A federal appeals court has reversed a ruling that required Commonwealth Financial Network to pay $93 million to the Securities and Exchange Commission for failing to tell clients that some mutual fund share classes generated millions of dollars in revenue-sharing payments for the firm.
After a long-running battle, the U.S. District Court District of Massachusetts ruled last April that Commonwealth was liable for disgorgement of $65.6 million, interest of $21.2 million and a civil penalty of $6.5 million.
The order issued Tuesday by the U.S. Court of Appeals for the First Circuit vacates the grant of summary judgment and disgorgement.
The appeals court remanded the case for further proceedings, holding that a jury should decide whether the firm's alleged disclosure omissions were "material," the Eversheds Sutherland attorneys representing Commonwealth said Wednesday in a statement.
"The court explained that there were material issues of fact as to the importance of price, Commonwealth’s influence over funds, and the significance of the allegedly deficient disclosures themselves," the Eversheds attorneys said. Further, the appeals court "vacated the disgorgement award, citing 'concerning, fundamental legal errors' made by the district court regarding whether the SEC proved a causal relationship between Commonwealth’s profits and alleged violations."
Eversheds Senior Counsel Tom Byrne said in the statement that the firm was "gratified to represent Commonwealth in this successful effort to set aside the $93.5 million judgment awarded to the SEC. In its comprehensive opinion, the First Circuit agreed with our client’s position that summary judgment was improperly entered and that there was no evidence presented that would warrant the award obtained by the SEC."
Commonwealth is "pleased with this decision and will continue to pursue all legal avenues to defend ourselves," Peggy Ho, the firm's general counsel and chief risk officer, told ThinkAdvisor in an email. "We trust this decision validates the fact that Commonwealth and its advisors prioritize their client’s interests and make investment decisions based on what they believe is best for their clients."
SEC Allegations
The SEC sued Commonwealth in 2019, alleging that from at least July 2014 through December 2018, the company breached its fiduciary duty to its advisory clients by failing to disclose conflicts of interest in a revenue-sharing program with National Financial Services, its clearing firm.
Specifically, Commonwealth failed to tell clients that some mutual fund share classes generated millions of dollars for the firm, while other, cheaper share classes would have generated much less, or no, additional revenue, the SEC contended.
The crux of the SEC's allegations, according to the ruling issued last March by District Court Judge Indira Talwani, was that "Commonwealth's failures to disclose were egregious, including that Commonwealth had agreements with NFS to receive portions of the fees received by NFS' No Transaction Fee and Transaction Fee programs and that Commonwealth failed to make robust disclosures regarding the revenue it generated from the higher-cost shares."
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