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 mutual fund share classes for clients.
The case sprang from charges filed against Commonwealth in 2019, alleging the firm failed to alert customers to the fact that there were more affordable options for the mutual funds reps recommended to clients.
According to the order, Commonwealth has about 2,300 investment advisor representatives, using National Financial Services as its clearing broker. Through that arrangement, reps could recommend mutual fund shares via a No Transaction Fee program and a program including transaction fees.
But Commonwealth and NFS had a revenue-sharing agreement that made the firm more money to put clients in certain mutual fund share classes, according to the original order. At times, those share classes were more expensive for clients than other share classes of the same mutual funds, not including fees.
Between July 2014 and March 2018, Commonwealth received about $58.7 million from client assets invested in NTF mutual fund share classes, 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 of the more affordable options (even recommending them to clients in certain programs) and that these alternatives would result in lower revenue for the firm.
Commonwealth failed to alert clients about the revenue it made on the higher-cost share class recommendations and that those recommendations were conflicted. Even after Commonwealth amended its disclosures in 2017, the firm didn’t make it clear that the conflicts were not theoretical but real.
“As a result of Commonwealth's revenue sharing arrangement with NFS, Commonwealth's interests were in conflict with its clients,” the SEC claimed in the original order.
“Commonwealth is very disappointed in the ruling, and we are exploring all options to continue to defend our position in the legal system," Commonwealth CEO Wayne Bloom said about the decision.
U.S. District Judge Indira Talwani ordered Commonwealth to pay $65,588,906 in disgorgement, as well as prejudgment interest totaling $21,185,162 and a civil penalty totaling $6.5 million.
Talwani opted against ordering an injunction for the firm, as it would be “unduly punitive” in light of the monetary penalties.