The Commonwealth Financial Network is attractive a $93 million judgment that disclosed no conflicts of interest when recommending certain mutual fund share classes to clients when more affordable options were available.
The Commonwealth is moving to appeal the case to the U.S. Court of Appeals for the First Circuit after a Massachusetts federal judge ruled in favor of the Securities and Exchange Commission. (The First Circuit includes Maine, Massachusetts, New Hampshire, Rhode Island, and Puerto Rico.)
In a statement to WealthManagement.comPeggy Ho, senior vice president, general counsel and chief risk officer with the firm, said Commonwealth will “vigorously continue to pursue all available legal avenues” in the case.
“In the meantime, we remain focused on our mission to provide independent advisors with the services and solutions they need to grow their businesses and improve the experience for their clients,” she said.
The SEC first filed charges in 2019, accusing Commonwealth of failing to warn clients of the mutual fund share class that there were cheaper options (with Commonwealth making less profit as a result).
According to the original complaint, Commonwealth has approximately 2,300 investment advisory representatives, using 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 NTF mutual fund share classes while receiving $77 million in payments from client assets invested in transaction fee share classes.
The Commission argued that the Commonwealth knew these affordable options were available. According to the complaint, he even referred certain clients, but did not notify them of the income he received from higher-cost referrals.
In April 2023, the SEC won a motion for summary judgment (which requires the judge to rule on the merits of the case before trial). In late March, U.S. District Judge Indira Talwani upheld the judgment and ordered the Commonwealth to pay nearly $66 million in disgorgement, as well as prejudgment interest totaling $21 million and a civil penalty of $6.5 million, for a total of about 93 million dollars.
The SEC has settled dozens of stock class-related cases with registrants over the years, including a 2018 self-disclosure initiative that required firms to self-report stock class violations to avoid higher penalties.
Jury trials in this case are rare (the Commonwealth's case, for example, never reached a jury), and the SEC's success there is checkered. In March 2022, a jury ruled in favor of the SEC in his case against Pennsylvania-based Ambassador Advisors for failing to disclose stock-class conflicts (although the judge later “overturned” the jury's verdict).
CapWealth Advisors, a Tennessee-based RIA, won her jury trial against the commission in 2022. After the decision, CapWealth founder Tim Pagliara said WealthManagement.com both parties were like “David and Goliath” and called the SEC's approach “a regulatory abuse of a small business.”