A U.S. advisory firm is paying US$5 million to settle allegations that it breached its fiduciary duty to clients by failing to disclose material conflicts of interest to mutual fund investors.
In 2019, the U.S. Securities and Exchange Commission (SEC) charged Massachusetts-based broker-dealer and advisory firm Commonwealth Equity Services, LLC, for allegedly breaching the rules governing investment advisors in connection with its revenue sharing arrangements.
Specifically, the SEC alleged that, since 2007, Commonwealth had a revenue sharing deal with a brokerage firm that it required most of its clients use for trades in their accounts. According to the regulator, the firm failed to disclose the specifics of this arrangement to clients — including instances where investors were not advised that they could have bought cheaper mutual fund classes that wouldn’t have generated revenue-sharing payments to the firm.
The SEC alleged that between July 2014 and December 2018, Commonwealth received over US$100 million in revenue sharing from the broker, driven by clients’ investments in certain classes of mutual funds.
By failing to disclose the conflicts of interest created by this arrangement, the regulator alleged that the firm breached its fiduciary duty to investors.
Now, without admitting or denying the SEC’s allegations, Commonwealth has consented to the entry of the final judgment in U.S. district court in Massachusetts that orders the firm to pay a US$5-million civil penalty.