Federal Appeals Court Overturns $93M SEC Judgment Against Commonwealth
A federal appeals court has reversed a lower court’s ruling that mandated Commonwealth Financial Network to pay $93 million to the U.S. Securities and Exchange Commission for alleged disclosure failures regarding revenue sharing from mutual fund share classes.
The U.S. Court of Appeals for the First Circuit vacated the previous April 2024 ruling by the U.S. District Court District of Massachusetts, which had ordered the broker-dealer to pay $65.6 million in disgorgement, $21.2 million in interest, and a $6.5 million civil penalty.
The appeals court’s decision remands the case for further proceedings, stating that a jury trial is necessary to determine if Commonwealth’s alleged omissions regarding disclosures were “material.” According to attorneys from Eversheds Sutherland, representing Commonwealth, the court found “material issues of fact” concerning the importance of price, Commonwealth’s influence over funds, and the significance of the disputed disclosures.
Furthermore, the appeals court criticized the district court’s disgorgement award, citing “concerning, fundamental legal errors” in the lower court’s assessment of the causal relationship between Commonwealth’s profits and the alleged violations.
This legal news comes on the heels of LPL Financial’s definitive agreement to acquire Commonwealth, previously the largest independently owned wealth management firm in the nation, for approximately $2.7 billion in cash.
The acquisition will add approximately 2,900 financial advisers managing around $285 billion in brokerage and advisory assets to LPL’s platform. Expected to close in the second half of 2025, the full integration of Commonwealth into LPL is anticipated by mid-2026, pending regulatory approvals and customary closing conditions.
Regarding the reversal of the SEC fine, senior counsel at Eversheds expressed satisfaction with the ruling, stating that the First Circuit agreed with Commonwealth’s position that summary judgment was improperly granted and that the SEC lacked sufficient evidence to justify the award.
Commonwealth’s general counsel and chief risk officer also conveyed the firm’s approval of the decision, affirming their commitment to defending themselves and emphasizing their dedication to prioritizing client interests.
The SEC’s 2019 lawsuit alleged that Commonwealth failed to disclose conflicts of interest related to a revenue-sharing program with National Financial Services between July 2014 and December 2018 and, thus, breached its fiduciary duty. Specifically, the SEC claimed Commonwealth did not inform clients that certain mutual fund share classes generated substantial revenue for the firm, while lower-cost share classes would have yielded significantly less or no revenue.
The district court judge had previously ruled that Commonwealth’s disclosure failures were “egregious,” particularly their agreements with NFS regarding revenue from their no transaction fee and transaction fee programs, and their lack of adequate disclosures regarding the revenue from higher-cost shares.
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