Securities and Exchange Commission v. COMMONWEALTH EQUITY SERVICES, LLC, d/b/a Commonwealth Financial Network

United States Court of Appeals
For the First Circuit
No. 24-1427
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff, Appellee,
v.
COMMONWEALTH EQUITY SERVICES, LLC,
d/b/a Commonwealth Financial Network,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Indira Talwani, U.S. District Judge]
Before
Montecalvo, Circuit Judge,
Breyer,* Associate Justice,
and Lynch, Circuit Judge.
Thomas M. Byrne, with whom Olga Greenberg, Rebekah
Whittington O'Brien, and Eversheds Sutherland (US) LLP were on
brief, for appellant.
Joshua M. Feinzig, Kelly P. Dunbar, Elizabeth L. Mitchell,
Joseph M. Toner, and Wilmer Cutler Pickering Hale and Dorr, LLP,
on brief for Financial Services Institute, Inc., amicus curae.
Paul G. Álvarez, Senior Appellate Counsel, with whom Megan
Barbero, General Counsel, Michael A. Conley, Solicitor, and Daniel
Staroselsky, Assistant General Counsel, Securities and Exchange
Commission, were on brief, for appellee.
* Hon. Stephen G. Breyer, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.

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April 1, 2025

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LYNCH, Circuit Judge. Commonwealth Equity Services,
LLC, appeals from entry of summary judgment on liability and awards
totaling roughly $93 million in a civil enforcement action brought
by the Securities and Exchange Commission. The SEC alleges
Commonwealth failed to adequately disclose potential conflicts of
interest from 2014 to 2018 in violation of Sections 206(2) and (4)
of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6(2), (4),
and SEC Rule 206(4)-7, 17 C.F.R. § 275.206(4)-7(a), and claimed a
jury trial. On cross motions, the district court granted the SEC's
motion for summary judgment as to Commonwealth's liability and
denied both Commonwealth's cross-motion for summary judgment, SEC
v. Commonwealth Equity Servs., LLC, No. 19-cv-11655, 2023 WL
2838691, at *1 (D. Mass. Apr. 7, 2023), and its later motion to
reconsider the grant of summary judgment to the SEC, SEC v.
Commonwealth Equity Servs., LLC, 718 F.Supp.3d 113, 115 (D. Mass.
2024). The district court then entered final judgment against
Commonwealth, ordering disgorgement of $65,588,906 in
revenue-sharing income plus $21,185,162 in prejudgment interest
and imposing on Commonwealth a civil penalty of $6,500,000. SEC
v. Commonwealth Equity Servs., LLC, No. 19-cv-11655, 2024 WL
1375970, at *1, *11-12, *13 (D. Mass. Mar. 29, 2024). Commonwealth
appeals from all of these orders. We vacate the grant of summary
judgment and the disgorgement order and remand for further
proceedings consistent with this opinion.

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I.
We recite the relevant undisputed facts of record, as
well as many of the material disputed facts.
Commonwealth is an SEC-registered broker-dealer and
investment advisor. Commonwealth offers its advisory services
through a network of approximately 2,300 investment advisor
representatives. These representatives are affiliated with
Commonwealth but operate independent advisory businesses in their
own names, providing advisory services and buying and selling for
their clients. There are many different types of clients, as
discussed below. Representatives disclose to clients their
affiliation with Commonwealth.
Commonwealth representatives are responsible for
identifying prospective clients, communicating with those clients
about their financial circumstances and investment objectives, and
managing clients' accounts in accordance with those objectives.
As required by regulation, representatives agree that they will
offer only those products Commonwealth has approved. Commonwealth
charges clients annual advisory fees based on a percentage of the
assets under Commonwealth management, and representatives receive
as compensation between 50% and 98% of the advisory fees their
clients pay.
To buy and sell mutual funds, these representatives
utilize National Financial Services, LLC (NFS), which acts as a

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clearing broker. Commonwealth functions as an "introducing firm,"
providing its representatives with access to NFS. In its role as
clearing broker, NFS "executes and clears client trades" and NFS
or one of its affiliates "maintains custody of the investments
held by Commonwealth's clients." NFS provides Commonwealth, and
by extension its representatives, with access to the FundsNetwork,
a platform through which mutual funds may be purchased. In
addition to the mutual funds available through the FundsNetwork,
representatives are permitted to purchase and sell Fidelity Funds
and Fidelity Advisor Funds, also through NFS.
Mutual funds that are part of the FundsNetwork are
separated into three programs: the No Transaction Fee (NTF)
program, the Transaction Fee (TF) program, and the Institutional
No Transaction Fee (iNTF) program. The iNTF program was offered
for the first time in February 2017. Mutual funds in the TF
program incur fees when bought and sold, whereas those within the
NTF and iNTF programs do not. As to TF funds, representatives may
choose to absorb any of the transaction fees incurred when buying
and selling TF program funds and choose whether to pass on those
fees as part of the advisory fees they charge their clients.
Mutual funds, including those available via the
FundsNetwork, may issue multiple share classes of the same fund,
and many do so. Each share class of a mutual fund generally has
identical voting, dividend, liquidation, and other rights and

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limitations, and different classes of the same fund will receive
the same income, realized and unrealized capital gains and losses,
and expenses that are common to the mutual fund. But each class
may have different class-based fees, expenses, or other
requirements associated with it, and may be offered to different
types of investors. Some of a share class's expenses are ongoing,
and a share class's total ongoing expenses are referred to as its
"expense ratio." Other expenses are incurred periodically, such
as "transaction fees" charged when investors buy, sell, or exchange
an investment. These transaction fees are not ongoing and are not
included in a share class's expense ratio. Share classes may also
differ in the minimum investment required to purchase a particular
class. FundsNetwork provides access to more than 17,000 mutual
fund share classes, and some mutual funds are offered in multiple
share classes made available for purchase via FundsNetwork through
more than one program (TF, NTF, or iNTF).
Mutual fund companies that offer mutual funds through
the FundsNetwork platform often pay fees to NFS, though some share
classes of funds are made available through the FundsNetwork
platform without paying such fees. Sometimes, NFS receives
payments from mutual fund companies to make some share classes of
a fund available on FundsNetwork, but it is also true that other
share classes of the same fund may be made available on
FundsNetwork without any such payment to NFS. Neither Fidelity

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Funds nor Fidelity Advisor Funds make such payments to NFS. Since
at least 2009, NFS has shared a portion of these payments with
Commonwealth, and, beginning in 2014, Commonwealth and NFS agreed
that NFS would pay Commonwealth 80% of the gross revenue it
received from funds in the NTF and TF programs.
The parties agree that representatives are not aware
which share classes were part of the revenue-sharing agreement
between NFS and Commonwealth. The parties also agree that
representatives' compensation is not increased or decreased in any
way based on whether the funds they select for their clients
provide Commonwealth with revenue-sharing income.
In addition to providing representatives with access to
NFS and the FundsNetwork, Commonwealth provides representatives
with access to its Preferred Portfolio Services (PPS) program, a
Mutual Fund Resource Guide, and a list of recommended funds. The
PPS program includes model portfolios which representatives or
clients may select, offered under sub-programs known as the "PPS
Select" and "PPS Direct" programs. Model portfolios in the PPS
Select program are developed by Commonwealth's Investment
Management and Research team, while model portfolios in the PPS
Direct program are created and managed by third parties and made
available through Commonwealth.1 The Mutual Fund Resource Guide
1 Representatives and clients can also avail themselves of
the PPS Custom program, in which case the representative would

