First Circuit Reverses SEC Win in $93 Million Investment Adviser Disclosure Case
The court rejects the SEC's per se materiality argument and requires proof of a causal connection between the defendant's allegedly inadequate disclosures and purported unlawful profits.
On April 1, 2025, the First Circuit reversed summary judgment for the Securities and Exchange Commission ("SEC") that imposed $93 million in sanctions against registered investment adviser Commonwealth Equity Services, LLC. The SEC alleged that Commonwealth had failed to properly disclose conflicts of interest arising from revenue-sharing arrangements that supposedly incentivized it to direct client investments into higher-cost mutual funds. In granting summary judgment, the district court concluded that Commonwealth's allegedly deficient disclosures were per se material to all of the firm's advisory clients and that Commonwealth therefore had to disgorge all of its allegedly conflicted profit from those arrangements over nearly five years.
Rejecting the district court's per se materiality conclusion, the First Circuit held that a reasonable jury could find that adding greater detail to Commonwealth's existing disclosures—which already referenced the revenue-sharing arrangements—would not have altered the "total mix" of information available. The court also faulted the assumption that choosing a lower-cost fund was significant to all of Commonwealth's clients, who were differently situated in many respects.
The First Circuit then flagged "numerous shortcomings" in the disgorgement award, chiefly the lack of evidence causally connecting Commonwealth's alleged misconduct to the amount of disgorgement. The district court erred in treating causation as "self-evident" merely because "at least some" clients would have chosen less-expensive funds had they received greater disclosure. As the First Circuit explained, this is not the relevant standard for calculating disgorgement and improperly equates "a few" investors with "every" investor.
This decision offers two key takeaways:
- First, it undermines a tenet of SEC investment adviser oversight: that inadequately disclosed conflicts of interest are presumptively material. Under this case, the SEC must prove both that the conflict itself was significant to advisory clients' investment decisions and that more fulsome disclosure would have altered the total mix of available information. This could have implications for disclosure cases the SEC pursues in other contexts.
- Second, the decision imposes greater rigor on disgorgement calculations. While disgorgement need only "reasonably approximate" a defendant's unlawful profits, the SEC still must "connect" allegedly faulty disclosures to the disgorgement sum, especially where the agency seeks to extrapolate from "a few" investors to an entire population. This could be challenging, especially in cases with numerous differently situated investors.
