WHEN THE IAR IS ALSO AN RR OR INSURANCE AGENT: THE PERILS OF TRYING TO REMOVE THE FIDUCIARY HAT

Introduction

Once a dual registrant adorns the “fiduciary hat” of the registered investment adviser/investment adviser representative (RIA/IAR) with respect to a client, can the dual registrant remove that hat and become a non-fiduciary broker-dealer/registered representative (BD/RR)? And does the fiduciary RIA/IAR hat, once in place, extend to recommendations of insurance products with investment characteristics, such as fixed index annuities? For most IARs who also practice as RRs and/or as insurance agents, attempts to switch from a fiduciary to a non-fiduciary role will often fail to succeed.

This result flows from a 2022 California federal district court decision, SEC v. Criterion Wealth Management, as well as the April 23, 2025 jury verdict (and previous district court decision denying the defendant’s Motion to Dismiss) in SEC v. Cutter Financial Group and Jeffrey Cutter.

Following I present extended excerpts from the opinions of each district court. I then provide my own comments.

An RIA Providing Portfolio Management Does Not Remove Fiduciary Hat When Selling a Security

The term “dual registrant” refers to firms registered as both RIAs and BDs, and to individual financial professionals who are registered both as an investment adviser representative of an RIA and as a registered representative of a BD.

In SEC v. Criterion Wealth Management, 599 F. Supp. 3d 932 (C.D. Cal. 2022), the court found that the dual registrants continued to be RIAs/IARs when recommending a private placement to clients, for which the dual registrant firm received a commission.

In that case, the two financial consultants of the firm “were each dual registrants, meaning that they were registered and regulated by the SEC as investment advisers and simultaneously registered and regulated by FINRA as broker-dealers … Dual registration in and of itself is permissible and is relatively common, though the practice presents ample opportunity for conflicts of interest to arise ….”

The court opined: “No one argues that Criterion and Gravette were not broker-dealers when they brokered their clients’ private placement transactions and otherwise acted as agents of Ausdal ... But the question is not whether Gravette and MacArthur ever acted as broker-dealers. The question is whether, regardless of when and to what extent they acted as broker-dealers, they were also acting as investment advisers when they recommended to a Criterion/Ausdal client that the client invest in a particular private placement offering.

“Based on the statutory definitions of investment adviser and broker-dealer, the answer to this question, as a matter of law, is ‘yes.’ Under those definitions, when Gravette or MacArthur presented a private placement offering to one of their Criterion/Ausdal clients, explained the upside and downside risks of the offering, and discussed whether the private placement would be a wise addition to the investor’s portfolio, Gravette and MacArthur were acting as investment advisers, because they were providing investment advice in the context of broader portfolio management … Once the investor decided to invest in a private placement and directed Gravette or MacArthur to execute the transaction, Gravette and MacArthur would then step into their roles as agents of Ausdal and broker the transaction in a suitable way on behalf of their client … Simply put, when Gravette and MacArthur discussed or recommended whether a client should invest in a private placement, they were acting as investment advisers; when they discussed or recommended how to execute a private placement transaction (and actually brokered and executed the transaction), they were acting as broker-dealers.”

“Importantly, even after an investor decided to invest in a private placement and Gravette and MacArthur stepped into their roles as broker-dealers, their roles as investment advisors did not cease, and instead continued in full force with respect to Criterion’s management of the private placement investments. Furthermore, after Ausdal brokered the transactions and established the investors’ positions in the private placements, Criterion continued to manage those investments and collect management fees. Thus, even after Ausdal brokered the private placement transactions, Gravette and MacArthur continued in their roles as investment advisors with respect to Criterion’s management of the private placements. The fact that Gravette and MacArthur at times stepped into their roles as broker-dealers did not invalidate their roles as investment advisers when they rendered services on behalf of Criterion.”

SEC v. Criterion Wealth Management, 599 F. Supp. 3d 932, 949-950 (C.D. Cal. 2022) (Emphasis in original; emphasis added.)

The district court went on to note that waivers of fiduciary duties are ineffective, stating: “Defendants may have had their investor clients sign agreements stating that, when recommending private placement offerings, Gravette and MacArthur were acting in their capacities as broker-dealers for Ausdal … the Advisers Act governs investment advisers by operation of law, and advisers may not sign contracts with clients waiving the clients’ rights under the Advisers Act by simply calling investment advising activity something else. Commission Interpretation Regarding Standard of Conduct of Investment Advisers, Inv. Adv. Act Rel. No. 5248, at 10–11 (June 5, 2019) (noting as ‘inconsistent’ with Adviser’s Act ‘[a] contract provision purporting to waive the adviser’s federal fiduciary duty generally, such as (i) a statement that the adviser will not act as a fiduciary, (ii) a blanket waiver of all conflicts of interest, or (iii) a waiver of any specific obligation under the Advisers Act’).”

