SEC hammers Commonwealth with $93M in penalties over revenue sharing

The penalty represents about one or two years of net income for the firm.

Commonwealth Financial Network lost a stunning $93 million judgment over the Easter weekend in its five-year legal battle with the Securities and Exchange Commission, which had alleged in 2019 that the firm, in its role as a registered investment advisor, from July 2014 through December 2018 failed to disclose material conflicts of interest related to certain revenue-sharing agreements with its clearing firm.

The SEC claimed Commonwealth had breached its fiduciary duty by failing to tell its clients that they could have invested in less expensive share classes of funds.

It’s highly unusual in the securities industry for a broker-dealer to put up such resistance to a regulator like the SEC; many senior executives fear any potential backlash from a regulator.

Commonwealth Financial Network is a leading independent broker-dealer and RIA, with 2,200 financial advisors across its platform and $296 billion in client assets. The firm was preparing to take a financial hit over the matter; at the end of February, Commonwealth stated in an SEC filing that it could see a fine and loss of between $5 million and $24 million as a result of the SEC’s complaint.

The penalty represents in the neighborhood of one or two years of net income for the firm. Commonwealth’s net income was close to $56.5 million in 2014, according to the court order, and $119.4 million in 2018.

According to the court filing Friday, Commonwealth is liable for disgorgement of $65.6 million, interest of $21.2 million and a civil penalty of $6.5 million. That totals $93.3 million, and the firm has 30 days to move the funds to the SEC, according to the filing.

“Commonwealth is very disappointed in the ruling, and we are exploring all options to continue to defend our position in the legal system,” the firm’s CEO, Wayne Bloom, wrote in an email to InvestmentNews Wednesday morning.

The crux of SEC’s allegation was that Commonwealth had agreements with its clearing firm, National Financial Services, to receive portions of the fees received by NFS’s “no transaction fee” and “transaction fee” programs, according to the court order, which was signed by Indira Talwani, US District Judge for the District of Massachusetts.

According to Talwani, the SEC also alleged that “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,” and that “Commonwealth 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.”

The SEC also charged that “Commonwealth failed to make robust disclosures regarding the revenue it generated from the higher-cost shares,” according to the order.