The SEC has settled for $5 million in a landmark court case that had previously walloped Commonwealth Financial Network with a $93 million judgment.
Processing Content
The Securities and Exchange Commission on Monday obtained the approval of Judge Indira Talwani of federal district court in Massachusetts for a $5 million settlement of charges it initially filed in 2019 accusing Commonwealth brokers of failing to properly disclose conflicts of interest in their recommendations of certain mutual fund products. Commonwealth, which was bought by its longtime rival LPL Financial last year, was hit in 2024 with a landmark $93.2 million penalty — consisting of $72 million in disgorgement and civil penalties and $21.2 million in prejudgment interest.
But that was overturned about a year later after the First Circuit Court of Appeals found the lower court that had set the penalty amount had committed legal errors. The SEC settlement approved consists solely of a $5 million civil penalty — down from $6.5 million in the original judgment — and no disgorgement and prejudgment interest, which had made up the bulk of the previous penalty.
Peggy Ho, general counsel and chief risk officer at Commonwealth, said, “We are pleased with this resolution and happy to put this matter behind us.” The SEC declined to comment.
READ MORE: Despite losses, LPL claims it kept biggest, best Commonwealth teams
Initial decision marred by ‘fundamental legal errors’
Commonwealth won its appeal of the initial $93 million judgment the day after LPL announced it would be acquiring its former rival in a deal valued at $2.7 billion. In overturning that penalty — also handed down by Judge Talwani — a three-judge panel of the First Circuit Court of Appeals found that it had been marred by “fundamental legal errors.”
In its initial complaint, the SEC accused Commonwealth of failing to adequately disclose to clients how much it received in fees for selling certain mutual fund products through an arrangement with National Financial Services — a trade-clearing arm of Fidelity Investments. Regulators contended there were cheaper alternatives to those funds but that Commonwealth failed to bring them to investors’ attention in a proper way.
“Had Commonwealth’s clients known they were invested in higher-cost shares of funds for which lower-cost shares existed, and that the higher cost resulted in greater profit for Commonwealth, there is reason to believe that at least some of those clients would have elected to move their money to the lower-cost funds,” Talwani then wrote.
In overturning her decision, judges on the First Circuit Court of Appeals found that it should have been left to a jury to decide if Commonwealth clients would have acted differently had they been provided more information.
“”There are material issues of fact as to the importance of price, Commonwealth’s influence over the funds selected, and about the significance of the allegedly deficient disclosures, themselves,” according to the decision. “It is the role of a jury to determine those questions.”
Under former President Joe Biden, the SEC brought a flurry of enforcement actions against firms accused of not doing enough to disclose how they were making money from fees. In April 2023, the SEC hit Merrill with a $9.5 million penalty over allegations that it had failed to notify clients of more than $4 million in undisclosed foreign exchange fees. The previous November, two subsidiaries of the large independent broker-dealer Cetera Financial Group were ordered to pay $8.6 million for not disclosing various fees and payments they received for the sale of mutual funds.