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provides information on mutual funds and share classes available
to representatives. The list of recommended funds contains funds
that have been screened by Commonwealth's Investment Management
and Research team and are recommended for use by representatives
when crafting their clients' portfolios. Representatives may also
conduct independent research into available funds and share
classes using Morningstar, a tool Commonwealth makes available to
its representatives at a discounted price.
As an SEC-registered investment advisor, Commonwealth
maintains a "Form ADV" brochure for its clients, and it updates
this brochure annually in March of each year, as well as
periodically between its annual filings. This brochure is filed
with the SEC and a copy is posted on Commonwealth's website.
Commonwealth also mails its clients letters summarizing any
material changes made to the brochure and notifying the clients
how they may obtain copies of the full brochure if they so wish.
Pertinently, SEC regulations require that this brochure:
make full disclosure of all material conflicts
of interest between [Commonwealth] and [its]
clients that could affect the advisory
relationship. This obligation requires that
[Commonwealth] provide the client with
sufficiently specific facts so that the client
is able to understand the conflicts of
interest [Commonwealth has] and the business
practices in which [Commonwealth] engage[s],
develop a custom investment portfolio for the client and act as
that portfolio's manager.

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and can give informed consent to such
conflicts or practices or reject them.
Amendments to Form ADV, Investment Advisers Act of 1940, Release
No. 3060 (2010), 2010 WL 2957506, at *74. SEC regulations further
specify that "[i]f someone who is not a client provides an economic
benefit to you for providing investment advice or other advisory
services to your clients, generally describe the arrangement,
explain the conflicts of interest, and describe how you address
the conflicts of interest." Id. at *86.
As it pertains to Commonwealth's revenue-sharing
arrangement with NFS, Commonwealth's 2014 brochure provided:
NFS offers a "No Transaction Fee" program with
more than 1,200 no-load mutual funds.
Participating mutual fund sponsors pay a fee
to NFS to participate in this program, and a
portion of this fee is shared with
Commonwealth. None of these additional
payments is paid to any advisors who sell
these funds.
. . . .
Commonwealth and your advisor may receive
service fees and other compensation from
investment product sponsors and distributors
when they make recommendations or investment
decisions for you. These fees and
compensation include, but are not limited to,
mutual fund and money market 12b-1 and
subtransfer agent fees, mutual fund and money
market management fees and administrative
expenses, mutual fund transaction fees,
certain deferred sales charges on previously
purchased mutual funds transferred into an
account, variable annuity expenses, due
diligence fees, marketing reimbursements or
reallowances, or other transaction or service

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fees. Commonwealth and your advisor may
receive a portion of these fees. This
additional compensation presents a potential
conflict of interest because Commonwealth and
your advisor may have a greater incentive to
recommend (or make investment decisions
regarding) investments for your account that
provide such additional compensation to
Commonwealth or your advisor.
. . . .
Where permitted by law, Commonwealth and/or
your advisor may receive transaction-based
commissions, mutual fund 12b-1 fees,
distributor fees, service fees, due diligence
fees, marketing reimbursements, revenue
sharing, or other payments relating to your
investment in or otherwise supporting
Commonwealth's or your advisor's activities
regarding the securities and insurance
products recommended, purchased, or held
within your Commonwealth advisory program
account. To the extent Commonwealth is the
investment adviser, sponsor, or other service
provider to your investment advisory program,
Commonwealth receives compensation for its
services. Clients should be aware that
Commonwealth's or your advisor's receipt of
commissions, fees, payments, and other
compensation may present a potential conflict
of interest because Commonwealth or your
advisor may have an incentive to recommend
those products or programs or make investment
decisions regarding investments that provide
such compensation to Commonwealth or your
advisor.
(Emphasis added). Commonwealth made disclosures substantially
similar to these in 2015 and 2016.
Commonwealth's 2017 brochure included this additional
disclosure regarding its revenue-sharing arrangement with NFS:

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NFS offers an NTF program composed of no-load
mutual funds. Participating mutual fund
sponsors pay a fee to NFS to participate in
this program, and a portion of this fee is
shared with Commonwealth. None of these
additional payments is paid to any advisors
who sell these funds. NTF mutual funds may be
purchased within an investment advisory
account at no charge to the client. Clients,
however, should be aware that funds available
through the NTF program may contain higher
internal expenses than mutual funds that do
not participate in the NTF program and could
present a potential conflict of interest
because Commonwealth may have an incentive to
recommend those products or make investment
decisions regarding investments that provide
such compensation to Commonwealth.
(Emphasis added).
And in August 2017, Commonwealth amended its brochure to
add:
Clients . . . should be aware that funds
available through the NTF program often
contain higher internal expenses than mutual
funds that do not participate in the NTF
program. Commonwealth's receipt of a portion
of the fees associated with the NTF program
creates a conflict of interest because
Commonwealth has an incentive to make
available or to recommend those products, or
make investment decisions regarding
investments, that provide such compensation to
NFS and Commonwealth over those mutual fund
sponsors that do not make such payments to NFS
and Commonwealth.
(Emphasis added).
In 2018, Commonwealth further modified its brochure to
state that Commonwealth "will receive" revenue-sharing payments

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from NFS, rather than that it "may receive" those payments.
Commonwealth's 2018 disclosure also stated:
Although NTF funds do not assess transaction
charges, most NTF funds have higher internal
expenses than funds that do not participate in
an NTF program. These higher internal fund
expenses are assessed to investors who
purchase or hold NTF funds. Depending upon
the frequency of trading and hold periods, NTF
funds may cost you more, or may cost
Commonwealth or your Commonwealth advisor
less, than mutual funds that assess
transaction charges but have lower internal
expenses. In addition, the higher internal
expenses charged to clients who hold NTF funds
will adversely affect the long-term
performance of the client's account when
compared to share classes of the same fund
that assess lower internal expenses.
For those Commonwealth advisory programs that
assess transaction charges to clients or to
Commonwealth or the advisor, a conflict of
interest exists because Commonwealth or your
advisor have a financial incentive to
recommend or select NTF funds that do not
assess transaction charges but cost you more
in internal expenses than funds that do assess
transaction charges but cost you less in
internal expenses. In addition to reading
this Brochure carefully, clients are urged to
inquire whether lower-cost share classes are
available and/or appropriate for their account
in consideration of the client's expected
investment holding periods, amounts invested,
and anticipated trading frequency. Further
information regarding fees and charges
assessed by a mutual fund is available in the
appropriate mutual fund prospectus.
(Emphasis added).
And in December 2018, Commonwealth amended its brochure
to add the following language:

