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SEC Sues Commonwealth Financial Network for Breach of Fiduciary Duty Relating to Mutual Fund Revenue Sharing

The Securities and Exchange Commission (SEC) filed a case on August 1, 2019 against Commonwealth Equity Services, LLC (which does business as Commonwealth Financial Network) for “failing to disclose material conflicts of interest related to revenue sharing Commonwealth received for certain client investments.”

A registered investment adviser and broker-dealer based in Waltham, Massachusetts, Commonwealth manages approximately $85 billion in assets for thousands of clients. $60 billion belongs to clients without a high net worth. As an investment adviser, Commonwealth representatives are fiduciaries and are legally bound to put clients’ interests ahead of their own.

The complaint alleges that Commonwealth breached its fiduciary duty by failing to disclose conflicts of interest arising from the fact that certain share classes of mutual fund investments were subject to revenue sharing agreements between Commonwealth and Commonwealth’s clearing firm, National Financial Services (NFS), an affiliate of Fidelity Investments.

According to the complaint:

From at least July 204 through December 2018, Commonwealth breached its fiduciary duty to its advisory clients by failing to disclose certain conflicts of interest. Commonwealth was paid to select and manage investments for its clients, but failed to tell its clients that some investment choices generated additional multi-million dollar revenues for Commonwealth (referred to as ‘revenue sharing’) while other similar investment choices would have generated much less, or no, additional revenue.

Over this same period, the SEC alleges, “Commonwealth received approximately $58.7 million in revenue sharing payments from NFS related to advisory client assets invested in no transaction fee mutual fund share classes.” Similarly, the SEC alleges that “Commonwealth received approximately $77 million in revenue sharing payments from NFS related to advisory client assets invested in transaction fee mutual fund share classes.” There were no revenue sharing agreements with Fidelity, but clients were not aware of that.

Without information about revenue sharing, some clients were unknowingly investing in more expensive share classes of mutual funds because Commonwealth allegedly pointed them to these investments in order to generate extra revenue for the firm, purportedly prioritizing funds with revenue sharing agreements over those without such agreements The complaint alleges that investors did not have all the information they were entitled to when making financial decisions about their investment advisers.

If you’ve invested with Commonwealth or have questions about mutual funds, revenue sharing agreements, or breach of fiduciary duty, don’t hesitate to contact the knowledgeable securities attorneys of Fitapelli Kurta. Call (877) 238-4175 or email info@fkesq.com.