Securities Materiality Under the Advisers Act in Massachusetts

When a civil enforcement action by the Securities and Exchange Commission led to an error in awarding the SEC summary judgment, questions arose regarding the materiality of certain omitted statements, which should have been considered a jury deliberation matter, according to a recent case. The case involved Commonwealth Equity Services, LLC, appealing the entry of summary judgment and financial awards amounting to approximately $93 million by the SEC. The SEC alleged that Commonwealth did not adequately disclose potential conflicts of interest between 2014 and 2018, violating specific sections of the Investment Advisers Act of 1940 and SEC Rule 206(4)-7. Commonwealth advocated for a jury trial, contesting that the materiality issue should have been left for a jury to decide. The district court had entered a judgment against Commonwealth, including disgorgement of $65,588,906, and interest, and imposing a civil penalty of $6,500,000. Commonwealth contested these decisions and appealed against all the orders, leading to a vacating of the summary judgment and the disgorgement order for further proceedings consistent with the appellate opinion.

The crux of the matter lies in whether the alleged omission of certain statements should have been deemed material as a jury issue. Commonwealth contended that the question of materiality should have been decided by a jury, disagreeing with the district court’s ruling that, by a per se rule, the SEC was entitled to summary judgment on materiality. The court’s interpretation of a per se rule equating all potential conflicts as material errors was challenged by Commonwealth. The correct criterion for materiality should have weighed whether additional disclosures with more precise descriptions would have significantly altered the information available, tipping towards the need for summary judgment. With the liability judgment being vacated, the disgorgement order was also deemed invalid, warranted through fundamental legal errors in the calculations related to the SEC’s claims against Commonwealth.

The recording showed that the SEC was unable to demonstrate the recommended detailed disclosures or any causal links between Commonwealth’s profits and the alleged violations to sustain the disgorgement award, further weakening the SEC’s case. With the judgment overturned, there would be no cost awarded, indicating a significant turning point in the legal battle between the SEC and Commonwealth, necessitating a retrial to ascertain a more accurate and legally sound decision moving forward. The Securities and Exchange Commission v. Commonwealth Equity Services, LLC case serves as a notable example of the complexities involved in adjudicating matters of materiality and conflict of interest under the purview of the Investment Advisers Act of 1940.