Commonwealth Financial Network will pay more than $93 million to settle Securities and Exchange Commission charges that it failed to disclose conflicts of interest when recommending certain classes of mutual fund shares to clients.
The case arose out of allegations filed against Commonwealth in 2019, alleging that the firm failed to warn clients that there were more affordable options for mutual fund representatives recommended to clients.
According to the order, the Commonwealth has about 2,300 investment adviser representatives, using the National Financial Services as its clearing broker. Through this agreement, representatives may recommend shares of mutual funds through a program with no transaction fee and a program that includes transaction fees.
But Commonwealth and NFS had a revenue-sharing agreement that made the firm more money for placing clients in certain mutual fund share classes, according to the original order. Sometimes, those share classes were more expensive for clients than other share classes of the same mutual funds, excluding fees.
Between July 2014 and March 2018, Commonwealth received approximately $58.7 million from client assets invested in share classes of NTF mutual funds, while receiving $77 million in payments from client assets invested in share classes with transaction fees between July 2014 and December 2018.
The SEC argued that Commonwealth knew about more affordable options (even recommending them to clients in certain programs) and that those alternatives would result in lower revenue for the firm.
Commonwealth failed to advise clients of the income it realized on the higher cost share class recommendations and that those recommendations were in conflict. Even after the Commonwealth amended its disclosures in 2017, the firm did not make clear that the conflicts were not theoretical but real.
“As a result of Commonwealth's revenue sharing agreement with NFS, Commonwealth's interests conflicted with those of its customers,” the SEC alleged in the original order.
“The Commonwealth is very disappointed by the decision and we are considering all options to continue to defend our position in the legal system,” Commonwealth CEO Wayne Bloom said of the decision.
U.S. District Judge Indira Talwani ordered the Commonwealth to pay $65,588,906 in contempt, as well as prejudgment interest totaling $21,185,162 and a civil penalty of $6.5 million.
Talwani chose not to order an injunction against the firm, as it would be “unnecessarily punitive” in light of the monetary penalties.