Commonwealth Financial Network Faces Potential Damages Amid SEC Lawsuit
From the desk of Jim Eccleston at Eccleston Law
Commonwealth Financial Network is under fire, as it faces potential damages amounting to $111.5 million from a Securities and Exchange Commission (SEC) complaint filed nearly five years ago. Despite anticipating a loss of up to $24 million, the investment advisory firm remains embroiled in an ongoing legal battle.
In 2019, the SEC initiated legal action against Commonwealth, alleging breaches of fiduciary duty related to a revenue-sharing program with its clearing firm. The SEC claimed that from July 2014 to December 2018, Commonwealth failed to disclose conflicts of interest to its advisory clients. As reported by ThinkAdvisor, the company purportedly neglected to inform clients about revenue discrepancies between different mutual fund share classes, thereby generating substantial revenue-sharing payments for the firm.
In April 2023, a district court ruled in favor of the SEC, finding Commonwealth in violation of the Advisers Act of 1940 for inadequate conflict disclosure and policy implementation. Commonwealth filed a motion for reconsideration in May of 2023, and the SEC countered with a motion for final judgment, seeking damages totaling $111.5 million. Commonwealth subsequently opposed the SEC's motion in July.
Despite the court's denial of Commonwealth's motion for reconsideration, the company maintains its stance that the SEC failed to establish a necessary causal connection and argues against disgorgement. In its financial report, Commonwealth estimates potential losses between $5 million and $24 million, with $5 million provisioned in accrued liabilities as of December 31, 2023.
The 2019 SEC action reflects a broader regulatory crackdown on firms' failure to disclose 12b-1 fees and revenue-sharing arrangements, resulting in fines for numerous entities.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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