The US Securities and Exchange Commission (SEC) is accusing Commonwealth Equity Services, also known as Commonwealth Financial Network, of not notifying clients that it had material conflicts of interest involving certain investments. This purportedly allowed the investment adviser and brokerage firm to earn more than $100M in revenue sharing involving certain mutual funds.
The SEC contends that since at least 2007, Commonwealth had a deal with National Financial Services and a Fidelity Investments affiliate that the majority of its Preferred Portfolio Service advisory clients were obligated to utilize when trading in their accounts. As part of the agreement, clients have to choose National Financial Services as its clearing broker for their investment accounts.
Whenever these advisory clients would invest in specific mutual fund shares, Commonwealth received a portion of the money that certain mutual fund companies paid National Financial Services to make trades on the platform. Also as part of the deal between National Finance Services and Commonwealth is that the clearing broker would share recurring mutual fund fees with the investment adviser. This was determined by the latter’s client assets that were invested in specific mutual fund share classes that didn’t charge a transaction fee.
The SEC is also accusing Commonwealth of breach of fiduciary duty for not disclosing to clients that they could have instead invested in mutual fund share classes that were less costly. The regulator notes that in 2016, about $174M in client assets at Commonwealth were invested in the most expensive share classes, allowing the firm to make $515K in revenue sharing fees.
Failure to disclose such conflicts of interest kept clients from knowing what the Commonwealth advisors’ true motivations may have been in recommending certain mutual fund share classes to them. Was it because they benefited the clients and their investment goals or was it to generate revenue for Commonwealth?
Commonwealth has about $85B of advisory assets under management. Earlier this year, an ex-Commonwealth broker was charged by Massachusetts Secretary of the Commonwealth William Galvin for investor fraud. Bruce Worthington is accused of fraudulently misappropriating almost $100K from a retiree. This person is an inexperienced investor who was his client for over 15 years.
Investment Advisory Fraud
Investment advisors owe their clients a fiduciary obligation to act in their best interests. Failure to do so can be grounds for a claim. Contact Shepherd Smith Edwards and Kantas, LLP (SSEK Law Firm) to speak with one of our investment advisory fraud attorneys.