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Investment Adviser Charged for Failing to Disclose Conflicts Arising from Revenue Sharing

(HedgeCo.Net) The Securities and Exchange Commission has charged Commonwealth Equity Services, LLC d/b/a Commonwealth Financial Network (Commonwealth), a registered investment adviser and broker-dealer based in Waltham, Massachusetts, with failing to disclose material conflicts of interest related to revenue sharing Commonwealth received for certain client investments.

According to the SEC’s Complaint, since at least 2007, Commonwealth had a revenue sharing agreement with the broker it required most of its clients use for trades in their accounts. Under that agreement, Commonwealth received a portion of the money that certain mutual fund companies paid to the broker to be able to sell their funds through the broker, if Commonwealth invested client assets in certain share classes of those funds. Between July 2014 and December 2018, Commonwealth received over $100 million in revenue sharing from the broker related to client investments in certain share classes of “no transaction fee” and “transaction fee” mutual funds. The SEC’s Complaint alleges that Commonwealth breached its fiduciary duty to its clients by failing to disclose the conflicts of interest created by its receipt of compensation through the revenue sharing agreement. Specifically, the SEC’s Complaint alleges that Commonwealth failed to tell its clients that (i) there were mutual fund share class investments that were less expensive to clients than some of the mutual fund share class investments that resulted in revenue sharing payments to Commonwealth, (ii) there were mutual fund investments that did not result in any revenue sharing payments to Commonwealth, and (iii) there were revenue sharing payments to Commonwealth under the broker’s “transaction fee” program. As a result of these material omissions, Commonwealth’s advisory clients invested without a full understanding of the firm’s compensation motives and incentives.

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