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Commonwealth uses National Financial Services
("NFS") as its clearing and custody firm for
substantially all of Commonwealth's PPS
managed accounts. Commonwealth's business
relationship with NFS provides Commonwealth
considerable revenue-sharing benefits. In
particular, Commonwealth receives substantial
monthly revenue-sharing payments from NFS
based on client assets held by Commonwealth
with NFS in . . . non-Fidelity NTF funds that
participate in Fidelity's NTF program, and
non-Fidelity TF funds that participate in
Fidelity's TF program.
Commonwealth's revenue-sharing agreement with
NFS, and the existence of various fund share
classes with lower-internal expenses that
Commonwealth may not make available for
purchase in managed account programs, present
a conflict of interest between clients and
Commonwealth or its advisors. A conflict of
interest exists because Commonwealth and your
advisor have a greater incentive to make
available, recommend, or make investment
decisions regarding investments that provide
additional compensation to Commonwealth that
cost clients more than other available share
classes in the same fund that cost you less.
(Emphasis added).
From July 2014 through December 2018, NFS paid
Commonwealth approximately $189.1 million, which included both
revenue-sharing payments and payments for other expenses. The
parties disagree as to what portion of the $189.1 million NFS paid
to Commonwealth was paid pursuant to the revenue-sharing
agreement. Commonwealth contends that "NFS itself had no
visibility into the breakdown between revenue sharing and other
payments." The SEC has estimated that approximately $155.6 million

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of this was related to the advisory client assets relevant to this
enforcement action. Commonwealth has not conceded the accuracy of
this $155.6 million figure.
Deposition Testimony from Commonwealth Representatives
The SEC took depositions from six Commonwealth
representatives, each of whom testified as to his own experience
as a Commonwealth representative, his own decision-making process
when investing on behalf of his clients, and his clients' different
investment objectives. The relevant portions of their deposition
testimonies in the record follow.
Hal Michels
Hal Michels, a registered Commonwealth representative
since 2007, testified to at least two instances where, on behalf
of his clients, he purchased share classes that were not the
absolute lowest cost funds available.
Michels testified that his firm bought and held shares
of the PIMCO Income Fund, Share Class D, from 2014 to 2017. At
that time, the expense ratio for Class D was approximately 34 basis
points higher than the institutional share class of the PIMCO
Income Fund, and 24 basis points higher than Class P of the Fund.
Michels was not aware of why his firm purchased the Class D shares
for their clients instead of either the Class P or institutional
shares and was not personally aware that there was a Class P or
institutional share class of the Fund.

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In 2017, PIMCO discontinued its Class D shares. Michels
delegated the decision as to what to do with clients' existing
Class D shares to two of his associates, Jamie Direnzo and Joe
Valenza. Direnzo and Valenza decided to convert clients' Class D
shares to Class P shares and not to a cheaper available fund. As
Valenza explained: "[w]e are aware that the institutional share
class is 10 basis points cheaper than the P share class; however,
the institutional class is not considered a core fund. The P share
class is a core share class. This matters more to us, so we want
the P share class." Michels explained that the difference between
core and non-core funds is that core funds don't pay a transaction
fee on the purchase portion of a transaction.
Michels also testified that, when determining what share
classes to purchase for clients, his firm's practice was "typically
to start with the Commonwealth recommended list and then do [their]
own research on the . . . funds that are there, as well as other
funds." Direzo and Valenza "ma[de] those decisions as to which
share class to use with the instructions" to select "the cheapest
most effective share class available." In this context, "cheapest"
meant "lowest expense ratio . . . relative to any other charges
that there might be, like [transaction fees]." For classes that
did not charge transaction fees, or where Michels' firm absorbed
the cost of transaction fees, staff were instructed to select share
classes with the lowest expense ratio. But, from 2014 to 2018,

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Michels' firm purchased shares of the investor class of the
American Century Equity Income Fund, rather than the institutional
class of that Fund, even though the expense ratio of the
institutional class was 20 basis points lower. Michels testified
that he did not know why his firm had made that investment
decision.
David Bucholtz
David Bucholtz, a registered Commonwealth representative
since 2003, testified that "upwards of [75%]" of his firm's clients
were invested in the PPS Custom program and "a very small
percentage" were invested in PPS Select and "[m]aybe even less" in
PPS Direct. When purchasing funds for clients, Bucholtz would
"look and . . . try to find . . . the lower cost. Cost matters a
lot." But the definition of lower cost, itself, varied in
different ways. He would:
look at how long [he was] expecting to hold
this fund, if [he was] going to hold it for a
long period of time, what's the expense
ratio . . . [He would] try and look for a no
transaction fee. If it's something [he] might
be moving out of or if it's something [he]
kn[e]w [was] going to be there for a long time,
the transaction fee can be more significant
than another one where [he was] looking to
keep it for a long time.
Bucholtz testified that he purchased PIMCO Class P shares for his
clients in 2016, and that when he did, he was aware that there
were other PIMCO Income Fund share classes with lower expense

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ratios, but purchased Class P because it "was the lowest expense
ratio . . . without . . .[a] ticket charge on the front side for
buying it." At the time he purchased the shares he considered
buying the institutional class, instead, but "wasn't certain how
long [he] would be in th[e] fund" and "the expense ratio was ten
basis points, so it wasn't a huge difference between the two."
However, a 24 basis point difference in expense ratio between Class
P and Class D shares was more than Bucholtz was willing to pay.
William A. Muskat
William Muskat, a registered Commonwealth representative
since 2009, testified that, from 2014 to 2018, he was not "an
active trading advisor" and his firm "had a buy and hold strategy."
During that time, he "look[ed] for share classes that had the lower
expense ratio" as "a general rule," and, at the time, "those share
classes [were] typically outside of the NTF program." During the
period in which Muskat had a buy and hold strategy, he did not
recall transaction fees being a factor he considered when selecting
a share class. Muskat testified that factors other than
transaction fees and expense ratio might also affect the price of
a share class, such as whether a fund was supplementing the fee
for the expense ratio for a period of time. Muskat also testified
that the summary prospectuses for at least some funds laid out the
total operating expenses for each share class in the fund and that
a fund's prospectus is publicly available information.

