’s own admission, the Cutter case is about insurance products and a state-licensed insurance agent. The SEC has long sought—and long been denied—jurisdiction over insurance products such as fixed interest annuities (FIAs).”
The case should instead be “addressed by state insurance regulators, if at all,” argued Morgan.
He also pointed out: “The SEC itself has recognized in another context (Reg BI) the adverse impact on investor choice that occurs when investment advisor fiduciary standards are imposed over non-IA intermediaries such as brokers, or, in the case of Cutter, licensed insurance agents.”
Allowing the case to go forward “would present the same risks to investors: a significant reduction in retail investor access to different types of investment services and products, specifically insurance products such as FIAs,” according to Morgan.