Commonwealth Must Pay SEC $93M Over Revenue Sharing

Commonwealth Financial Network lost a long battle with the Securities and Exchange Commission last week when a court ruled that the firm must pay $93 million over revenue sharing violations.

Commonwealth is liable for disgorgement of $65.6 million, interest of $21.2 million and a civil penalty of $6.5 million, according to the order issued by the U.S. District Court District of Massachusetts.

Wayne Bloom, Commonwealth’s CEO, said in a statement shared with ThinkAdvisor on Wednesday that “Commonwealth is very disappointed in the ruling, and we are exploring all options to continue to defend our position in the legal system.”

The crux of SEC’s allegations, according to the ruling, were that:

• Commonwealth had agreements with its clearing firm, National Financial Services, to receive portions of the fees received by NFS’ No Transaction Fee and Transaction Fee programs;
• 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;
• The firm knew of the lower-cost alternatives to these share classes, their availability to clients, and that those lower-cost alternatives would generate less or no revenue for Commonwealth; and
• Commonwealth failed to make robust disclosures regarding the revenue it generated from the higher-cost shares.

The ruling, issued by District Court Judge Indira Talwani on March 29, states that “Commonwealth’s failures to disclose were egregious.”

The court determined that 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. This is a fundamental violation of an investment advisers’ fiduciary duty to act in the best interest of its clients.”