The opinion
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
SECURITIES AND EXCHANGE
COMISSION, No. 23-cv-10589-DJC
Plaintiff,
v.
CUTTER FINANCIAL GROUP, LLC AND
JEFFREY CUTTER,
Defendants.
MEMORANDUM AND ORDER ON DEFENDANTS’ MOTION TO COMPEL PLAINTIFF
TO ANSWER REQUEST FOR ADMISSION
CABELL, U.S.M.J.
The Securities and Exchange Commission (“SEC”) has sued
defendants Cutter Financial Group, LLC (“CFG”) and its owner
Jeffery Cutter (“Cutter”) (collectively “defendants”) for
violations of the Investment Advisor Act, 15 U.S.C. §§ 80b et seq.
Cutter, who is both a registered investment advisor and insurance
agent, allegedly schemed to elevate his own economic interests
above those of his investment advisory clients. The defendants
move to compel the SEC to respond to request for admission number
7 (“RFA 7”) or to deem the request admitted. (D. 80). For the
reasons set forth below, the motion is denied.
I. LEGAL STANDARD
Federal Rule of Civil Procedure 36(a) allows a party to serve
a request to admit “the truth of any matters within the scope of
Rule 26(b)(1) relating to” the “facts, the application of the law
to the facts, or opinions about either.” Fed. R. Civ. P. 36(a)(1).
If the responding party does not admit a matter, “the answer must
specifically deny it or state in detail why the answering party
cannot truthfully admit or deny it.” Fed. R. Civ. P. 36(a)(4).
“A denial must fairly respond to the substance of the matter.”
Id. A party may also qualify its answer but must do so in good
faith. Fed. R. Civ. P. 36(a)(4) (“[W]hen good faith requires that
a party qualify an answer . . . the answer must specify the part
admitted and qualify or deny the rest.”).
II. BACKGROUND AND THE PARTIES’ ARGUMENTS
RFA 7 seeks information about whether the SEC has issued
written guidance regarding commissions received by registered
investment advisors for selling fixed income annuities. It asks
the SEC to admit or deny the following:
RFA 7:
The SEC has not issued any written guidance stating that an
insurance agent who is also associated with a registered
investment advisor must disclose the amount of his or her
commission on the sale of a fixed indexed annuity.
(D. 81-1). The defendants’ original and supplemental responses
deny the request and provide qualifications.1
1 The SEC’s more recent supplemental response reads:
Denied. There is significant guidance regarding the obligations of a
Registered Investment Adviser that directly applies to the allegations in
the complaint. As we explained in our meet and confer, we cannot point
you to specific guidance that refutes RFA 7 as you have constructed it,
but it is not appropriate or relevant for you to compel us to prove a
negative when we have identified the relevant guidance. That guidance
clearly establishes that a registered investment adviser owes a fiduciary
duty to his advisory clients. You have argued that Mr. Cutter was acting
in a different capacity – as an insurance agent – when he sold annuities
to his investment advisory clients. We have alleged that he was not, in
fact, acting in a different capacity. This is thus a factual dispute:
did Mr. Cutter make it clear to his investment advisory clients that he
was not acting as their advisor, but rather was acting as an insurance
agent? We have been, and continue to, develop the factual record on this
point. But the relevant legal principle is well established – if Mr.
Cutter/CFG were acting as both advisers and insurance agents with respect
to the same clients, their fiduciary duty required them to disclose all
material facts about that relationship, and what capacity they were acting
in, especially any conflicts of interest.
We further note that the Commission has provided clear guidance that an
investment adviser, as part of their fiduciary duty to their client, has
an obligation to be clear about the capacity in which they are acting.
The scenario that most commonly arises is when an individual or firm is
both an investment adviser and a broker-dealer. In such cases, the
Commission has said:
To meet its duty of loyalty, an adviser must make full and fair
disclosure to its clients of all material facts relating to the
advisory relationship. Material facts relating to the advisory
relationship include the capacity in which the firm is acting with
respect to the advice provided. This will be particularly relevant
for firms or individuals that are dually registered as broker-
dealers and investment advisers and who serve the same client in
both an advisory and a brokerage capacity. Thus, such firms and
individuals generally should provide full and fair disclosure about
the circumstances in which they intend to act in their brokerage
capacity and the circumstances in which they intend to act in their
advisory capacity.
