In a sudden turn in a long-running case, the SEC has decided to settle a lawsuit over mutual fund recommendations that walloped Commonwealth Financial Network with a now-overturned $93 million penalty.
Processing Content
The Securities and Exchange Commission and Commonwealth together filed a motion late last month seeking a stay in litigation that regulators initially filed in 2019 over allegations that Commonwealth brokers had failed to properly disclose conflicts of interest in their recommendations of certain mutual fund products. The suit resulted in a landmark $93.2 million penalty — consisting of $72 million in disgorgement and civil penalties and $21.2 million in prejudgment interest — against Commonwealth in 2024.
That judgment was overturned about a year later after the First Circuit Court of Appeals found the lower court involved in the case had committed “fundamental legal errors.”
READ MORE: Commonwealth wins appeal of $93M SEC penalty ahead of LPL purchase
Now the parties “have reached an agreement on settlement terms,” according to the motion to stay, which was approved on Monday by Judge Indira Talwani of the U.S. District Court for Massachusetts. The motion did not specify details of the settlement. A spokesperson for the SEC said the agency “is not able to respond to many inquiries from the press” during the current partial government shutdown.
Commonwealth was an independent firm when the alleged violations occurred but is now part of LPL Financial as a result of a $2.7 billion acquisition deal last year. Representatives of LPL did not immediately respond to a request for comment.
The SEC’s initial case against Commonwealth accused the firm of not properly disclosing to clients that there were cheaper alternatives to the mutual fund products its brokers were often recommending. When handing down the $93.2 million penalty against Commonwealth, Judge Talwani had written, “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.”
Commonwealth quickly appealed what it deemed a “draconian” judgment. In siding with the firm, judges on the federal First Circuit Court of Appeals faulted Judge Talwani for deciding on her own that investors might have chosen cheaper products had they been aware of the advisors’ supposed conflicts. That question, the appellate judges said, should have been left to a jury.
“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.”
Joe Wojciechowski, a managing partner at Stoltmann Law in Chicago, said the SEC could have easily chosen to reargue the case at the district court level. The decision to abandon the suit, he said, reflects the agency’s lighter regulatory touch under current Chair Paul Atkins rather than any weakness in the case against Commonwealth, he said.
READ MORE: With enforcement actions plummeting, is the SEC losing its regulatory zeal?
Atkins’ appointment to the head of the SEC last year was accompanied with calls for a “new day” in industry regulation. The number of actions the agency took against public companies and their subsidiaries plummeted last year.
“This is a throwback to 2006 and 2007 and the ‘kinder, gentler’ SEC under George W. Bush,” said Wojciechowski, who is also executive vice president of the Public Investors Advocate Bar Association. “I think that what we are seeing now is, it’s ‘take my ball and go home.’ They don’t even stay in the arena anymore and fight. They just walk away.”
