The Cutter Case Affirms that the Advisers Act Is Not Just About Securities

By Seth Davis

On April 23, 2025, a Massachusetts federal jury returned a mixed verdict in SEC v. Cutter, finding Massachusetts-based investment adviser Cutter Financial Group LLC (CFG) and its founder, Jeffrey Cutter, liable for violating Section 206(2) of the Investment Advisers Act of 1940 (Advisers Act), while clearing them of alleged violations of Section 206(1) and of claims relating to inadequate compliance policies. U.S. S.E.C., Samuel Waldon, Acting Director, Division of Enforcement, Statement on Jury’s Verdict in Trial of Cutter Financial Group LLC and Jeffrey Cutter (Apr. 24, 2025); John Hilton, Jury delivers split decision in Jeffrey Cutter annuity sales trial, Insurance Newsnet, Apr. 24, 2025. Although the jury rejected the SEC’s scienter-based claims, the verdict nonetheless reinforces an important principle: the Advisers Act governs the entirety of the adviser-client relationship and is not limited to conduct involving securities transactions alone.

The Facts on the Ground

In 2023, the SEC sued Cutter and CFG, alleging breaches of fiduciary duties owed to advisory clients, many of whom were retirees. According to the SEC, Cutter engaged in a “pattern of deception” by failing to disclose annuity commissions. Cutter, who was a registered investment advisor representative and a licensed insurance agent, allegedly sold to investment advisory clients insurance products known as fixed index annuities (FIAs) through Cutterinsure Inc., a Massachusetts corporation, controlled by Cutter and his wife, while investing the remainder of a client’s assets with a third-party financial firm that managed Cutter’s clients’ assets for him. In the latter case, CFG’s advisory clients paid CFG an annual, asset-based fee of approximately 1.5%-2% of the amount of the client’s assets managed by CFG. For the fixed annuity sales, however, Cutter, directly or indirectly via Cutterinsure, received an up-front commission from the insurance company of 7%-8% of the annuity’s value. From 2014 to 2022, Cutter generated at least $9.3 million in commissions from the sale of annuities to his advisory clients.

The SEC further argued that Cutter recommended replacement of existing annuities without adequately disclosing the commissions he would receive or the negative financial consequences clients might face, including surrender charges and loss of annuity bonuses. Complaint, SEC v. Cutter Fin. Grp., LLC, No. 1:23-cv-10589 (D. Mass. filed Mar. 17, 2023).

Cutter’s Motion to Dismiss and a Tale of Two Regulatory Schemes

Prior to trial, Cutter filed a motion to dismiss arguing, in part, that the SEC lacked authority to bring claims based on the sale of insurance products under the Advisers Act, which, he claimed, relates solely to securities and does not apply to FIAs. Given that Cutter is a licensed insurance agent as well as an investment adviser, he argued that he was acting in his capacity as an insurance agent when selling annuities and, therefore, his professional conduct in relation to the FIAs should be evaluated under state regulation pursuant to the National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulation. To bolster his argument, Cutter cited the McCarran-Ferguson Act of 1945, 15 U.S.C. §§ 1011–1015, which generally precludes the application of federal law over state law in matters regarding insurance, as well as the Dodd-Frank Act, Pub. L. No. 111–203, 124 Stat. 1376 (2010), which, he argued, makes clear that FIAs are insurance products and should be regulated as such, rather than as securities.

In response, the SEC argued that Section 206 of the Advisers Act, which contains the anti-fraud provisions of the regime, is not limited to conduct solely in connection with securities, but rather applies to the entirety of the adviser-client relationship, whether securities are involved or not. According to the SEC, the allegations at the heart of the enforcement action dealt with Cutter’s actions as an investment adviser rather than solely as an insurance agent, evidenced by the fact that the sale of the FIAs was enmeshed with Cutter’s investment advice to his advisory clients.

The Court’s Ruling

The court, U.S. District Judge Denise J. Casper, denied Cutter’s motion to dismiss, concluding the SEC had sufficiently alleged that Cutter did not disclose several incentives he received from recommending annuities over other investments. Further, the court disagreed with Cutter’s argument that the McCarran-Ferguson Act prohibited the SEC’s assertion of claims under the Advisers Act, observing that the Advisers Act regulates the obligations that an investment adviser owes to its clients, generally, and does not cause a direct conflict with or impairment of state insurance law. Expanding on this, the court stated that “no fiduciary duty adheres to Cutter based on his sale of insurance to a customer” and that the Advisers Act does not “require Cutter to use an altered version of the state’s insurance sales form or to sever his agency relationship with the insurance company.” Rather, according to the court, the Advisers Act simply requires that “when Cutter advises [advisory] clients as to the suitability of annuities as part of their investment strategy, he disclose the fact that his investment advice is conflicted by his role as the insurer’s agent.” Thus, the court concluded, the Advisers Act’s requirements neither supersede nor conflict with state insurance requirements but instead are supplementary to such requirements.