SEC v. Criterion Wealth Management, 599 F. Supp. 3d 932, 950 (C.D. Cal. 2022).

An RIA Selling a Fixed Index Annuity Remains a Fiduciary

By way of introduction, Section 206(2) of the Advisers Act prohibits “any investment adviser” from “directly or indirectly” “engag[ing] in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.” 15 U.S.C. § 80b-6(2). While proving a violation of Section 206(1) requires proof of scienter, “proof of simple negligence suffices for a violation of Section 206(2).” Robare Grp., Ltd. v. SEC, 922 F.3d 468, 472 (D.C. Cir. 2019).

In SEC vs. Cutter Financial Group and Jeffrey Cutter, a Massachusetts District Court, in denying the Motion to Dismiss filed by an RIA/IAR, wrote in its December 23, 2023 Memorandum Opinion: “An ‘investment adviser’ is “any person who, for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities.” 15 U.S.C. § 80b-2(11). Here, the SEC has plausibly alleged, and Defendants do not appear to dispute, that CFG is a registered investment adviser, that Cutter is the owner and operator of CFG, that the clients identified in the complaint were advisory clients of Cutter and CFG and that Cutter himself provided financial advice regarding securities to those clients.”

“Defendants attach Clients B and C’s investment advisory agreement with CFG and argue that the agreement ‘limit[s] the scope of investment advisory services to advice about securities held in clients’ brokerage accounts, which did not include FIAs’ … [However,] Courts do not allow investment advisers to contract around their fiduciary obligations to their clients ….”

“Defendants’ primary argument is that the SEC is not empowered by the Advisers Act to regulate insurance sales (including the sale of annuities) … Defendants argue, and the SEC does not dispute, that the FIAs at issue in this case are not ‘securities’ … According to Defendants, because FIAs are not securities, Cutter was not acting as an investment adviser when he sold FIAs, but rather in his separate role as a licensed insurance agent … The SEC instead characterizes its claims as arising from ‘the advisory-client relationship between Cutter and the clients alleged in the Complaint’ and emphasizes that § 206 contains no requirement that the fraud perpetrated by an investment advisor be related to the sale of securities.”

The District Court concluded: “[T]he SEC’s claim is not barred simply because the conflict of interest in this case involves FIAs. The violation of the Advisers Act in this case arises not from the fact that Defendants sold annuities, but rather that Defendants recommended that advisory clients spend a third of their total assets buying FIAs from Cutter without fully and fairly disclosing Cutter’s alleged conflict of interest … the relevant sections of Advisers Act do not contain any requirement that the defendant’s wrongful conduct be in connection with the purchase, sale or offer of securities. See 15 U.S.C. § 80b-6(1), (2). This language omission accords with the ‘congressional intent to eliminate, or at least to expose, all conflicts of interest which might incline as investment adviser—consciously or unconsciously—to render advice which was not disinterested.’”

Memorandum and Order (denying Motion to Dismiss), SEC vs. Cutter Financial Group and Jeffrey Cutter, Case No. 23-cv-10589-DJC (Dec. 14, 2023).

On April 23, 2025, a jury verdict was returned finding Cutter Financial Group and Jeffrey Cutter in violation of Section 206(2) of the Advisers Act.

Fiduciary Status is Determined by Law, Not By the Parties’ Agreement

It has long been established under the common law that the acquisition of fiduciary status is determined by law, based upon the facts present, not by any documents that purport to have the entrustor (client) purportedly agree that the status is not a fiduciary one. Once a relation between two parties is established, its classification as fiduciary and its legal consequences are primarily determined by the law rather than the parties. “A fiduciary relation does not depend on some technical relation created by or defined in law. It may exist under a variety of circumstances and does exist in cases where there has been a special confidence reposed in one who, in equity and good conscience, is bound to act in good faith and with due regard to the interests of the one reposing the confidence.”  In re Clarkeies Market, L.L.C., 322 B.R. 487, 495 (Bankr. N.H., 2005).

