Mutual Fund Manager Putnam Pays $40 Million Fine to Settle SEC Enforcement Action
summary
Putnam Investment Management paid a $40 million penalty to settle SEC charges for failing to disclose that it used mutual fund brokerage commissions to pay broker-dealers for 'shelf space' marketing services between 2000 and 2003, violating fiduciary duties and disclosure laws.
paragraph
Putnam Investment Management agreed to pay a $40 million civil penalty to resolve SEC charges that it failed to disclose conflicts of interest stemming from Preferred Marketing Arrangements with over 80 broker-dealers between January 2000 and December 2003. The firm used brokerage commissions generated from fund trades—funded by shareholders—to pay for marketing services that promoted fund sales, without informing the funds’ board or investors, thereby violating Sections 206(2) and 34(b) of the Investment Advisers and Investment Company Acts. The penalty, distributed to affected Putnam Funds under the Fair Funds provision of the Sarbanes-Oxley Act, was accompanied by a cease-and-desist order, censure, and mandates to overhaul compliance policies.
narrative
Putnam Investment Management paid a $40 million civil penalty to settle SEC charges for concealing conflicts of interest related to 'shelf space' arrangements with over 80 broker-dealers from January 2000 through December 2003. The firm used brokerage commissions generated from mutual fund portfolio trades—funded by shareholders—to pay for marketing services that increased fund visibility and sales, without disclosing that these payments were effectively using fund assets to benefit Putnam’s own profits. These arrangements, known as Preferred Marketing Arrangements, were based on negotiated formulas tied to fund sales and asset retention, and were not paid for with Putnam’s own capital. The SEC found that Putnam willfully violated Section 206(2) of the Investment Advisers Act by failing to disclose material conflicts to the funds’ board and Section 34(b) of the Investment Company Act by omitting key information from prospectuses and Statements of Additional Information. Putnam agreed to settle without admitting or denying the allegations, accepted a cease-and-desist order and censure, and committed to implementing new compliance policies overseen by a senior employee. Pursuant to the Fair Funds provision of the Sarbanes-Oxley Act, the $40 million penalty was distributed to the affected Putnam Funds to compensate shareholders. The case underscored the SEC’s enforcement focus on fiduciary breaches where fund advisers use client assets for their own benefit without transparency.
Classified investment-adviser-fraud(confidence 100%). EDGAR detection: forms ADV/ADV-E/ADV-W/Form D· recall 33% / precision 13%. detection rule →
Statutes
Section 206(2) of the Investment Advisers ActSection 34(b) of the Investment Company ActSection 206(2) of the Advisers Act and Section 34(b) of the Investment Company Act
Parties
ari gabinetpreferred marketing arrangementsputnam investment management, llcSecurities and Exchange Commission
Keywords
putnamfundarrangementsmutual fundputnam funds'brokerage commissionscommission's orderpreferred marketingmarketing arrangementsmillioninvestmentfund managermanager putnamputnam payspays million
Exhibits & Attached Documents (1)
Extracted insights
Dollar amounts 2
- $40.00M $40 MILLION $10M–$100M
- $40.00M $40 million $10M–$100M
Entities 4
- person ari gabinet
- person preferred marketing arrangements
- company putnam investment management, llc
- agency Securities and Exchange Commission
Triples 8
- Putnam Investment Management, LLC pays $40 million
- Putnam Investment Management, LLC settles Securities and Exchange Commission enforcement action
- Putnam Investment Management, LLC failed to disclose conflicts of interest
- Putnam Retail Management Limited Partnership entered into Preferred Marketing Arrangements
- Securities and Exchange Commission censures Putnam Investment Management, LLC
- Putnam Investment Management, LLC violated Section 206(2) of the Investment Advisers Act of 1940
- Putnam Investment Management, LLC violated Section 34(b) of the Investment Company Act of 1940
- Ari Gabinet investigated the case
PDF (from attached: pdf)
Text layers
Extracted body text (4,487c)
MUTUAL FUND MANAGER PUTNAM PAYS $40 MILLION FINE TO SETTLE SEC ENFORCEMENT ACTION FOR IMMEDIATE RELEASE 2005-40 FIRM CHARGED WITH HAVING FAILED TO ADEQUATELY DISCLOSE CONFLICTS OF INTEREST RELATING TO ITS USE OF MUTUAL FUND BROKERAGE COMMISSIONS TO PAY FOR "SHELF SPACE" AT BROKERAGE FIRMS Washington, DC, March 23, 2005--The Securities and Exchange Commission today announced that Putnam Investment Management, LLC (Putnam) will pay $40 million to settle charges related to Putnam's "shelf space" arrangements with broker-dealers. The Commission issued an order that finds Putnam failed to adequately disclose to the Putnam Funds' Board of Trustees and the Putnam Funds' shareholders the conflicts of interest that arose from these arrangements for increased visibility within the broker-dealers' distribution systems. The $40 million