As a result of its five-year legal skirmish with the Securities and Exchange Commission over alleged conflicts, Commonwealth Financial Network is preparing for a potential fine and loss of between $5 million and $24 million, according to a filing at the end of February with the SEC.
The disclosure of the potential fine is the result of Commonwealth Financial Network, with 2,200 financial advisors across its brokerage and registered investment advisor platform and $296 billion in client assets, pushing back against the SEC after the agency sued the firm in 2019, and deciding to litigate the matter as opposed to settling it.
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.
In its complaint from five years ago, the SEC alleged that the firm, in its role as an RIA 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.
Two months after the SEC sued Commonwealth Financial Network, the firm shot back at the charges by the SEC that it failed to disclose material conflicts of interest related to revenue-sharing. The firm's clients were not deceived by any fee payments or revenue-sharing payments, according to a Commonwealth court filing in October 2019.
Since then, the SEC's complaint has been working its way through federal court in Boston, and last June the SEC filed a motion for entry of final judgment seeking damages in total of $111.5 million, according to Commonwealth Financial Network's Focus report, or annual audited financial statement.
The company then countered with a legal memorandum opposing the SEC's motion, arguing that the SEC had failed to demonstrate its argument and that no disgorgement was required.
The US District Court for the District of Massachusetts last month denied Commonwealth Financial Network's motion for reconsideration, and the company's estimate of a potential fine and damages is in a "reasonable range of loss is between $5 and $24 million," according to the Focus report.
"As a matter of company policy, we do not discuss ongoing and pending legal matters," Peggy Ho, Commonwealth's senior vice president, general counsel and chief risk officer, wrote in an email.
One plaintiff's attorney noted that fees that clients are charged for products should be without any conflicts. "If you’re a fiduciary and an investment advisor already charging a fee, all other fees should be suspended and returned to clients," said Adam Gana of the law firm Gana Weinstein.
As Goldman Sachs tightens rules on event contract trading, RIAs and hedge funds are weighing their own policies
Meanwhile, Wells Fargo lures defectors from UBS and JPMorgan to expand in the East Coast, while another bank aligns itself with RayJay's financial institutions division.
New research suggests AI-exposed workers over 55 are leaving jobs more often than before ChatGPT’s rise.
Agentic AI is landing in trading, treasury and wealth management roles across major banks, with advisory functions as the next frontier.
Wells Fargo affiliate and women-focused wealth firm both promote leadership as they scale advisor support.
Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains
Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income