Fiduciary Status is “Sticky” – and Deservedly So

Fiduciary duties are often said to be “sticky.” In other words, once fiduciary status is undertaken, termination of the fiduciary-client relationship, to enter into an arms-length relationship with the client, is difficult (and at times prohibited). The “stickiness” of the fiduciary hat can be explained, in part, by the various behavioral biases that consumers possess. A growing body of academic research into the behavioral biases of investors reveals substantial obstacles individual investors must overcome in order to make informed decisions,[1] and reveal the inability of individual investors to contract for their own protections.[2]

Note as well that “instead of leading investors away from their behavioral biases, financial professionals may prey upon investors’ behavioral quirks … Having placed their trust in their brokers, investors may give them substantial leeway, opening the door to opportunistic behavior by brokers, who may steer investors toward poor or inappropriate investments.”[3] Moreover, “not only can marketers who are familiar with behavioral research manipulate consumers by taking advantage of weaknesses in human cognition, but … competitive pressures almost guarantee that they will do so.”[4]

It must also be asked – even if parties could bargain as to fiduciary status – what client would ever decide to not have fiduciary status imposed? Any knowledgeable, sophisticated investor, if truly cognizant of the important protections afforded to the investor by the fiduciary status of his or her advisor, would nearly always bargain for the continued application of fiduciary status, rather than move to an arms-length commercial relationship.

IARs Who Are Also RRs and Insurance Licensed – Proceed with Caution.

I urge all investment adviser representatives who are dually registered as registered representatives, and/or who also possess licensure to recommend insurance products, to first choose with respect to each and every consumer to who they provide recommendations which of the roles they will undertake – fiduciary or non-fiduciary (“arms-length” product sales relationship, in essence).

If you choose to be an investment adviser representative to the client, then assume that all of the financial advice you provide is subject to the fiduciary standard. In this regard, I define “financial advice” very broadly – like the manner that the Certified Financial Planner Board of Standards, Inc. in its Code of Ethics and Standards of Conduct defines the term. The CFP Board’s states in pertinent part its definition of “Financial Advice” as: “A communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the Client take or refrain from taking a particular course of action with respect to: (1) The development or implementation of a financial plan; (2) The value of or the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets; (3) Investment policies or strategies, portfolio composition, the management of Financial Assets, or other financial matters; or (4) The selection and retention of other persons to provide financial or Professional Services to the Client; or The exercise of discretionary authority over the Financial Assets of a Client.” In this regard, the CFP Board defines “Financial Assets” as” “Securities, insurance products, real estate, bank instruments, commodities contracts, derivative contracts, collectibles, or other financial products.”

Given the SEC’s recent examination focus on fiduciary recommendations of higher-cost products, especially where the investment adviser receives additional compensation for same, great care should also be taken in providing product recommendations.

For example, given the rise of low-commission and even no-commission annuity products, and the ability of investment advisers to charge asset-based management fees for certain annuity products, there is no need to resort to commission-based insurance sales. I predict that providers of high-commission fixed index annuities to investors, while also assuming the investment adviser hat (often to manage another portion of the portfolio, or to advice on the sale of previous investment assets), will now face increased scrutiny as a result of these recent judicial decisions. In particular, state securities administrators and their examiners may well decide to more closely examine the due diligence (or lack thereof) undertaken by those who are insurance licensed to sell fixed index annuities and other annuity or cash value life insurance products.

I also note that there any need for any investment adviser representative to proceed down the rabbit hole of recommending mutual funds with 12b-1 fees. I also urge caution in recommending mutual funds that provide other forms of revenue sharing to your broker-dealer, or which provide soft dollar payments.

If your employer unduly restricts your ability to exercise your duty of due care – by undertaking appropriate due diligence in the design of your investment strategy, and/or in the selection of investment products to implement that strategy – perhaps you are not with the right firm.

The much higher standard of conduct of an investment adviser flows from the requirement of the fiduciary “to adopt the principal’s goals, objectives, or ends.”[5] “It is what makes fiduciary law unique and separates fiduciaries from other service providers.”[6] As Professor Laby further explains: “Some even use the phrase ‘alter ego’ to reference the fiduciary norm. This personalizes the duty in a particular way. The fiduciary must appropriate the objectives, goals, or ends of another and then act on the basis of what the fiduciary believes will accomplish them – a happy marriage of the principal’s ends and the fiduciary’s expertise. The fiduciary does not eliminate its own legal personality, rather it must consider the principal’s delegation of authority to the fiduciary from the perspective of fidelity to the principal’s objectives as the fiduciary understands them.”[7]

Adhering to the fiduciary duties of loyalty and due care is tough. As a professional with a high degree of expertise, you should be well-compensated for the objective, sound financial and investment advice that you provide.

But don’t, as a fiduciary, abrogate your ability to adhere to your fiduciary duties by working within a business model full of conflicts of interest, or by acting within imposed constraints that in some way materially limits your ability to provide the very best advice to your clients.

