SEC Charges IAR with Defrauding Clients in Connection with FIA Sales

              To DOWNLOAD the actual SEC complaint (which should be mandatory reading for insurance agents and securities licensed advisors), click on the following link:

This case is one the ENTIRE industry should be watching. Why?

1) The SEC is attempting to regulate FIAs (Fixed Indexed Annuities) (in a back-handed way).

2) This is a warning to advisors who like to “replace” existing FIAs with new FIAs.

3) Overrides and marketing payments from IMOs were also part of the failure to disclose.

4) The SEC is pursuing a VERY high standard when it comes to disclosure of commissions and conflicts of interest.

Essentially the SEC is alleging that Cutter replaced clients’ existing FIAs with new ones and did a lot of things wrong in the process.

From the Complaint (emphasis added)

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.

To perpetuate his scheme, Cutter made false statements to the insurance companies to effectuate the switches…

Replacing FIAs within the Surrender Period

              I’ve seen many advisors replace existing FIAs (ones within the surrender period) with new ones. The justifications used by Cutter as alleged in the complaint are the same ones I hear time and time again from most advisors making the replacement.

-The client doesn’t have a guaranteed income rider and now needs one.

-The client has a guaranteed income rider and now doesn’t need it.

I’m not saying that there are not legitimate justifications for replacing an existing FIA with a new FIA, but this case should scare the s-h-i-t out of a lot of advisors doing it without documenting specifically why the recommendation is being made. The full ramifications should be disclosed to clients.

Be careful of recommending exchanging a 10–15-year surrender charge annuity you sold 3-5 years ago with a new FIA that has a new 10–15-year surrender period EVEN if there is a 10-15-20% bonus (and a bonus that doesn’t fully vest for 5, 7, 10, 15 years).

This case suggests that advisors should also disclose commissions and ANY OTHER financial incentives (part of the override from the IMO, any marketing reimbursement from the IMO, and any incentive trip you can qualify for, etc.).

FIA Disclosure Documents

              I am a fan of over-disclosure with clients on ALL important topics. While no one likes the PTE 84-24 disclosure requirements, they do help insulate advisors from claims by clients for failure to disclose financial incentives. That’s why we created a website advisors can use where you can fill out an 84-24 disclosure for FIA sales and print it to a PDF. Maybe advisors should consider using that for all FIAs sales.  To check out our PTE 84-24 site, click on the following link or image:

OnPointe Risk Analyzer—Your FIA Compliance Tool!

              I believe OnPointe Risk Analyzer is the “BEST” point of sales tool in the industry today (a tool to help you interact with and onboard new clients). Besides our industry-best client questionnaire (click here to try), it has the ability to show the value of FIAs to increase ‘risk-adjusted returns’ of portfolios.

The following charts instantly communicate the value of FIAs…


We have a full version of OnPointe Risk and a “light” version for insurance-only licensed advisors.  If you want to attend a LIVE DEMO, email me and we’d be happy to set that up.

Roccy DeFrancesco, JD, CAPP, CMP