Commonwealth Still Grappling With SEC Over 12b-1 Fees

Commonwealth Financial Network remains entangled in a legal battle with the Securities and Exchange Commission over allegations that the broker-dealer and RIA engaged in conflicts associated with revenue sharing tied to 12b-1 fees.

Last year, the SEC’s enforcement division launched new investigations into advisory firms that did not self-report violations under its Share Class Selection Disclosure Initiative — with a new focus on revenue sharing. The program ended in 2019.

Commonwealth Financial Network came under the SEC’s sword over revenue sharing in August 2019.

The SEC charged the firm with breaching its fiduciary duty by failing to disclose that it received over $100 million in a revenue sharing arrangement related to client investments in certain share classes of “no transaction fee” and “transaction fee” mutual funds.

The allegation came about six months after the independent broker-dealer joined 78 other firms in paying a combined $125 million over 12b-1 fees.

Commonwealth, which has about 2,000 affiliated independent financial advisors, filed a reply brief on Sept. 30, 2019, denying the SEC’s allegations and is refusing to hand over documents in the case.

Latest Developments

On Aug. 27, the SEC filed with the U.S. District Court for the District of Massachusetts to compel Commonwealth to produce documents. The SEC is seeking advisory accounts “that were open during the relevant time period alleged in the complaint and, within that list, identifying the Commonwealth PPS advisory programs with which they were associated and their applicable transaction fee codes,” the complaint explains.

In a recent statement sent to ThinkAdvisor, the firm said that it “has denied the allegations in the complaint and believes they are categorically without merit. We are confident we have operated both appropriately and justly and will continue to vigorously defend our actions in this matter.”

On Sept. 4, Commonwealth filed a motion opposing the securities regulator’s third request for documents, stating “the Commission’s motion concerns a so-called ‘big data’ production request, … that seeks materials that are not relevant to its claim, and that are not proportional to case needs given their burden on Commonwealth and on the efficient resolution of this litigation.”

In its defense, the firm told the court that the SEC complaint “alleges that Commonwealth’s Clearing Agreement with [National Financial Services] NFS/Fidelity created an incentive for Commonwealth to select and hold more expensive mutual funds/share classes which paid more revenue sharing to Commonwealth.”

It added: “With respect to the [Preferred Portfolio Services] PPS Custom program, Commonwealth did not select and hold mutual funds/share classes that had higher expenses and paid more revenue sharing. As noted above, Commonwealth’s Advisors are independent contractors that conduct business through entities which they establish, while disclosing their affiliation with Commonwealth.”

The firm also filed a motion for protective order, seeking to indefinitely delay depositions.

“Both motions remain undecided, our motion for protective order and SEC’s motion to compel production of certain data,” Steve Crimmins, attorney for Commonwealth who’s a partner at Murphy & McGonigle in Washington, told ThinkAdvisor Tuesday.

Both motions are now pending before the judge, Crimmins said.

Details on Allegations

The SEC alleges that Commonwealth’s Clearing Agreement with NFS/Fidelity created an incentive for Commonwealth to select and hold more expensive mutual funds/share classes which paid more revenue sharing to Commonwealth.

“With respect to the PPS Custom program, Commonwealth did not select and hold mutual funds/share classes that had higher expenses and paid more revenue sharing,” the Commonwealth attorneys argue in the brief.

Commonwealth’s advisors “are independent contractors that conduct business through entities which they establish, while disclosing their affiliation with Commonwealth. Advisors solicit clients, negotiate advisory fees, and sign advisory agreements,” according to the complaint.