Earlier this year, the U.S. Court of Appeals for the First Circuit vacated and remanded a $93 million district court judgment entered against a broker-dealer and investment adviser for allegedly inadequate disclosures of conflicts of interest, finding that questions of materiality in securities cases should typically be decided by juries, not judges at summary judgment. Following remand, the litigation was stayed in light of the parties' ongoing settlement discussions. In this post, we take another look at this important decision, in SEC v. Commonwealth Equity Services, LLC, because it reaffirms fundamental principles regarding materiality determinations in securities litigation while also establishing important guardrails for SEC disgorgement calculations. Also worth noting, retired U.S. Supreme Court Justice Stephen A. Breyer was a member of the appeals court panel, sitting by designation.
Background
Commonwealth Equity Services (Commonwealth) is an SEC-registered broker-dealer and investment adviser whose network of independent representatives manages client accounts, for which Commonwealth charges annual advisory fees based on clients' assets under management. As an SEC-registered investment advisor, Commonwealth is required to prepare, provide and maintain a Form ADV brochure for its clients. SEC regulations require this brochure to "make full disclosure of all material conflicts of interest between Commonwealth and its clients that could affect the advisory relationship."1
In 2014, Commonwealth entered into a revenue-sharing agreement with its clearing broker. Under this arrangement, the clearing broker shared with Commonwealth a portion of fees that the clearing broker received from mutual fund companies that offered funds through its platforms – with Commonwealth receiving approximately 80 percent of the gross revenue the clearing broker received from mutual funds in certain programs.
Starting in 2014, Commonwealth disclosed conflicts of interest arising from the revenue-sharing agreement in its Form ADV. However, in 2019, the SEC filed an enforcement action against Commonwealth in federal district court, claiming that the form failed to adequately disclose potential conflicts of interest arising from the arrangement from 2014 to 2018 in violation of Sections 206(2) and (4) of the Investment Advisers Act of 1940 (Advisers Act) and SEC Rule 206(4)-7. Specifically, the SEC alleged that Commonwealth breached its fiduciary duties to clients insofar as it failed to adequately disclose a conflict of interest by not stating that the revenue-sharing agreement incentivized Commonwealth to direct clients' investments toward mutual fund share classes that produced revenue-sharing income over potentially cheaper alternatives.
District Court Decision
On April 7, 2023, the U.S. District Court for the District of Massachusetts granted summary judgment to the SEC on liability, finding that – as a matter of law – Commonwealth's disclosures describing the arrangement omitted material information.2 The court held that "potential conflicts of interest are material facts that investors would consider important in making investment decisions"3 and concluded that – notwithstanding its existing disclosures during the relevant period – Commonwealth's failure to fully disclose its revenue-sharing arrangement violated its fiduciary duties under the Advisers Act.
Nearly a year after the district court found in favor of the SEC on liability and the parties' briefing on applicable remedies, the court ordered Commonwealth to pay approximately $93 million, including $65.6 million in disgorgement of revenue-sharing income, $21.2 million in prejudgment interest and a $6.5 million civil penalty.
On April 26, 2024, Commonwealth appealed the decision on the basis that materiality (of alleged omissions from its prior disclosure) was a question of fact for the jury, not a question of law able to be answered by the court on summary judgment.
Materiality: Let the Jury Decide
On April 1, 2025, a three-judge panel for the First Circuit, comprising Justice Breyer and First Circuit Judges Lara E. Montecalvo and Sandra L. Lynch, vacated the lower court's judgment and remanded the case for further proceedings. In vacating the district court's decision, the First Circuit rejected the court's application of a per se rule that all potential conflicts of interest are material as a matter of law. Writing for the court, Judge Lynch noted the "usual rule that materiality is to be decided by the jury" and explained, "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, that summary judgment was appropriate."4
Relying on well-established Supreme Court precedent, the First Circuit emphasized that determining materiality "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."5 As the opinion noted, summary judgment on materiality is appropriate only when the omissions are "so obviously important to an investor, that reasonable minds cannot differ on the question of materiality."6
Turning to the facts, the First Circuit found it significant that Commonwealth's clients made investment decisions through advisory representatives who were themselves "sophisticated and independent members of the financial industry."7 These representatives conducted independent research to determine appropriate share classes for clients, and some never used Commonwealth's recommendations or resources. As the court noted, "There is no evidence that Commonwealth limited or otherwise affected representatives' ability to research and assess the comparative cost of funds."8 This intermediary role created factual questions concerning materiality of the SEC's alleged omissions from Commonwealth's Form ADV brochure – questions the First Circuit found are best resolved by a jury.
