(Article from Registered Funds Regulatory Update, April 2026)
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On March 23, 2026, the U.S. District Court for the District of Massachusetts approved the negotiated settlement between the SEC and Commonwealth Financial Network following an arduous seven-year legal battle relating to Commonwealth’s failure to disclose material conflicts of interest related to a revenue sharing agreement with National Financial Services, an affiliate of Fidelity Investments that provides clearing services.
According to the SEC’s complaint filed in August 2019, Commonwealth failed to disclose material conflicts of interest relating to its revenue sharing arrangement in which Commonwealth received payments from NFS when it invested client assets in certain classes of mutual funds. The Complaint alleged that: (i) in some instances, the mutual fund share classes purchased by Commonwealth’s clients had at least one lower-cost share class available for which Commonwealth received less or no revenue sharing; (ii) in some instances, Commonwealth purchased transaction-fee mutual fund share classes for its clients, NFS charged a transaction fee on the purchase and sale of such shares, and the mutual funds paid a portion of the ongoing fees to NFS that it then shared with Commonwealth; and (iii) certain mutual funds did not provide Commonwealth with any incentive to select them because Commonwealth received no revenue sharing with respect to those funds. In response, Commonwealth argued that the SEC failed to allege facts showing a conflict of interest, insufficient disclosure, and deception.
On April 7, 2023, the District Court granted summary judgment in favor of the SEC, finding that as a matter of law, Commonwealth negligently breached its fiduciary duties to its advisory clients for deficient disclosures in violation of the anti-fraud provisions of the Advisers Act. The District Court agreed with the SEC, taking particular issue with Commonwealth’s use of “may” in its disclosure of potential conflicts of interest. Specifically, the District Court noted that Commonwealth presented the revenue sharing payments as hypothetical payments it may receive and stated that Commonwealth may have an incentive to select investments for which it received compensation, when both should have been presented to investors “as a matter of fact.”
Furthermore, the District Court noted that, without having more information regarding the cost differences between share classes, Commonwealth’s clients did not have access to the “total mix of information” necessary to make informed investment decisions. As such, the District Court determined that Commonwealth’s disclosures were inadequate under the Advisers Act and, in April 2024, after denying Commonwealth’s February 2024 motion for reconsideration, ordered that Commonwealth pay in the aggregate roughly $93 million in the aggregate – $65.6 million in disgorgement, $21.2 million in prejudgment interest, and $6.5 million in civil penalty. Commonwealth appealed the District Court’s decision on questions of materiality. Specifically, it argued that “‘[w]hether Commonwealth’s revenue sharing arrangement…would be material to a reasonable client and whether its disclosures “provide[d] the information an advisory client would reasonably need to understand and consent to a conflict of interest’ were matters for a jury,” and the issue of negligence should have also been submitted to the jury.
On April 1, 2025, the U.S. Court of Appeals for the First Circuit reversed the District Court’s ruling, finding that the District Court applied the incorrect test for “materiality.” The Court of Appeals discussed whether the issues Commonwealth raised constituted genuine disputes as to material fact and were therefore inappropriate for an order of summary judgment. The Court of Appeals ultimately held that questions of fact remained and should have gone to a jury. Moreover, the Court of Appeals found that a reasonable jury could conclude, based on the facts of the case, that additional disclosures providing more precise descriptions, beyond the conflicts of interest already disclosed, would not have “significantly altered the total mix of information made available,” under the test set forth by the U.S. Supreme Court in Basic Inc. v. Levinson. Because the finding of liability was reversed, the Court of Appeals also reversed the disgorgement order. The case was then remanded to the District Court for further proceedings.
On February 2, 2026, the District Court granted the SEC’s and Commonwealth’s joint motion to extend the stay of proceedings in the action to allow the parties to attempt to conclude settlement negotiations, staying the action until March 31, 2026. On March 23, 2026, the District Court entered a final judgment by consent as to Commonwealth for previously filed charges of the Advisers Act violations. Without admitting or denying the SEC’s allegations, Commonwealth consented to a civil penalty of $5 million.
SEC Litigation Release, Commonwealth Equity Services, LLC d/b/a Commonwealth Financial Network, No. 26508 (Mar. 27, 2026), available at:
https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26508.
SEC v. Commonwealth Equity Services, No. 24-1427(1st Cir. Apr. 1, 2025).