This article represents the personal views of Ron A. Rhoades, JD, CFP(r), and does not necessarily reflect the views of any firm, institution, organization, society, cult, or gang to which he now belongs or has been kicked out of.

[1] As stated by Professor Ripken: “[E]ven if we could purge disclosure documents of legaleze and make them easier to read, we are still faced with the problem of cognitive and behavioral biases and constraints that prevent the accurate processing of information and risk. As discussed previously, information overload, excessive confidence in one’s own judgment, overoptimism, and confirmation biases can undermine the effectiveness of disclosure in communicating relevant information to investors. Disclosure may not protect investors if these cognitive biases inhibit them from rationally incorporating the disclosed information into their investment decisions.  No matter how much we do to make disclosure more meaningful and accessible to investors, it will still be difficult for people to overcome their bounded rationality. The disclosure of more information alone cannot cure investors of the psychological constraints that may lead them to ignore or misuse the information. If investors are overloaded, more information may simply make matters worse by causing investors to be distracted and miss the most important aspects of the disclosure … The bottom line is that there is ‘doubt that disclosure is the optimal regulatory strategy if most investors suffer from cognitive biases’ … While disclosure has its place in a well-functioning securities market, the direct, substantive regulation of conduct may be a more effective method of deterring fraudulent and unethical practices.”  Ripken, Susanna Kim, The Dangers and Drawbacks of the Disclosure Antidote: Toward a More Substantive Approach to Securities Regulation. Baylor Law Review, Vol. 58, No. 1, 2006; Chapman University Law Research Paper No. 2007-08.  Available at SSRN: http://ssrn.com/abstract=936528.

[2] See Robert Prentice, Whither Securities Regulation Some Behavioral Observations Regarding Proposals for its Future, 51 Duke Law J. 1397 (March 2002).  Professor Prentices summarizes: “Respected commentators have floated several proposals for startling reforms of America’s seventy-year-old securities regulation scheme. Many involve substantial deregulation with a view toward allowing issuers and investors to contract privately for desired levels of disclosure and fraud protection. The behavioral literature explored in this Article cautions that in a deregulated securities world it is exceedingly optimistic to expect issuers voluntarily to disclose optimal levels of information, securities intermediaries such as stock exchanges and stockbrokers to appropriately consider the interests of investors, or investors to be able to bargain efficiently for fraud protection.”  Available at http://www.law.duke.edu/shell/cite.pl?51+Duke+L.+J.+1397.

[3]  Stephen J. Choi and A.C. Pritchard, “Behavioral Economics and the SEC” (2003), at p.18.

[4] Robert Prentice, “Contract-Based Defenses In Securities Fraud Litigation: A Behavioral Analysis,” 2003 U.Ill.L.Rev. 337, 343-4 (2003), citing Jon D. Hanson & Douglas A. Kysar, “Taking Behavioralism Seriously: The Problem of Market Manipulation,” 74 N.Y.U.L.REV. 630 (1999) and citing Jon D. Hanson & Douglas A. Kysar, “Taking Behavioralism Seriously: Some Evidence of Market Manipulation,” 112 Harv.L.Rev. 1420 (1999).

[5]  A fiduciary is “a person having a duty, created by his undertaking, to act primarily for the benefit of another in matters connected with his undertaking.” Restatement (2d) Agency § 13 comment (a) (1958). “[T]he general fiduciary principle requires that the agent subordinate the agent’s interests to those of the principal and place the principal’s interests first as to matters connected with the agency relationship.” Restatement (3d) Agency § 8.01 cmt. b (2007).  See also Laby, Arthur B., “The Fiduciary Obligation as the Adoption of Ends,” Buffalo L. Rev 99, 103 (2008), available at available at: http://ssrn.com/abstract=1124722.  See also Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), in which the U.S. Supreme Court, applying ERISA, stated that: “There is more to plan (or trust) administration than simply complying with the specific duties imposed by the plan documents or statutory regime; it also includes the activities that are "ordinary and natural means" of achieving the "objective" of the plan.  Bogert & Bogert, supra, § 551, at 41-52.  Indeed, the primary function of the fiduciary duty is to constrain the exercise of discretionary powers which are controlled by no other specific duty imposed by the trust instrument or the legal regime.  If the fiduciary duty applied to nothing more than activities already controlled by other specific legal duties, it would serve no purpose.” Id. (Emphasis added.)

[6] Laby, Arthur B., “The Fiduciary Obligation as the Adoption of Ends,” Buffalo L. Rev 99, 130 (2008).

[7] Laby, supra n.6, at 135.