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Richard Hana
Richard Hana, a registered representative of
Commonwealth since 2005, testified that, from 2014 to 2018, he
determined what mutual funds were available through Commonwealth
by consulting lists Commonwealth provided via email and by calling
NFS to determine whether a particular fund could be purchased
through Commonwealth. Hana was familiar with Commonwealth's
Mutual Fund Resource Guide but testified that his office "use[d]
Morningstar a lot for [their] research," identifying mutual funds
within Morningstar that they would like to purchase for their
clients, then contacting Commonwealth or NFS to determine whether
those funds were available. In Spring 2018, Hana's office
converted client holdings in PIMCO funds to the institutional share
class of that PIMCO fund because the conversion offered "the lowest
[cost] share class that [Hana's office] thought was
available . . . at the time." Commonwealth then provided Hana's
office with a spreadsheet listing other mutual fund share classes
then held by his clients alongside proposed lower-cost share
classes to which Hana's clients could convert their holdings. Hana
could not recall whether his office converted any of their clients
to the lower-cost share classes Commonwealth identified.
Larry Robert Brown
Larry Brown, a registered Commonwealth representative
since August 1, 2017, testified that he never "at any time looked

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for whether or not a . . . particular mutual fund[] was approved
by Commonwealth," offering only the PPS Custom program to his
clients. Nor did Brown ever use Commonwealth's Mutual Fund
Resource Guide. Brown testified that "for new purchases since
being at Commonwealth, we're only using one share class per fund
family, whichever share class has the lowest expense ratio." Upon
joining Commonwealth in 2017, Brown opted to absorb the cost for
all of his clients' transaction fees.
In November of 2018, Brown received an announcement from
Commonwealth notifying him that Commonwealth intended to begin
offering only a single share class of each mutual fund and would
"automatically convert existing PPS Custom and advisor-managed
mutual fund holdings to the single share class on a rolling basis."
Brown noted that the institutional share class of PIMCO funds
(which Brown had purchased for his clients because it had the
lowest expense ratio of the PIMCO funds) was not the share class
that Commonwealth would be offering going forward. Brown became
concerned that his clients would have their institutional share
class holdings automatically converted into another share class
with a higher expense ratio, and that clients would not be able to
purchase institutional shares of PIMCO in the future, and reached
out to Commonwealth about his concerns. Commonwealth responded,
indicating that it would not convert share classes to a more
expensive share class but that Brown's clients would no longer be

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able to purchase the PIMCO institutional share class after April
1, 2019. Brown testified that it was his understanding that these
changes did not go into effect as described, however, because he
was still able to purchase the PIMCO institutional share class for
his clients after April 1, 2019.
The SEC presented no testimony from any investor client
of any Commonwealth representative.
II.
The SEC initiated this enforcement action in 2019. The
SEC alleged that, from July 2014 through December 2018,
Commonwealth failed to adequately disclose that its
revenue-sharing agreement with NFS created a conflict of interest
by incentivizing Commonwealth to direct its clients' investments,
through the representatives, to mutual fund share classes that
produced revenue-sharing income for Commonwealth over other share
classes that could be cheaper for Commonwealth's clients.2 The
SEC contended that these inadequate disclosures constituted a
negligent breach of Commonwealth's fiduciary duty under Section
206(2) of the Investment Advisers Act of 1940 and that
Commonwealth's failure "to adopt and to implement written policies
and procedures reasonably designed to ensure that Commonwealth
2 The SEC has not claimed that Commonwealth's disclosures
have been deficient from the December 2018 amendment to its
brochure onward.

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identified and disclosed these conflicts of interest" violated
Section 206(4) of the Advisers Act and SEC Rule 206(4)-7.
At the close of discovery, the SEC and Commonwealth each
cross-moved for summary judgment with supporting expert reports.
The SEC's in-house expert, Evgeny (Eugene) Orlov, described the
methodologies he used to reach an estimate of the revenue
Commonwealth received from December 2014 to December 2018 from its
alleged violations. He treated behavior during that time period
as constant and represented that he analyzed the extent to which
there were alternative, lower-cost share classes available to
Commonwealth's clients. Orlov estimated that, of the $189.1
million in total revenue sharing Commonwealth received from NFS,
$155.6 million was "related to advisory client assets" with $61.3
million coming from NTF share classes, $77.0 million from TF share
classes, and $17.3 million from iNTF share classes.
To estimate the number of share classes with lower cost
alternatives, Orlov chose to analyze initially only the ten fund
families in the NTF program that produced the highest revenue-
sharing payments to Commonwealth. He then compared his ten fund-
family sample to the lower-cost alternative share classes of those
very same funds that were listed as available to Commonwealth
clients. From this, he concluded that more than 80% of the revenue
from those fund families came from share classes with alternatives
that were less expensive for clients overall. He conducted a

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similar analysis of the five highest-revenue fund families in the
TF/iNTF programs and concluded that more than fifty percent of
that revenue came from share classes with lower-cost alternatives.
Orlov then purported to compare what he estimated to be
the revenue from these higher-cost share classes against the lesser
revenue Commonwealth would have received had clients been invested
in the lower-cost share classes of the same funds. Orlov
extrapolated from these findings as to the fifteen fund families
to the much larger group of funds available through Commonwealth
as to which it had a conflict of interest.
Orlov's conclusions and methodology were contested on
numerous grounds by Commonwealth experts. One Commonwealth
expert, Mark E. Potter, of the firm of Crowninshield Financial
Research, responded, saying that Orlov had erred in numerous ways.
To start, the SEC expert extrapolated from funds which were not
representative of the roughly 17,000 share classes approved by
Commonwealth. Further, many of the lower-cost alternatives Orlov
identified would, if clients converted their shares to those
classes, result in the same or higher revenue-sharing payments to
Commonwealth. Potter further opined that behavior during the
period in question was not static, but "[could] change over time"
based on changing "goals and objectives and situations." The
revenue-sharing payments Commonwealth received decreased over time

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relative to Commonwealth's total holdings,3 and Commonwealth
clients were "being placed in lower revenue sharing programs" and
funds "at an increased rate over time." Potter concluded that
each of these errors called into question the validity of Orlov's
reliance on only the highest revenue-sharing fund families.
Potter also criticized Orlov for failing to account for
the impact of transaction fees when calculating whether a lower-
cost alternative to a particular share class existed. Potter
explained that representatives take into account more than just a
share class's expense ratio when building a client's portfolio,
"also consider[ing] whether the mix of active or passive
investments is a good fit for the client's goals and objectives."
Potter said that "[t]ransaction fees will have a greater impact on
smaller accounts, accounts that contain less liquid securities,
and accounts that have more need for rebalancing or periodic
withdrawals." Using the fund PIMIX as an example of the impact
transaction fees would have on a representative's choice of share
class, Potter observed that "[a]t a cost of $24 per trade, it would
only take 3 trades" to make a fund with a higher-expense ratio
3 Potter noted that the average monthly revenue went from
"roughly $2.5 million in July 2014 to about $3.6 million by
year-end 2018" while Commonwealth's total mutual fund holdings
increased substantially more, going from "$33.7 million in 2014 to
$61.8 million in 2018." Another Commonwealth expert, Alex J.
Russell, of the firm Bates Group, LLC, likewise concluded that
"Client Assets that did not pay revenue sharing accounted for an
increasing percentage of all Client Assets" between 2014 and 2018.

