A federal court is expected to rule in the coming months on Commonwealth Financial Network’s appeal of penalties that were imposed by the Securities and Exchange Commission, reports Investment News.
The case dates back to 2019, when the SEC alleged that Massachusetts-based Commonwealth had breached its fiduciary duty.in its mutual fund revenue sharing practices.
According to the SEC’s lawsuit, the registered investment advisor failed to tell clients between 2014 and 2018 that it received as much as $136 million in payments from Fidelity’s National Financial Services for selling funds that paid NFS to be on its platform.
A federal judge in Massachusetts agreed with the SEC in finding that the payments created a material customer conflict and that clients were placed into revenue sharing funds without knowing that cheaper alternatives were available.
Commonwealth was ordered to pay $93.3 million, including more than $65 million in disgorgement, $21 million in prejudgment interest and a $6.5 million civil penalty
Commonwealth filed an appeal over what it called a “draconian” landmark judgment, arguing that the SEC never established a causal link between client harm and its allegedly inadequate investment disclosures. With regards to the disgorgement figure, Commonwealth stated, “The SEC’s disgorgement request here was staggering in its magnitude and audacity.”.
The US Court of Appeals for the First Circuit in Boston heard oral arguments from both sides in January, and one attorney told InvestmentNews that a ruling from the court may come by the middle of the year.
“When there is an appeal, the final step in the process is oral arguments,” said Max Schatzow, cofounder of RIA Lawyers. “It’s the step before the judges on the panel make an opinion.”
The SEC defended its penalty in its filing to the court. “Commonwealth’s rhetoric about the size of the monetary sanctions is misguided,” the SEC stated. “The $65 million disgorgement award reflects the massive scale on which Commonwealth abused its fiduciary position at the expense of more than 300,000 clients who entrusted it with their money.”
In the original court ruling in favor of the SEC in April 2024, the judge said Commonwealth had committed a fundamental violation of its fiduciary duty in the matter. “Commonwealth’s failures to disclose were egregious,” Judge Indira Talwani wrote in the order. “Commonwealth was aware that lower-cost share classes of funds in which its clients were invested were available, knew that it was generating revenue from keeping its clients in the higher cost share classes, and failed to disclose any of this to its clients.”
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