The US Securities and Exchange Commission (SEC) said in separate statements that Citigroup would pay $20 million and Putnam $50 million over the allegations of not disclosing payments to broker-dealers for “shelf space” to increase the visibility of certain funds.
The SEC charged that Putnam, from at least January 1, 2000 through December 31, 2003, Putnam Funds’ distributor and an affiliate, Putnam Retail Management Limited Partnership (PRM), had entered into “Preferred Marketing Arrangements” with more than 80 broker-dealers under which the broker-dealers provided services designed to promote the sale of the Putnam Funds. More than sixty broker-dealers received directed brokerage commissions from the Putnam Funds’ portfolio transactions. The arrangements were mostly based on negotiated formulas based on gross or net fund sales and/or the retention of fund assets.
Putnam did not adequately disclose this conflict of interest to the Putnam Board and the Putnam shareholders, the SEC said.
“We are following through on our commitment to take a hard look at the practices of mutual fund advisers who directed the use of fund assets for their own benefit,” said Ari Gabinet, District Administrator of the SEC’s Philadelphia Office, which investigated the case, in an agency announcement. “Financial arrangements that benefit a fund adviser at the potential expense of fund shareholders must be adequately disclosed to the fund’s board,”
A copy of the SEC administrative order against Putnam is here www.sec.gov/litigation/admin/ia-2370.pdf .
Citigroup/Smith Barney’s Tier Program
Meanwhile, the second of two SEC announcements Wednesday concerned the settled enforcement action against Citigroup Global Markets, Inc. (CGMI), which offered retail brokerage services under the Smith Barney trade name.
According to the SEC, CGMI did not properly disclose its system of broker payments for shelf space, called the Tier Program. Under the Tier Program, approximately 75 mutual fund complexes made revenue sharing payments. In fact, CGMI sold only the funds of those mutual fund complexes that participated in the Tier Program, regulators charged. CGMI also provided additional benefits to the mutual fund complexes that made higher revenue sharing payments. These benefits included increased access to branch offices, greater agenda space at sales meetings, and visibility in CGMI’s in-house publications and broadcasts, the SEC said.
The second allegation of failing to properly disclose potential conflicts relates to CGMI’s sale of Class B shares of mutual funds in total of $50,000 or greater, the SEC announcement said. CGMI recommended and sold Class B shares of mutual funds to certain customers who, depending on the amount of the investment and the holding period, generally would have obtained a higher overall rate of return had they purchased Class A shares instead.
According to the SEC, these customers could have benefited had they purchased Class A shares because they could have qualified for breakpoints beginning at the $50,000 level. In addition, as a result of the customers’ purchases of Class B shares, CGMI received greater commissions than it would have earned had it sold Class A shares of the same mutual funds. However, CGMI’s financial consultants, when recommending and selling Class B shares of mutual fund shares to customers, did not adequately disclose that such shares were subject to higher annual fees that could hurt the customers’ investment return, or that once breakpoints become available beginning at the $50,000 level, an equal investment in Class A shares could yield a higher return.
Stephen Cutler, Director of the Commission’s Division of Enforcement, said in an SEC statement: “We hope securities industry professionals have by now received the message that they must fully inform their customers of the nature and extent of any conflicts of interest that may affect their recommendations.”
NASD Enforcement Actions
In a related move, the National Association of Securities Dealers disclosed that Citigroup, American Express Co. and JPMorgan Chase & Co. had agreed to pay a total $21.25 million for alleged violations in sales of mutual funds.
The NASD fined Citigroup $6.25 million, American Express $13 million and JPMorgan Chase $2 million. The investment firms, which also were censured by the organization, neither admitted nor denied wrongdoing. They did agree to establish a plan to correct deficiencies for some 50,000 households that invested in the fund shares.
The regulators’ moves were the latest enforcement actions over alleged abuses in the trading and marketing of mutual funds, in an industrywide crackdown that began in September 2003.
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