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more cost-effective for a client planning to actively trade.
Potter cautioned that the impact of transaction fees is "not
necessarily predictable and Advisors may set up their clients'
portfolios to be nimble and flexible over time."
The district court granted partial summary judgment to
the SEC as to Commonwealth's liability under Section 206(2).4 The
district court held that it was undisputed that Commonwealth was
an investment advisor within the meaning of the Advisers Act and
that it relied on the instrumentalities of interstate commerce to
conduct its business, as required by the Act. The district court
further held that Commonwealth's disclosures were inadequate as a
matter of law. The court reasoned that this was so because over
the period from 2014 to 2018 Commonwealth "present[ed] the payments
[Commonwealth] receive[d] from the revenue sharing arrangement as
a hypothetical rather than disclosing it as a matter of fact,"
"made no mention of the TF program revenue sharing or that the
arrangement was limited to non-Fidelity funds," and failed to
disclose that, in some cases, "class shares of the same fund
4 The district court also held that Commonwealth violated
Section 206(4) of the Advisers Act and SEC Rule 206(4)-7, which
requires registered investment advisors to "[a]dopt and implement
written policies and procedures reasonably designed to prevent
violation" of the Advisers Act. 17 C.F.R. § 175.206(4)-7(a); 15
U.S.C. § 80b-6(4). The district court concluded that
Commonwealth's lack of a written policy as to disclosure of
conflicts of interest, and its inadequate disclosure of those
conflicts of interest in practice, sufficed to establish its
liability as a matter of law.

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- 25 -
existed with lower internal expenses." The district court reasoned
that Commonwealth's arrangement with NFS was a material fact,
disclosure of which was required by the Advisers Act, because "[i]t
is well-settled that potential conflicts of interest are material
facts that investors would consider important in making investment
decisions." (Quoting SEC v. Duncan, 19-CV-11735, 2021 WL 4197386,
at *10 (D. Mass. Sept. 15, 2021)). The district court also
rejected Commonwealth's argument that the fact that it was
representatives who were unaware of Commonwealth's revenue-sharing
arrangement who gave investment advice to clients precluded entry
of summary judgment. This was because, among other things,
Commonwealth's Investment Team still exercised an "advisory role"
in the process by which representatives selected funds by "creating
model portfolios, the Mutual Fund Recommended List, and the Mutual
Fund Resource Guide."5
Commonwealth moved for reconsideration of the district
court's summary judgment ruling, arguing that the district court
committed clear errors of law in granting summary judgment to the
SEC because the questions of "[w]hether Commonwealth's revenue-
sharing arrangement . . . would be material to a reasonable
5 The district court also determined that Commonwealth
acted with the requisite negligence because "Commonwealth's
revenue paying arrangement with NFS created undisclosed conflicts
of interest . . . , Commonwealth made material omissions in its
disclosure related to the arrangement," and so "Commonwealth was
negligent in its failure to fully disclose its economic conflicts."

-- 25 of 43 --

- 26 -
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. Commonwealth
also argued that the issue of its negligence should have been sent
to a jury. The district court denied Commonwealth's motion,
determining that Commonwealth's arguments as to materiality were
"the same as Commonwealth's materiality arguments on summary
judgment" and that Commonwealth's argument that the SEC was not
entitled to summary judgment had not also explicitly argued that
the adequacy of its disclosures created a jury issue.
The SEC then moved for entry of final judgment against
Commonwealth, submitting an additional expert declaration from
Eugene Orlov. This additional declaration was in response to Mark
Potter's earlier criticism, at summary judgment, that Orlov's
report failed to account for the impact of transaction fees when
Orlov purported to determine the number of accounts invested in
share classes with lower cost alternatives. The additional Orlov
declaration revised down Orlov's calculation of Commonwealth's
estimated revenue from NTF share classes from approximately $37.3
million to $34.1 million, to a lesser total incremental revenue of
approximately $65.5 million.
Commonwealth, in response, moved to introduce an
additional declaration from its expert Alex J. Russell, proposing
an alternate total disgorgement calculation in the amount of

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- 27 -
approximately $25.6 million. The SEC moved to strike this
declaration on the ground that it had not been disclosed during
discovery and was untimely. The district court granted the SEC's
motion and struck Russell's declaration, reasoning that "the new,
alternative lower-cost share analysis offered by Russell in his
declaration falls squarely in the category of a new theory,
opinion, or methodology" that needed to be "excluded as an
impermissible supplementary report." (Quoting Zeolla v. Ford
Motor Co., No. 09-40106, 2013 WL 308968, at *11 (D. Mass. Jan. 24,
2014)). The district court stated that "both parties could foresee
from the inception of this case that disgorgement would be a
question if Commonwealth was found liable for violations of the
Advisers Act" and any proposed disgorgement analysis should have
been submitted earlier, at the summary judgment stage, "in rebuttal
to Orlov's original report."
The district court then adopted the SEC's proposed
disgorgement amount of $65,588,906. It reasoned that disgorgement
in that amount, as calculated by Orlov, was appropriate because
the incremental revenue Commonwealth gained was causally connected
to Commonwealth's failure to disclose its conflicts of interest.6
6 "Incremental revenue" was defined as "the difference
between the revenue Commonwealth received by allowing clients to
hold higher-cost NTF and TF share classes of funds and
Commonwealth's revenue had clients moved their investments to the
lower-cost share classes of those funds that paid less or no fees
via revenue sharing to Commonwealth."

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- 28 -
This was so, the court explained, because "Commonwealth's failure
to disclose its conflicts of interest kept clients invested in
higher-cost shares of Fund A rather than lower-cost shares also of
Fund A" and that, "[h]ad Commonwealth's clients known that they
were invested in higher-cost shares of funds for which lower-cost
shares existed, and that the higher cost resulted in greater profit
for Commonwealth, there is reason to believe that at least some of
those clients would have elected to move their money to the lower-
cost funds." The district court declined to deduct Commonwealth's
expenses from the amount disgorged, reasoning that deduction of
expenses was unavailable "[w]here the entirety of the disgorgement
award is based on 'ill-gotten gains,'" which it found to be the
case here, where the "SEC ha[d] limited its disgorgement request
to incremental revenue Commonwealth received due to its failures
to disclose conflicts of interest, which are, in their entirety,
unlawful gain." The district court then assessed prejudgment
interest in the amount of $22,191,790 and imposed a second-tier
civil penalty of $6,500,000.7 The district court denied the SEC's
7 Courts may impose three tiers of penalties for
violations of the Advisers Act, based on the severity of the
underlying conduct. See 15 U.S.C. § 80b-9(e)(2). Second tier
penalties may be imposed "if the violation . . . involved fraud,
deceit, manipulation, or deliberate or reckless disregard of a
regulatory requirement" and the penalty may be equal to "the gross
amount of pecuniary gain . . . as a result of the violation." Id.
at § 80b-9(e)(2)(B).