Commission Interpretation Regarding Standard of Conduct for Investment
Advisers, Adv. Act Rel. No. 5248, 84 Fed. Reg. 33669, 33675-76 (July 12,
2019) (available here).
Furthermore, the staff issued a bulletin last year providing similar
guidance:
[T]he disclosure obligations of both Reg BI and the IA fiduciary
standard require a firm or financial professional to disclose to
the retail investor the capacity in which the firm or financial
professional is acting (e.g., broker-dealer or investment adviser).
The staff caveats that the disclosure of capacity may not be
determinative if the facts and circumstances suggest the financial
professional was acting in a different capacity from the one
disclosed.
Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment
Advisers Care Obligations, Question 1.b. (Apr. 20, 2023) (available here).
(D. 81-1).
The amended complaint includes two claims. Germane to the
RFA, the second claim alleges that CFG violated section 206(4) of
the Investment Advisors Act, 15 U.S.C. § 80b-6(4), and its
accompanying regulation, Title 17 of the Code of Federal
Regulations, section 275.2006(4)-7 (“CFR 275.206(4)-7”), by
“fail[ing] to adopt and implement written policies and procedures
reasonably designed to prevent” the violations. (D. 15, ¶¶ 118-
119) (emphasis added). Cutter allegedly aided and abetted CFG’s
violations. (D. 15, ¶ 121). To provide additional context, the
presiding judge in denying a motion to dismiss (based on the
factual allegations in the amended complaint) determined that the
defendants were experienced investment advisers, who knew, yet
failed to disclose to their clients who purchased fixed income
annuities, that the defendants received up-front commissions of 7%
to 8% of the annuity’s total value from the insurance company.
(D. 58, pp. 2, 4, 12). These undisclosed commissions contrasted
with the 1.5% to 2% annual asset-based fee the defendants received
of the total amount of assets managed. (D. 58, p. 4).
More, the presiding judge deemed the failure “to disclose to
advisory clients” the higher incentive in recommending they invest
in a fixed income annuity was a material omission. (D. 58, p. 9)
(“As alleged, Cutter failed to disclose to advisory clients that
his incentive to recommend that clients invest their assets in
FIAs was significantly higher than his incentive to advise clients
to invest in other options, . . . Such omission is material.”);
(D. 58, p. 10) (“The material omission is not merely that Cutter
obtained any commission for the sale of FIAs, but that the up-
front commission rate Cutter earned from annuities was higher than
the fee he earned when he advised clients to invest their funds in
a money management account.”). The presiding judge also determined
that a section 206(1) violation “require[d] a determination that
the adviser acted with scienter” whereas “‘simple negligence’
satisfies Section 206(20.”) (D. 58, p. 11).
Against this backdrop, the defendants argue that the RFA seeks
an admission of fact that is relevant to its defense that the SEC
never issued guidance about disclosure of insurance commissions by
an investment advisor who also sells insurance. (D. 81, 89). In
a separate argument, the defendants characterize the SEC’s
original and supplemental responses as improper legal argument.
(D. 81).
The SEC counters that RFA 7 includes an embedded legal
argument asking it to admit that an insurance agent who is
associated with an investment advisor must disclose the amount of
his commission. (D. 84). The SEC further argues that it does not
provide guidance to insurance agents selling insurance products
outside the scope of their investment advisory role. It also
points out, correctly, that it identified written guidance in the
supplemental response.2
III. DISCUSSION
First, the court rejects the defendants’ argument that the
RFA seeks only an admission of fact. Regardless, an RFA may relate
not just to the facts but also to the application of the law to
the facts. Fed. R. Civ. P. 36(a)(1). Thus, “Requests for
admissions seeking the application of law to the facts of the case
are proper under Fed. R. Civ. P. 36.” Nautilus Ins. Co. v.
Operation Stand Down, R.I., CA 09-192 ML, 2009 WL 10729080, at *3
(D.R.I. Dec. 11, 2009). Indeed, as indicated, the language of
Rule 36(a)(1) allows a party to serve a request relating to “the
application of law to fact.” Fed. R. Civ. P. 36(a)(1).
