SEC Hits Commonwealth for Failure to Disclose Revenue Sharing Conflicts

The complaint states that since at least 2007, Commonwealth has had a clearing relationship with National Financial Services, an affiliate of Fidelity Investments, as the clearing broker for PPS investment accounts, and that Commonwealth requires substantially all of its PPS advisory clients to select NFS.

While Commonwealth disclosed it would receive revenue sharing for investments in a “no transaction fee” program offered by its clearing firm, the complaint states that Commonwealth “did not disclose that this revenue sharing arrangement meant that Commonwealth had differing financial incentives depending on which products it selected for its customers.”

The complaint cites three examples:

• In some instances mutual fund shares offered through this program had at least one lower-cost share class that clients could invest in for which Commonwealth received less or no revenue sharing;
• Commonwealth also received revenue sharing on certain mutual fund investments for which the broker charged a transaction fee, and;
• There were certain mutual funds for which Commonwealth did not receive any revenue sharing and thus had an incentive not to select.

In a statement, the independent broker-dealer said that while the SEC’s enforcement action “is a pending legal matter, Commonwealth Financial Network vehemently denies the allegations and believes they are categorically without merit. We are confident we have operated both appropriately and justly and will vigorously defend our actions in this matter.”

The Share Class Disclosure Initiative was launched by the securities regulator’s enforcement division in February 2018 to identify and correct what the agency has seen as “ongoing harm in the sale of mutual fund shares by investment advisors.”

In December, the enforcement division began new investigations of advisory firms that did not self-report violations under the agency’s initiative — with a new focus on revenue sharing.