Commonwealth Equity Services, LLC d/b/a Commonwealth Financial Network

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 25968 / April 4, 2024

Securities and Exchange Commission v. Commonwealth Equity Services, LLC d/b/a Commonwealth Financial Network, No. 1:19-cv-11655 (D. Mass. filed Aug. 1, 2019)

SEC Obtains $93 Million Judgment Against Massachusetts Investment Adviser that Failed to Disclose Conflicts Arising from Receiving Revenue Sharing on Client Investments
 

On March 29, 2024, the United States District Court for the District of Massachusetts entered a final judgment against Commonwealth Equity Services, LLC d/b/a Commonwealth Financial Network, a registered investment adviser and broker-dealer based in Waltham, Massachusetts.

The SEC’s complaint, filed on August 1, 2019, alleged that Commonwealth failed to disclose material conflicts of interest related to revenue sharing payments it received for certain client investments.  According to the complaint, Commonwealth entered into a revenue sharing agreement with the broker that Commonwealth required most of its clients to use and received revenue sharing payments from that broker when it invested client assets in certain classes of mutual funds.  Specifically, the SEC’s complaint alleged that Commonwealth failed to tell its clients that: (i) there were mutual fund share class investments that were less expensive for clients than some of the mutual fund share class investments that resulted in revenue sharing payments to Commonwealth; (ii) there were mutual fund investments that did not result in any revenue sharing payments to Commonwealth; and (iii) there were revenue sharing payments to Commonwealth under the broker’s “transaction fee” program.  As a result of these material omissions, Commonwealth’s advisory clients invested without a full understanding of the firm’s compensation motives and incentives.  In doing so, the complaint alleged that Commonwealth violated the antifraud and compliance provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-7 thereunder.

On April 7, 2023, the Court granted the SEC’s motion for summary judgment on both claims. The Court found Commonwealth liable for failing to disclose material conflicts of interests to its advisory clients in violation of Section 206(2) of the Advisers Act and failing to adopt and implement required policies and procedures in violation of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.

On March 29, 2024, the Court entered a final judgment ordering Commonwealth to pay $65,588,906 in disgorgement, representing the difference between the revenue sharing payments that Commonwealth received from investing clients’ assets in higher-cost mutual fund share classes, and what Commonwealth’s revenue sharing would have been if the clients’ assets had been invested in lower-cost share classes of those funds, which paid less or no revenue sharing to Commonwealth. The Court also ordered Commonwealth to pay $21,185,162 in prejudgment interest and a civil penalty of $6,500,000.

The SEC’s litigation was handled by Richard M. Harper II, Alfred A. Day, and Naomi Sevilla of the Boston Regional Office.  The SEC's investigation was conducted by Asset Management Unit staff in Denver, Boston and Washington, DC, including Danielle R. Voorhees, Ms. Sevilla, John Farinacci, Robert Baker and Jason Burt.