Disgorgement: Not Just Any "Reasonable Approximation" Will Do
The First Circuit also analyzed the district court's disgorgement award, which deserves special attention, as it establishes important limitations on the SEC's ability to seek broad financial remedies without demonstrating a clear causal connection to the alleged violations.
The First Circuit identified fundamental legal errors in the district court's disgorgement calculation, finding that the SEC failed to establish a causal relationship between Commonwealth's alleged disclosure violations and its profits. The district court's reasoning that "at least some" of Commonwealth's clients would have moved to lower-cost funds was deemed "incompatible with the requirement that disgorgement represent 'a reasonable approximation' of Commonwealth's unjust enrichment."9 The First Circuit emphasized that though disgorgement calculations need not be exact, they must at least demonstrate more than a tenuous link between violations and profits. The First Circuit found that the SEC's approach – essentially assuming that all Commonwealth clients would have chosen different fund share classes but for the alleged disclosure violations – lacked the evidentiary foundation required under established precedent.
The First Circuit also highlighted another serious flaw in the disgorgement calculation: the district court's failure to deduct legitimate business expenses. Citing the Supreme Court's 2020 decision in Liu v. SEC, which we previously covered, the First Circuit emphasized that courts must properly analyze which expenses represented legitimate business costs before ordering disgorgement versus "merely wrongful gains under another name."10 Here, the appellate court also found serious methodological flaws in the SEC's expert analysis for 1) using an unrepresentative sample of funds that potentially skewed the results, 2) failing to adequately account for transaction fees when calculating whether alternative share classes were truly "lower-cost" and 3) making unsupported assumptions about investor behavior.
After the case was remanded to the district court, the SEC and Commonwealth jointly moved the court to stay the litigation to allow them to engage in settlement negotiations.
Key Takeaways
Materiality Remains a Jury Question. Commonwealth reaffirms that materiality determinations in securities cases involve nuanced, fact-specific inquiries that are particularly suited for jury resolution, not judges at summary judgment. The decision highlights the importance of considering the specific context in which disclosures are made, including the sophistication of intermediaries and end investors. This is, of course, a double-edged sword, as it is difficult for both parties to succeed on a motion for summary judgment if the materiality of relevant representations or omissions is disputed. Though the SEC will no doubt continue pursuing cases involving conflicts of interest, this ruling ensures that defendants will have a meaningful opportunity to contest materiality determinations before a jury.
Omissions-Based Disclosure Deficiencies Can Be Challenging to Prove. Though the First Circuit's analysis provides an important walkthrough on the "usual" rule that materiality is a fact question for the jury, it is especially notable that – in this case – the issue arose within the context of Commonwealth's existing disclosure describing the arrangement. At base, the SEC argues that Commonwealth failed to say enough about the arrangement, and what it did not say made what it did say misleading. For parties facing SEC scrutiny about alleged omissions, consideration should be given to carefully detailing any actual duty to disclose, the substance and relevance of existing disclosure, and whether "saying more" would alter the total mix of information on which a reasonable investor would make investment decisions.
Disgorgement Calculations May Face More Rigorous Judicial Review. The Commonwealth decision provides defendants with powerful tools for challenging disgorgement calculations in SEC enforcement actions. The First Circuit's requirement of both the causation evidence between alleged violations and financial gains and the deduction of legitimate expenses aligns with the Supreme Court's Liu decision and creates a more balanced framework for assessing appropriate financial remedies. Companies facing SEC investigations or defending agency enforcement actions should carefully document all business expenses associated with revenue streams that might be subject to disgorgement and be prepared to scrutinize the SEC's causation evidence and calculation methodologies during settlement negotiations and litigation.
Footnotes
1. Amendments to Form ADV, Investment Advisers Act of 1940, Release No. 3060 (2010), 2010 WL 2957506, at *74.
2. SEC v. Commonwealth Equity Servs., LLC, No. 19-cv-11655, 2023 WL 2838691 (D. Mass. April 7, 2023).
3. Id. at *3.
4. SEC v. Commonwealth Equity Servs., LLC, 133 F.4th 152, 168, 170 (1st Cir. 2025) (internal citation and quotation omitted).
5. Id. at 168 (internal citation and quotation omitted).
6. Id.
7. Id. at 170.
8. Id.
9. Id. at 172.
10. Commonwealth, 133 F.4th at 172.
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