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- 29 -
request that Commonwealth be permanently enjoined from violating
the Advisers Act.
III. Legal Analyses
A. Error in Entry of Summary Judgment for SEC on Issues of
Liability
Commonwealth argues that, on the facts of this case, the
issue of materiality should have gone to the jury, and this
requires reversal of the entry of summary judgment for the SEC.8
8 In denying Commonwealth's motion for reconsideration
arguing that materiality is to be determined by a jury, the
district court stated that because Commonwealth had moved for entry
of summary judgment in its favor without explicitly arguing any
disputed facts should be determined by a jury, it could not "now
claim that adequacy was a jury question." Commonwealth Equity
Servs., 718 F.Supp.3d at 118. A party's cross-motion for summary
judgment "does not constitute an agreement that if one [motion] is
rejected the other is necessarily justified or that the losing
party waives judicial consideration and determination whether
genuine issues of material fact exist. If any such issue exists
it must be disposed of by a plenary trial . . . ." Wiley v. Am.
Greetings Corp., 762 F.2d 139, 140-41 (1st Cir. 1985) (quoting
Rains v. Cascade Indus., Inc., 402 F.2d 241, 245 (3d Cir. 1968)).
Commonwealth did not need to separately argue that, if its
motion was unsuccessful, disputed facts as to materiality must be
sent to a jury, as this is inherent in a summary judgment analysis.
If undisputed facts "support plausible but conflicting inferences
on a pivotal issue in the case, the judge may not choose between
those inferences at the summary judgment stage." McGurn v. Bell
Microprods., Inc., 284 F.3d 86, 93 (1st Cir. 2002) (emphasis added)
(quoting Coyne v. Taber Partners I, 53 F.3d 454, 460 (1st Cir.
1995)); see also Sherwood v. Wash. Post, 871 F.2d 1144, 1147 n.4
(D.C. Cir. 1989) (noting that when parties file cross-motions for
summary judgment, "each side concedes that no material facts are
at issue only for the purposes of its own motion" (quoting McKenzie
v. Sawyer, 684 F.2d 62, 68 n.3 (D.C. Cir. 1982))). Because the
SEC demanded a jury trial in its complaint, Commonwealth did not
need to do so. "Where one party has made a demand, others are
entitled to rely on the demand with respect to issues covered by
the demand and need not make an independent demand of their own."

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- 30 -
Summary judgment is appropriate when "there is no genuine dispute
as to any material fact and the movant is entitled to judgment as
a matter of law." Fed. R. Civ. P. 56(a). We review grants of
summary judgment de novo and draw all reasonable inferences in
favor of the nonmoving party, here, Commonwealth. See Gibson
Found., Inc. v. Norris, 88 F.4th 1, 5 (1st Cir. 2023).
Commonwealth argues that the question of whether the alleged
omission of certain statements was material constituted a jury
issue. We agree.
"Section 206 [of the Advisers Act] imposes a fiduciary
duty on investment advisors to act at all times in the best
interest of . . . its investors, and includes an obligation to
provide 'full and fair disclosure of all material facts' to
investors and independent trustees of the fund." SEC v. Tambone,
550 F.3d 106, 146 (1st Cir. 2008) (quoting SEC v. Cap. Gains Rsch.
Bureau, 375 U.S. 180, 194 (1963)), reh'g en banc granted on other
grounds, opinion withdrawn, 573 F.3d 54 (1st Cir. 2009), and
opinion reinstated in part on reh'g on other grounds, 597 F.3d 436
(1st Cir. 2010). Basic Inc. v. Levinson, 485 U.S. 224 (1988),
establishes the standard for materiality, holding that the test
for materiality stated in TSC Industries, Inc. v. Northway, Inc.,
In re N-500L Cases, 691 F.2d 15, 22 (1st Cir. 1982); see also SEC
v. Jarkesy, 603 U.S. 109, 140 (2024) ("A defendant facing a fraud
suit has the right to be tried by a jury of his peers before a
neutral adjudicator.").

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- 31 -
426 U.S. 438, 449 (1976), was the best way to realize the "various
Securities Acts[']," Basic, 485 U.S. at 234, policy of "full
disclosure," id. (quoting Cap. Gains Rsch. Bureau, 375 U.S. at
186). The TSC Industries materiality standard states that
[a]n omitted fact is material if there is a
substantial likelihood that a reasonable
shareholder would consider it important in
deciding how to vote . . . . Put another way,
there must be a substantial likelihood that
the disclosure of the omitted fact would have
been viewed by the reasonable investor as
having significantly altered the "total mix"
of information made available.
TSC Indus., 426 U.S. at 449. The Court in TSC Industries went on
to caution that determining whether an omitted fact is material
requires delicate assessments of the
inferences a "reasonable shareholder" would
draw from a given set of facts and the
significance of those inferences to him, and
these assessments are peculiarly ones for the
trier of fact. Only if the established
omissions are "so obviously important to an
investor, that reasonable minds cannot differ
on the question of materiality" is the
ultimate issue of materiality appropriately
resolved "as a matter of law" by summary
judgment.
Id. at 450 (quoting Johns Hopkins Univ. v. Hutton, 422 F.2d 1124,
1129 (4th Cir. 1970)). Since then, this circuit has also held
that "[t]he determination of materiality is typically left to the
jury." SEC v. Lemelson, 57 F.4th 17, 25 (1st Cir. 2023); see also
In re Cabletron Systems, Inc., 311 F.3d 11, 34 (1st Cir. 2002)

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- 32 -
("In general, the materiality of a statement or omission is a
question of fact that should normally be left to a jury . . . .").
As we explain further on, the usual rule that materiality
is to be decided by the jury applies in this case. But first we
deal with the district court's error of law in its holding that,
as a matter of law, under a per se rule, the SEC was entitled to
summary judgment as to materiality. Even the SEC does not argue
to us that entry of summary judgment in its favor is justified by
application of any such per se rule. It has cited no circuit case,
nor have we found any, which substitutes a per se materiality rule
for the summary judgment standard. The district court did not
engage in the required "fact-specific inquiry" and instead rested
on a generalized per se conclusion that "[i]t is indisputable that
potential conflicts of interest are 'material' facts with respect
to clients." Commonwealth Equity Servs., 2023 WL 2838691, at *12
(quoting Vernazza v. SEC, 327 F.3d 851, 859 (9th Cir. 2003)). The
district court cited two out-of-circuit decisions which it viewed
as articulating such a per se rule. See Vernazza, 327 F.3d at
859, amended, 335 F.3d 1096 (9th Cir. 2003); Robare Grp., Ltd. v.
SEC, 922 F.3d 468, 472 (D.C. Cir. 2019). These cases do not alter
the standard the Supreme Court and this circuit have articulated
for materiality. They are also not the law of this circuit and
are easily distinguishable.

