I’ve been waiting for this verdict and it’s finally in.
I did two newsletters about this lawsuit in the past with the following titles (to download them and read the original complaint click on the 2nd article):
Turn Tax-Deferred Annuity Gains into Tax-Free LTC Benefits
If you missed last week’s newsletter, you can sign up for more info on the one-of-a-kind annuity that qualifies for this unique tax benefit AND download a one-page client brochure:
SEC Charges IAR with Defrauding Clients in Connection with FIA Sales
Judge Allows SEC Annuity (FIA) Fraud Case to Continue (a shockwave case)
https://advisorshare.com/tax-free-ltc-annuity
What’s the big deal with this commission disclosure case?
In this case, the Securities and Exchange Commission (SEC) was going after an advisor who has an insurance license and is an IAR/RIA over the sale of Fixed Indexed Annuities (FIAs).
The SEC has been trying to regulate FIAs as securities for years (and failing) and because this case was about FIA sales, it sent shockwaves through the industry when filed.
NAFA, Finseca, IRI, etc., were all watching this case very closely. Why? Because the fear is that this will open the door for more SEC actions against advisors on the sale of FIAs and is a slippery slope toward fully regulating FIAs.
After a 7-day jury trial, the jury found both the advisor and his RIA liable for violating Section 206(2) of the Investment Advisers Act of 1940, which prohibits “engag[ing] in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”
The following is from the jury form:
The SEC stated: “We are pleased with the jury verdict holding Jeffrey Cutter and Cutter Financial Group, LLC accountable for breaching their fiduciary duties to their clients.”
What was the defendant found liable for?
The defendant was found liable for failure to disclose commissions of FIA sales.
What WASN’T the defendant found liable for?
Actual fraud in how the FIAs were sold to clients. If you read the complaint, you’d think the SEC has a no-brainer case for actual fraud.
This case seemed to have a lot of bad facts as alleged in the complaint by the SEC:
Time after time, Cutter switched clients out of annuity contracts (FIAs) he had previously sold them into new annuity contracts without disclosing his financial incentive…
Defendant failed to disclose free marketing services and payments of more than $1.1 million that Cutter received from IMOs in exchange for peddling annuities to clients…
Cutter schemed to get his investment advisory clients into annuity contracts as soon as they became clients and to “replace” or “switch” annuity contracts whenever possible so that Cutter could receive another 7-8% annuity commission from the client’s purchase of the replacement annuity.
What can we take away from this case?
When you are doing a 1035 from an existing annuity (especially if it currently has a surrender charge) it’s a good idea to disclose the commission you are making).
The SEC is still trying everything it can to regulate FIAs as securities.
Even though the defendant wasn’t found liable for what many would call the churning of existing FIAs into new ones, this should be a warning to all that when you replace an existing annuity (FIA, VA, etc.), you should document the reasons you believe it was suitable for clients, disclose the commission you are making, and make sure you document your client discussions of the pros and cons of doing replacements with clients.
