The SEC has filed fraud charges against a large ($85 billion AUM) registered investment adviser for its failure to disclose material conflicts of interest in connection with a “revenue sharing” arrangement with its clearing broker. The SEC’s Complaint against the adviser, Boston-based Commonwealth Equity Services, LLC, d/b/a Commonwealth Financial Network (“Commonwealth”), was filed in Massachusetts federal district court, and alleges that Commonwealth received over $100 million in revenue sharing from the clearing broker while failing to properly apprise its advisory clients of the full nature of the revenue sharing arrangement and the inherent conflicts of interest implicated by it. The Commonwealth case is just the latest in a string of actions by the SEC involving mutual fund share class selection by advisers and comes on the heels of the recent DC Circuit decision in the Robare case, which has likely emboldened the SEC somewhat.
The Commonwealth case involves a revenue sharing arrangement between Commonwealth and National Financial Services, LLC (“NFS”), an affiliate of mutual fund giant Fidelity Investments. Pursuant to that arrangement, NFS paid Commonwealth a percentage of the money paid to NFS by mutual fund companies in return for the right to sell their mutual funds through NFS. The money paid to Commonwealth by NFS under this arrangement, in turn, was directly related to the amount of Commonwealth client assets invested in certain share classes of specific funds offered on NFS’ platform. In other words, the more client assets placed by Commonwealth into particular funds and classes of those funds, the more revenue shared with Commonwealth. Continue reading