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- 33 -
Vernazza involved a petition for review in the courts of
an SEC administrative order, entered after a hearing before an
administrative law judge. Vernazza, 327 F.3d at 857. The petition
for review dealt with issues of scienter, not whether any
misrepresentations were material. See id. at 857-58. The district
court quoted a sentence from Vernazza that "[i]t is indisputable
that potential conflicts of interest are 'material' facts with
respect to clients and the Commission." Commonwealth Equity
Servs., 2023 WL 2838691, at *10 (quoting Vernazza, 327 F.3d at
859). That sentence is itself drawn from language in SEC v. Capital
Gains Research Bureau, Inc., 375 U.S. at 180, stating that an
investment advisor must "fully and fairly reveal[] his personal
interests in [his] recommendations to his clients," see Vernazza,
327 F.3d at 859 (citing Cap. Gains Rsch. Bureau, 375 U.S. at 201).
But the issue in Capital Gains Research Bureau was not about entry
of summary judgment, rather that case was about the correct
statutory interpretation of 15 U.S.C. § 80b-6, the Investment
Advisers Act of 1940. See Cap. Gains Rsch. Bureau, 375 U.S. at
181 (holding that the practice of "'scalping' . . . 'operates as
a fraud or deceit upon any client or prospective client' within
the meaning of the [Investment Advisers] Act" (quoting 15 U.S.C.
§ 80b-6(2))). Capital Gains Research Bureau did not alter the
standards for summary judgment, and both TSC Industries and Basic
post-date that decision.

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- 34 -
Robare also involved a petition for review of an SEC
administrative order entered after an evidentiary hearing before
an administrative law judge. Robare Grp., Ltd., 922 F.3d at 473.
The district court quoted from Robare's statement that "the
Securities and Exchange Commission has long held that '[f]ailure
by an investment adviser to disclose potential conflicts of
interest to its clients constitutes fraud within the meaning of
Sections 206(1) and (2),'" id. at 472 (alteration in original);
see Commonwealth Equity Servs., 2023 WL 2838691, at *12 (quoting
Robare Grp., Ltd., 922 F.3d at 472). That statement from Robare
cited only to an SEC release, Fundamental Portfolio Advisors, Inc.,
Investment Advisers Act Release No. 2146, 80 SEC Docket 1851, 2003
WL 21658248, at *15 & n.54 (Jul. 15, 2003). The quoted statement
from Robare was simply an acknowledgement that undisclosed
conflicts of interest fall within the statutory language of
Sections 206(1) and (2) of the Advisers Act of 1940, which
respectively prohibit "any device, scheme, or artifice to defraud"
and "any transaction, practice, or course of business which
operates as a fraud or deceit." 15 U.S.C. § 80b-6(1)-(2).
Both Vernazza and Robare are also inapplicable because
of the difference in standards of review. The standards of review
for grants of summary judgment are very different from the
substantial evidence standard of review when the SEC seeks to
enforce its orders after there have been proceedings before

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- 35 -
administrative law judges. See Flannery v. SEC, 810 F.3d 1, 8-9
(1st Cir. 2015). Our review of entry of summary judgment is de
novo and is not at all the same as the substantial evidence rule.
"[S]uch [substantial evidence] review is deferential." Jarkesy,
603 U.S. at 117. "By law, a reviewing court must treat the agency's
factual findings as 'conclusive' if sufficiently supported by the
record, even when they rest on evidence that could not have been
admitted in federal court." Id. (citations omitted). That is
simply not this case.
These cases on which the district court relied also
predate the Supreme Court's decision in SEC v. Jarkesy, which held
that the Seventh Amendment right to a jury trial applies to SEC
securities enforcement actions of its administrative orders, see
id. at 125, and that "every encroachment upon [the jury trial
right] has been watched with great jealousy," id. at 122 (quoting
Parsons v. Bedford, 28 U.S. 433, 446 (1830)).
In essence, the district court held that, in its view,
since all potential conflicts are material, the omissions at issue
were material as a matter of law. Applying the correct test of
materiality, we hold that a reasonable jury could conclude, on the
facts of this case, that additional disclosures with more precise
descriptions, added to the already-disclosed conflicts of
interest, would not have so "significantly altered the 'total mix'
of information made available," Basic Inc., 485 U.S. at 232

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- 36 -
(emphasis added) (quoting TSC Indus., 426 U.S. at 449), that
summary judgment was appropriate.
Commonwealth's advisory client base in 2018 was
estimated to include more than 319,000 investors served by 2,300
representatives. Those investors differed in many categories of
ways, including as to the types of investors, types of investments,
types of investment goals they set, and what advice they received
from their representatives. The SEC's motion and supporting
evidence in many ways assumed that these investors were identically
situated. Yet a reasonable jury could find those assumptions
questionable and not substantiated. The SEC did not provide
testimony from any Commonwealth clients or representatives
describing the significance they attribute to the omitted
information. Five of the six representatives the SEC deposed
testified, either explicitly or implicitly, that the overall price
of a share class was a factor they considered when determining
what share class of a mutual fund to purchase for their clients,
but only a factor. They also testified that they were not
necessarily looking for the absolute lowest-cost share class for
their clients. And it does not follow that, simply because a share
class was the lowest available cost, this was significant in the
materiality sense to these representatives and their clients.
Indeed, Commonwealth's capacity to indirectly influence
clients toward more profitable share classes (that at times were

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- 37 -
costly for clients) was tied to its recommendations in its Mutual
Fund Resource Guide and selected portfolios in its PPS Select and
Direct programs. But clients made their investment decisions
through their representatives rather than Commonwealth's
recommendations or pre-constructed portfolios. These
representatives were themselves sophisticated and independent
members of the financial industry who recommended to their clients
the funds and share classes to be purchased. Four of the six
representatives conducted independent research to determine what
share class was best for a particular client. One representative
testified that he never used Commonwealth's preconstructed
portfolios or Mutual Fund Resource Guide. There is no evidence
that Commonwealth limited or otherwise affected representatives'
ability to research and assess the comparative cost of funds.
Further, representatives looking to purchase a fund could use that
fund's publicly available prospectus to compare the various share
classes and find one that best suited their clients' investment
strategy. Cf. SEC v. Washington Inv. Network, 475 F.3d 392, 405
(D.C. Cir. 2007) ("[T]he public availability of information is a
relevant consideration when evaluating a party's disclosure
obligations . . . ."). There are material issues of fact as to
the importance of price, Commonwealth's influence over the funds
selected, and about the significance of the allegedly deficient

-- 37 of 43 --

- 38 -
disclosures, themselves. It is the role of a jury to determine
those questions.
The SEC relies heavily on this court's decision in SEC
v. Navellier & Associates, Inc., 108 F.4th 19 (1st Cir. 2024). It
misreads the decision. This court's decision in Navellier is
consistent with our result. In Navellier, we held that, on the
facts there, the appellants' omissions were material as a matter
of law because the omissions spoke "to the potential risk that an
investor w[ould] take if they decide[d] to invest," and disclosure
of the omitted information "'would obviously change the perceived'
risk of investing." Id. at 37 (quoting SEC v. Bauer, 723 F.3d 758,
773 (7th Cir. 2013)). Not so here. As we said above, it is not
obvious that the omitted facts from Commonwealth's conflict of
interest would have changed the investors' perceptions, given
their use of the investment advice of sophisticated intermediaries
in the form of Commonwealth's representatives. Further, the only
direct testimony in the record goes to the importance of price to
a Commonwealth representative, not "how . . . clients themselves"
or even the deposed representatives "considered the [conflict] at
issue." Id. at 38. While we are mindful that "the SEC [is] not
required to prove that any investor actually relied on
[Appellants'] misrepresentations," id. at 37 (alterations in
original) (quoting SEC v. World Tree Fin., LLC, 43 F.4th 448, 465
(5th Cir. 2022)), we conclude that reasonable minds could differ

