In another clear win for a broker-dealer versus a regulator, Commonwealth Financial Network and the Securities and Exchange Commission completed their seven- year-long dispute over mutual fund charges to clients on Friday, with Commonwealth paying $5 million in civil penalties, according to a court order.
The SEC previously wanted as much as $93 million in penalties from its complaint against Commonwealth, which the SEC filed in 2019 in federal court in Massachusetts.
“We are pleased with this resolution and happy to put this matter behind us,” wrote Peggy Ho, SVP, General Counsel & Chief Risk Officer, Commonwealth, in an email Monday afternoon.
Broker-dealers have been ducking steep penalties from the SEC under the business friendly administration of President Donald J. Trump.
LPL Financial Holdings Inc., which bought Commonwealth Financial Network last year, said in February the SEC would not penalize the firm for its cash sweep program, a hot button issue since the summer of 2024 for the financial advice industry.
What a difference a year – and a change in leadership in Washington – makes. The SEC in January 2025 penalized two broker-dealers of Wells Fargo Advisors $35 million and Merrill Lynch $25 million for not paying clients appropriate interest on cash held in advisory accounts, similar to issues LPL was dealing with.
In 2019, 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.
Rather than settle those charges, Commonwealth Financial Network fought the SEC’s claims in court, a highly unusual move in the securities industry. Broker-dealers are reluctant to put up such resistance to a regulator like the SEC. Many senior executives fear any potential backlash from a regulator.
But in this instance, Commonwealth’s unlikely strategy has paid off.
After the SEC’s 2019 complaint, Commonwealth in April 2024 lost a stunning $93 million judgment to the SEC, which had alleged 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.
Commonwealth then appealed the federal court’s decision, and in the summer of 2024 took aim at the SEC’s disgorgement figure of $63.5 million.
The appeals court almost a year ago then vacated the $63.5 million 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, according to a statement at the time by the firm’s lawyers.
By last weekend, the firm’s ultimate penalty in the matter had been whittled down to $5 million.
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