Commonwealth Ordered to Pay More Than $93 Million in SEC Conflict

Commonwealth Financial Network was ordered to pay over $93 million due to its failure to disclose conflicts of interest to clients who could have used that information to invest in lower-cost mutual funds.

This decision by a Massachusetts federal judge affirmed the U.S. Securities and Exchange Commission’s position that Commonwealth had breached its fiduciary duty.

U.S. District Judge Indira Talwani ruled that Commonwealth will have to disgorge nearly $65.6 million that it allegedly earned through a cost-sharing arrangement with clearing broker National Financial Services LLC, an affiliate of Fidelity Investments.

On top of disgorgement, Commonwealth will have to pay interest of $21.2 million and a $6.5 million civil penalty, the judge said in a decision handed down late last week. The firm has 30 days to move total funds to the SEC, according to the filing.

“Commonwealth’s failures to disclose” its arrangement with NFS “were egregious,” Judge Talwani ruled, later adding that the firm’s actions were “a fundamental violation of an investment advisers’ fiduciary duty to act in the best interest of its clients.”

Wayne Bloom, Commonwealth chief executive officer, expressed disappointment in the ruling and indicated the firm would explore “all options” to continue to defend its position in the legal system, as reported by Law360. According to previous reporting by The DI Wire, the SEC sued Commonwealth in 2019. Between July 2014 and December 2018, Commonwealth received more than $100 million in revenue sharing from NFS related to certain client investments in “no transaction fee” and “transaction fee” NFS mutual funds, and that it did so while knowing cheaper alternatives were available.

Two months after the lawsuit, Commonwealth denied the charges, asserting that clients were not deceived by any fee payments or revenue-sharing payments, according to a Commonwealth court filing in October 2019.

The agency also said Commonwealth was not entirely forthcoming with its clients about its relationship with NFS between 2014 and 2018. According to a filing with the SEC at the end of February 2024 and based on Commonwealth’s position that the SEC failed to show a causal connection, its estimation of potential fines, and its “alternative theory of damages,” Commonwealth was preparing for a fine and loss of between $5 million and $24 million.

The company had said its thousands of investment advisers were not aware of the revenue-sharing arrangement and did not financially benefit from it. It argued that no testimony had been provided by clients who said they would have made different investment decisions if they had known.

Nevertheless, Judge Talwani told Commonwealth on March 29 that its negligence would cost it more than $70 million over objections. She said that the clients did not know and, therefore, weren’t able to give informed consent to the adviser’s investment decisions.

“Had Commonwealth’s clients known they were invested in higher-cost shares of funds for which lower-cost shares existed, and that the higher cost resulted in greater profit for Commonwealth, there is reason to believe that at least some of those clients would have elected to move their money to the lower-cost funds,” the judge ruled.

She ordered the company to pay an amount that represented the difference between the revenue it earned from the NFS arrangement and what it would have earned if those clients had invested in lower cost shares of the same funds. The penalty equals about one or two years of net income for the firm. Commonwealth’s net income was close to $56.5 million in 2014, according to the court order, and $119.4 million in 2018.

The judge also handed down a $6.5 million penalty – 10% of the disgorgement amount – due in part to Commonwealth’s failure to accept responsibility and to litigation delays she said it caused.

The judge did deny the SEC’s request for a permanent injunction against Commonwealth, finding that the large monetary award would be enough to deter future violations.

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