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- 39 -
on the question of materiality in this case and summary judgment
is inappropriate.9
B. Error as to the Disgorgement Award
Because we vacate the liability judgment, necessarily
the disgorgement award must also be vacated. Should a jury find
liability in whole or in part and should the issue of disgorgement
arise again on remand, the district court must consider anew
whether the SEC has adequately established causal relationships
between Commonwealth's profits and its alleged violations, as well
as whether Commonwealth is entitled to deduct its expenses from
any disgorgement awarded. The district court made concerning,
fundamental legal errors as to these issues in its prior
disgorgement calculations.
"While monetary relief can be legal or equitable, money
damages are the prototypical common law remedy." Jarkesy, 603
U.S. at 123. Disgorgement may only be ordered in an amount that
is "a reasonable approximation of profits causally connected to
the [underlying] violation." Navellier, 108 F.4th at 42 (quoting
SEC v. Happ, 392 F.3d 12, 31 (1st Cir. 2004)). The SEC bears the
burden of showing that the amount it seeks in disgorgement is a
9 Because the district court's orders finding Commonwealth
liable for violating Section 206(4) of the Advisers Act and Rule
206(4)-7 were based on substantially the same reasoning as
Commonwealth's Section 206(2) liability, they also present
material issues of fact that should have been sent to a jury.

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- 40 -
reasonable approximation of the defendant's unjust enrichment.
See Happ, 392 F.3d at 31. "[T]he causal connection required is
between the amount by which the defendant was unjustly enriched,"
that is, "the amount . . . by which the defendant profited from
[their] wrongdoing," and "the amount [they] can be required to
disgorge." Navellier, 108 F.4th at 41, 43 (third alteration in
original) (first quoting SEC v. Banner Fund Int'l, 211 F.3d 602,
617 (D.C. Cir. 2000); then quoting CFTC v. JBW Cap., 812 F.3d 98,
111 (1st Cir. 2016); then quoting Banner, 211 F.3d at 617). It is
also clear that "enrichment, if sufficiently attenuated, no longer
appears unjust." Restatement (Third) of Restitution and Unjust
Enrichment § 51 cmt. f (Am. L. Inst. 2011).
On this record, the SEC has not adequately shown either
reasonable approximation or causal connection sufficient to
support the court's disgorgement award. The district court adopted
in total the $65,588,906 sum the SEC alleged was representative of
Commonwealth's profits. See Commonwealth Equity Servs., 2024 WL
1375970, at *11. The district court justified the use of the SEC's
entire sum as a disgorgement award by reasoning that causation was
"self-evident" because "at least some" clients would have moved
money to lower-cost funds had Commonwealth more fully disclosed
its conflict of interest. Id. at *7. This is not the relevant
standard and it is incompatible with the requirement that
disgorgement represent "a reasonable approximation" of

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- 41 -
Commonwealth's unjust enrichment. Happ, 392 F.3d at 31 (quoting
SEC v. First City Fin. Corp., 890 F.3d 1215, 1231 (D.C. Cir.
1989)). The district court's "at least some" standard encompasses
too wide a range of possibilities. Although "a reasonable
approximation" obviously need not be exact, it requires more
analysis and connection than is provided to move from "a few"
investors to "every" investor.
The district court must also consider and address the
numerous shortcomings in the SEC's causation evidence. These
include (1) the criticisms raised by Commonwealth's experts as to
the representativeness of the sample Orlov used to calculate the
number of lower-cost, alternative share classes; (2)
countervailing evidence of causation in statements from
Commonwealth representatives; and (3) the inadequately supported
assumptions made by the SEC, as discussed in our analysis of
materiality above.
The district court must assess whether Commonwealth is
entitled to deduct any of its expenses from the disgorgement
awarded. Courts awarding disgorgement "must deduct legitimate
expenses before ordering disgorgement." Liu v. SEC, 591 U.S. 71,
91-92 (2020). The Supreme Court has recognized a limited exception
to this rule "when the 'entire profit of a business or undertaking'
results from the wrongdoing." Id. at 92 (quoting Root v. Railway
Co., 105 U.S. 189, 203 (1882)). Even in such cases, courts may

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- 42 -
only decline to deduct those expenses that are determined to be
"inequitable," such as "unconscionable claims for personal
services," id. at 84, 92 (quoting Root, 105 U.S. at 203), expenses
"bought for the purposes of the [wrongful activity]," id. at 84,
or "extraordinary salaries," id. (quoting Providence Rubber Co. v.
Goodyear, 78 U.S. 788, 803 (1869)). This exception "requires
ascertaining whether expenses are legitimate or whether they are
merely wrongful gains 'under another name.'" Id. at 92 (quoting
Goodyear, 78 U.S. at 803).
The issues we have identified with the SEC's causation
evidence raise similar concerns as to whether Commonwealth's
entire profit is properly attributable to its alleged wrongdoing.
If the district court again concludes that the entirety of
Commonwealth's profit resulted from wrongdoing, it must
nevertheless then "ascertain[]" whether each of Commonwealth's
claimed expenses were "legitimate," in that they had "value
independent of fueling a fraudulent scheme,"10 and were subject to
deduction notwithstanding the Liu exception. See id.; see also
10 On appeal, Commonwealth disputes the district court's
characterization of its requested deduction for expenses, arguing
that it sought a deduction in the amount of $10.8 million, not
$49.5 million as the district court found. See Commonwealth, 2024
WL 1375970, at *11. Because we remand this case to the district
court on the issue of liability and, should Commonwealth again be
found liable for violating the Advisers Act, with instructions to
ascertain which of Commonwealth's claimed expenses may
legitimately be deducted, we express no opinion on this issue.

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- 43 -
SEC v. O'Brien, No. 23-1071, 2024 WL 2813722, at *2 (2d Cir. June
3, 2024) ("Courts must 'deduct legitimate expenses' associated
with the defendant's proceeds from his wrongdoing." (emphasis
added) (quoting Liu, 591 U.S. at 91-92)); SEC v. Team Res. Inc.,
No. 22-10359, 2023 WL 1434277, at *2 (5th Cir. Feb. 1, 2023) (per
curiam) ("Liu held that an order of disgorgement . . . is limited
to a defendant's net profits, meaning a court must deduct
legitimate business expenses when calculating the award." (second
emphasis added)).
IV.
For the reasons stated, we vacate the district court's
grant of summary judgment to the SEC and the disgorgement order
and remand for further proceedings consistent with this opinion.
No costs are awarded.

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