Commonwealth Financial Network, one of the biggest independent broker-dealers and RIAs in the nation, must pay the Securities and Exchange Commission $93.3 million for breach of fiduciary duty and failure to disclose to mutual fund clients that it had a revenue-sharing agreement with its clearing firm that made funds more costly, a federal judge ruled Friday.
Commonwealth, which had taken the extraordinary tack of fighting a five-year court battle with the SEC rather than settling the regulator’s 2019 claims, was found to have received more than $100 million in revenue sharing from National Financial Services’ no-transaction fee and transaction fee investment programs from July 2014 to December 2018.
Commonwealth failed to disclose the revenue-sharing arrangement or that there were less expensive shares of the same funds available, which constituted a breach of fiduciary duty by the firm, the SEC alleged in its 2019 claim.
Indira Talwani, a U.S. district judge for the District of Massachusetts, sided with the SEC in the agency’s claim that the payments constituted an undisclosed, material conflict of interest. She ordered the firm to pay $65.6 million in disgorgement, interest of $21.2 million and a civil penalty of $6.5 million.
“The mutual fund shares for which Commonwealth received those fees were sometimes more expensive for clients than shares of the same funds that did not generate fees for Commonwealth,” Talwani said.
Commonwealth, which has 2,200 financial advisors on its platform and $296 billion in client assets, has just 30 days to pay the SEC the judgment, Talwani ruled.
“Commonwealth is very disappointed in the ruling, and we are exploring all options to continue to defend our position in the legal system,” the company’s CEO, Wayne Bloom, said in an email to Financial Advisor.
The size of the fine left some industry observers stunned. Commonwealth had stated in a February SEC filing that it expected to see a judgment between $5 million and $24 million in the case. The $93.3 million judgment was nearly four times higher than the expected worst-case figure—and a sum almost equal to Commonwealth’s entire year of net income in 2018, the court order said.
In its order, the SEC alleged that Commonwealth was aware of the availability of low-cost funds and that the alternatives “would generate less or no revenue for Commonwealth.”
The SEC also charged that “Commonwealth failed to make robust disclosures regarding the revenue it generated from the higher-cost shares,” according to the order.