Commonwealth Financial fires back at SEC charges of conflicts of interest

Firm says clients were not deceived by alleged conflicts over revenue-sharing

Commonwealth Financial Network earlier this week shot back at charges from the SEC that it failed to disclose material conflicts of interest related to revenue-sharing.

Commonwealth Financial’s clients were not deceived by any fee payments or revenue-sharing payments, according to the firm’s court filing on Monday.

And the SEC complaint “fails to allege any statutory or regulatory obligation requiring an adviser to always select the lowest-priced or lowest-cost share class,” according to filing, which was Commonwealth’s formal response to the SEC’s charges.

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The firm has about $85 billion in advisory assets under management and 2,300 investment adviser reps.

In August, a Securities and Exchange Commission complaint alleged that since at least 2007, Commonwealth had had a revenue-sharing agreement with clearing broker National Financial Services, or NFS, an affiliate of Fidelity Investments, that Commonwealth required most of its adviser clients to use for trades in their accounts.

Under the terms of the agreement, Commonwealth received a portion of the money that some mutual fund companies paid to NFS to trade on the platform if the money was invested in certain fund share classes, according to the SEC.

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

The SEC has been cracking down on share-class disclosure by brokerage firms. In March, the SEC said that 79 investment firms had agreed to return $125 million to clients to whom they had sold inappropriate high-fee mutual funds.

It is rare for a firm, particularly one of the size and stature of Commonwealth Financial Network, to engage in a public legal fracas with its federal regulator, the SEC. But in the response to the SEC’s allegations that it filed Monday, Commonwealth showed it is far from fearful when rebuking the SEC’s claims.

The SEC complaint “fails to allege facts supporting the existence of conflicts of interest,” the court filing said. The SEC complaint also fails to allege that information about the revenue-sharing paid by NFS regarding specific mutual fund share classes was available to Commonwealth Financial’s reps and advisers using the platform or its internal teams managing investment portfolios for clients, according to the filing.

“Nor does the complaint allege that anyone affiliated with or employed by Commonwealth tracked which particular funds or share classes paid higher or lower revenue sharing in order to influence the selection of funds and share classes by Commonwealth’s independent and internal advisor personal,” the court filing said.