Here, consistent with this language, the SEC aptly points out
that the request includes an embedded legal argument. To explain,
the RFA asks for written guidance from the regulatory agency (the
SEC) that implicitly pertains to the legal issue of the scope of
a duty on the part of an investment advisor who was also an
insurance agent to inform clients about the higher commission.
The presiding judge’s discussion of both the defendants’ motive
for avoiding disclosure and, concomitantly, the issue of whether
2 See supra note 1 (quoting Staff Bulletin: Standards of Conduct for Broker-
Dealers and Investment Advisers Care Obligations,
https://www.sec.gov/about/divisions-offices/division-trading-markets/broker-
dealers/staff-bulletin-standards-conduct-broker-dealers-investment-advisers-
care-obligations, p. 17 (Apr. 30, 2023)).
the defendants acted with scienter or negligence under sections
206(1) and (2), bolster this finding. (D. 58, pp. 12-13) (“As
alleged, Defendants’ motive for the omission is evident from the
financial incentive Cutter had to sell annuities . . . Reading the
complaint as a whole, the Court may plausibly infer that Defendants
acted with the scienter required under § 206(1).”); (D. 58, p. 13)
(“Because the negligence required by § 206(2) is a less demanding
standard than scienter, the Court concludes that the SEC also has
plausibly alleged the requisite mens rea under both §§ 206(1) and
206(2).”).3 Somewhat separately, to the extent the defendants
criticize the SEC’s responses as identifying only general guidance
rather than specific guidance, RFA 7 asks about “written guidance,”
not “specific” guidance. The defendants’ contention inaptly
conflates the RFA regarding “written guidance” with specific
guidance.
Second, the court rejects the defendants’ assertion that the
SEC’s original and supplemental responses constitute improper
legal argument. Even so, “[i]f the answering party believes that
a request is based on an incorrect view of the facts or law, it
can and must say so in its response.” AMAG Pharms., Inc. v. Am.
Guar. and Liab. Ins. Co., Civil Action No. 21-CV-10618-LTS, 2022
WL 16950437, at *10 (D. Mass. Sept. 15, 2022) (emphasis added)
3 To be clear, this courts finds, as opposed to the presiding judge, that her
discussion above of motive, scienter, and negligence, are legal issues.
(citation omitted). The original response disagreed with the RFA’s
statement that the SEC had not issued any written guidance. (D.
81-1) (original response stating, “The Commission has provided a
significant amount of guidance, in a variety of formats, regarding
the Investment Advisers Act of 1940, including registration
requirements for investment advisers.”). In the more recent
supplemental response, the SEC disagreed with the assumption in
RFA 7 that Cutter was acting as an insurance agent. (D. 81-1)
(SEC’s supplemental response stating the defendants have argued
that “Cutter was acting in a different capacity—as an insurance
agent—when he sold [fixed income] annuities” whereas we, the SEC,
have alleged that Cutter was not acting in a different capacity,
which presumably means as an insurance agent.). Thus, even if the
responses included legal argument, which is highly debatable, the
SEC’s qualification is appropriate. See id.; see, e.g., U.S. ex
rel. Dyer v. Raytheon Co., Civil Action No. 08–10341–DPW, 2013 WL
5348571, at *5 (D. Mass. Sept. 23, 2013) (appropriately qualifying
answer to address assumption in RFA that defendant signed checks
in individual capacity by responding defendant signed checks in
official capacity) (citing Harris v. Oil Reclaiming Co., Ltd., 190
F.R.D. 674, 676–77 (D. Kan. 1999)).
Per the foregoing, the SEC’s responses complied with Rule
36(a). They do not, as the defendants seek, necessitate a further
response or a finding deeming the request to be admitted.
IV. CONCLUSION
For the foregoing reasons, the defendants’ motion to compel
the plaintiff to answer RFA 7 or, in the alternative, to deem it
admitted (D. 80) is DENIED.
s/s Donald L. Cabell
DONALD L. CABELL, Ch. U.S.M.J.
DATED: March 12, 2025