Commonwealth Financial Network has agreed to a settlement exceeding $93 million with the Securities and Exchange Commission (SEC) to resolve allegations that it did not adequately disclose conflicts of interest when advising clients on certain mutual fund share classes.
The allegations originated from a 2019 filing by the SEC, accusing Commonwealth of neglecting to inform clients about more cost-effective mutual fund options available, despite recommending them.
Commonwealth, which boasts approximately 2,300 investment advisor representatives and partners with National Financial Services for clearing services, enabled its representatives to suggest mutual fund shares through both a No Transaction Fee (NTF) program and another that includes transaction fees.
However, a revenue-sharing agreement between Commonwealth and NFS incentivized the firm to direct clients towards specific mutual fund share classes that, while generating more revenue for Commonwealth, often resulted in higher costs for clients compared to other available share classes of the same funds, excluding fees.
From July 2014 to March 2018, Commonwealth generated roughly $58.7 million from investments in NTF mutual fund share classes and received $77 million from investments in share classes with transaction fees from July 2014 to December 2018.
The SEC contended that Commonwealth was aware of the less expensive alternatives and that opting for these would lead to decreased revenue for the company. Despite this, Commonwealth did not adequately inform clients about the revenue it earned from the higher-cost share class recommendations or about the inherent conflict of interest in these recommendations.
Even after revising its disclosures in 2017, Commonwealth did not fully clarify that these conflicts were not merely hypothetical but actual.
The SEC's original order highlighted, "Due to its revenue-sharing agreement with NFS, Commonwealth's interests were not aligned with those of its clients."
Commonwealth's CEO, Wayne Bloom, expressed disappointment with the ruling and indicated the firm's intention to explore all available legal avenues to contest the decision.
Ultimately, U.S. District Judge Indira Talwani mandated Commonwealth to disgorge $65,588,906, in addition to paying prejudgment interest of $21,185,162 and a civil penalty of $6.5 million. Judge Talwani decided against imposing an injunction on Commonwealth, deeming it excessively punitive given the financial penalties already levied.