The court also noted that Massachusetts’s own fiduciary rule for investment advisers runs parallel to the fiduciary standards under the Advisers Act. The court noted that it would be an “odd result” if investment advisers could divorce themselves from their role as investment advisers where they had a financial interest in the success of a scheme on the basis that the target investment was not a “security” without the full and fair disclosure required by the Advisers Act and yet at the same time were trusted by their advisory clients to make recommendations in their clients’ best interest.

Cutter also argued there could be no finding of failure to disclose conflicts of interest because CFG’s forms, including Form ADV and Form CRS, contained disclosures informing clients about the difference in compensation stemming from the sale of insurance products and that this compensation resulted in a conflict of interest. In addressing this defense, the court noted that CFG’s regulatory filings utilized the phrase “may earn commission-based compensation” and presented the conflict of interest in a merely hypothetical light rather than concretely stating that Cutter did, in fact, earn commissions at a higher rate than other investment options he could have recommended.

Aftermath

Following a seven-day civil trial, the jury returned the verdict partly for and against Cutter and CFG. Subsequently, the court denied Cutter’s request to reverse the verdict finding him liable for violating Section 206(2) of the Advisers Act, as well as his request for a new trial. The SEC asked the court to fine Cutter and CFG in an amount between $300,000 and $700,000, as well as to bar Cutter and CFG from receiving client compensation for five years unless clients are shown a copy of the civil judgment. On February 2, 2026, the court fined Cutter $50,000 and CFG $100,000 and also granted the SEC’s request for a five-year injunction requiring CFG to provide every client with a copy of the civil judgment. In coming to these penalties, the court stated that the SEC’s requested monetary penalty was “too high, particularly in consideration of the jury’s determination” that Cutter and CFG did not act with scienter with respect to alleged violations of Section 206(1) of the Advisers Act.

Takeaways

The key takeaway from this case is that investment advisers operating simultaneously under multiple regulatory schemes must clearly disclose conflicts of interest arising from all the services and products comprising their advisory activities. Specifically, when providing advice to an advisory client on how best to allocate assets among different types of potential investments, including FIAs, an investment adviser should clearly disclose the commissions associated with the sale of the FIAs and other alternative investments and, if true, state that such commissions are higher than those received with respect to the fees earned when advising clients to invest directly in traditional products, such as mutual funds, exchange-traded funds, stocks, and fixed-income securities. As the court stated in its order, the Advisers Act requires that when an investment adviser advises clients as to the suitability of annuities, the investment adviser must disclose the fact that their investment advice is conflicted by the adviser’s role as an insurance agent.

While this case involved FIAs, the court’s reasoning (and the SEC’s arguments) should be understood to cover conflicts of interest arising from other types of non-securities products. Further, this case raises the question of whether the Advisers Act standards would have applied to Cutter and CFG had they not chosen to sell FIAs as a component of a client’s investment strategy for which they provided advice. The answer is presumably “no,” as the sale of the FIAs would have been outside the investment adviser-client relationship and not involve securities. Thus, where an investment adviser also operates as a registered insurance agent or in a similar capacity, it is best practice for the adviser to clearly delineate the precise scope and boundaries of its various client relationships (lest the adviser unknowingly become subject to the more onerous requirements of the Advisers Act) while keeping in mind that the disclosure obligations in the capacity of the insurance agent would still apply under state law.

In addition, investment advisers should undertake a review of their regulatory disclosures in Form ADV and Form CRS to ensure they are adequately disclosing both hypothetical conflicts and actual conflicts. Relatedly, it is prudent for investment advisers to review their compliance manual to ensure they have policies and procedures in place to mitigate or eliminate such conflicts.

Lastly, although it is unclear whether the current makeup of the SEC would have chosen to bring a similar case today, investment advisers should be wary of dismissing this case as simply a remnant of the past administration. The statute of limitations under the federal securities laws is typically five years, and there is no guarantee that the future SEC would not prioritize cases like this, especially where the impacted advisory clients are retirees, whose protection has been a non-partisan priority of the SEC’s examination staff.

Seth Davis is a Counsel in the Boston office of Simpson Thacher & Bartlett LLP, where he advises various types of fund sponsors across a host of regulatory and enforcement matters. Prior to joining the firm, Seth was a Senior Counsel at the U.S. Securities and Exchange Commission in the Division of Investment Management, Chief Counsel’s Office.