A federal appeals court has overturned a $93 million judgment against Commonwealth regarding client disclosures about differently priced mutual fund share classes.
The First Circuit Court of Appeals decision comes nearly a year after a district court judge decided in favor of the Securities and Exchange Commission against the Massachusetts-based broker/dealer (and days after LPL Financial’s $2.7 billion deal to buy Commonwealth).
The three appellate judges who decided on the case included former U.S. Supreme Court Justice Stephen Breyer, a visiting judge in the appellate division covering Maine, Massachusetts and several other Northeast states.
In their opinion, the judges wrote they agreed with Commonwealth’s argument that aspects of the case should have been heard in a jury trial, as opposed to the SEC winning a motion for summary judgment (in which a judge decides on the merits of a case before reaching a jury).
The SEC first filed charges in 2019, accusing the firm of not properly disclosing that advisors may have recommended more expensive options for mutual fund share classes when cheaper alternatives were available.
Commonwealth’s reps used National Financial Services as a clearing broker. However, the SEC alleged the companies had a revenue-sharing agreement with Commonwealth making more money if clients were placed in certain share classes that might be more expensive for clients.
Of the $189 million NFS paid Commonwealth over four years, the SEC estimated that about $155.6 million came from these payments (though Commonwealth disputed that figure). The commission claimed the firm’s disclosures about its own conflicts of interest didn’t adequately inform clients about the ramifications of their choices.
In April 2023, the SEC won its motion for summary judgment. In late March of last year, U.S. District Judge Indira Talwani affirmed the decision and ordered the Commonwealth to pay nearly $66 million in disgorgement, as well as prejudgment interest of $21 million and a $6.5 million penalty, for a total of about $93 million. Commonwealth quickly appealed the ruling.
In their ruling overturning the award, the judges took issue with the commission’s methodology of determining how many investors were negatively impacted in their share-class decision-making.
“Those investors differed in many categories of ways, including as to the types of investors, types of investments, types of investment goals they set, and what advice they received from their representatives,” the opinion read. “The SEC’s motion and supporting evidence in many ways assumed that these investors were identically situated. Yet a reasonable jury could find those assumptions questionable and not substantiated.”
The court remanded the case back to the same district where arguments were first heard; it is possible that the case could proceed to a trial if the SEC intends to continue (according to a spokesperson, the agency declined to comment “other than public filings” on the matter).
Commonwealth Senior Vice President, General Counsel and Chief Risk Officer Peggy Ho said the firm was pleased with the decision and would “pursue all legal avenues” to defend itself.
“We trust this decision validates the fact that Commonwealth and its advisors prioritize their client’s interest and make investment decisions based on what they believe is best for their clients,” she said.
On Monday, LPL announced it would acquire Commonwealth for $2.7 billion in cash. LPL hoped to bring over Commonwealth 2,900 reps and $285 billion in client assets, with the transaction set to close later this year and conversion to LPL’s platform complete in 2026.
In an interview with WealthManagement.com, LPL CEO Rich Steinmeier said they aimed for at least 90% advisor retention, though he said he’d be “disappointed” if that were the retention ceiling. Commonwealth CEO Wayne Bloom said he was determined to “make sure Commonwealth remains Commonwealth.”
“It’s our life’s work, and we put everything we have into building this great place and serving these great advisors, and we are just not going to let this fail,” he said. “We have to make sure that it perseveres and remains the firm’s it’s always been.”
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