penalty will be distributed to the affected Putnam Funds. The Commission's Order finds that from at least January 1, 2000 through December 31, 2003, Putnam Funds' distributor and affiliate, Putnam Retail Management Limited Partnership (PRM), had entered into arrangements (Preferred Marketing Arrangements) with over 80 broker-dealers whereby 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. All of these arrangements were based primarily upon negotiated formulas relating to gross or net fund sales and/or the retention of fund assets. PRM did not use its own assets to pay for the services obtained under these arrangements. Because the financial results of Putnam, PRM and other affiliates were combined within consolidated financial statements, the entire Putnam organization benefited from the use of fund assets to defray such expenses. But Putnam did not adequately disclose this conflict of interest to the Putnam Board and the Putnam Shareholders. "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. Financial arrangements that benefit a fund adviser at the potential expense of fund shareholders must be adequately disclosed to the fund's board," said Ari Gabinet, District Administrator of the SEC's Philadelphia Office, which investigated the case. The Commission's Order finds that Putnam willfully violated Section 206(2) of the Investment Advisers Act of 1940 (Advisers Act) and Section 34(b) of the Investment Company Act of 1940 (Investment Company Act). Section 206(2) prohibits an investment adviser from engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon its client. As a fiduciary, Putnam had a duty to disclose effectively to the Putnam Board any potential conflict of interest created by the use of fund brokerage commissions to satisfy the Preferred Marketing Arrangements. Section 34(b) prohibits any person from making materially misleading statements or omissions in a registration statement. Neither the Putnam Funds' prospectuses nor Statements of Additional Information adequately disclosed that Putnam directed fund brokerage commissions to satisfy the negotiated Preferred Marketing Arrangements. Putnam has agreed to settle this matter, without admitting or denying the findings in the Commission's Order. The Commission's Order censures Putnam and orders it to cease-and-desist from committing or causing any violations of Section 206(2) of the Advisers Act and Section 34(b) of the Investment Company Act. In addition, Putnam has undertaken to direct a senior level employee to implement and maintain policies and procedures with respect to (1) its Preferred Marketing Arrangements, including, among other things, the selection of broker-dealers that also sell fund shares, and (2) its disclosures to the Putnam Board and Putnam Shareholders. Finally, Putnam will make a nominal disgorgement payment and will pay $40 million in civil penalties. Pursuant to the Fair Funds provision of the Sarbanes-Oxley Act of 2002, Putnam will distribute the penalty to the Putnam Funds in accordance with a distribution plan approved by the Commission. Administrative Proceeding Contacts: Arthur S. Gabinet, District Administrator Elaine C. Greenberg, Assistant District Administrator Philadelphia District Office (215) 597-3100 http://www.sec.gov/news/press/2005-40.htm Home | Previous Page Modified: 03/23/2005
OCR text (4,487c · plain-text · 99% conf)
MUTUAL FUND MANAGER PUTNAM PAYS $40 MILLION FINE TO SETTLE SEC ENFORCEMENT ACTION FOR IMMEDIATE RELEASE 2005-40 FIRM CHARGED WITH HAVING FAILED TO ADEQUATELY DISCLOSE CONFLICTS OF INTEREST RELATING TO ITS USE OF MUTUAL FUND BROKERAGE COMMISSIONS TO PAY FOR "SHELF SPACE" AT BROKERAGE FIRMS Washington, DC, March 23, 2005--The Securities and Exchange Commission today announced that Putnam Investment Management, LLC (Putnam) will pay $40 million to settle charges related to Putnam's "shelf space" arrangements with broker-dealers. The Commission issued an order that finds Putnam failed to adequately disclose to the Putnam Funds' Board of Trustees and the Putnam Funds' shareholders the conflicts of interest that arose from these arrangements for increased visibility within the broker-dealers' distribution systems. The $40 million penalty will be distributed to the affected Putnam Funds. The Commission's Order finds that from at least January 1, 2000 through December 31, 2003, Putnam Funds' distributor and affiliate, Putnam Retail Management Limited Partnership (PRM), had entered into arrangements (Preferred Marketing Arrangements) with over 80 broker-dealers whereby 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. All of these arrangements were based primarily upon negotiated formulas relating to gross or net fund sales and/or the retention of fund assets. PRM did not use its own assets to pay for the services obtained under these arrangements. Because the financial results of Putnam, PRM and other affiliates were combined within consolidated financial statements, the entire Putnam organization benefited from the use of fund assets to defray such expenses. But Putnam did not adequately disclose this conflict of interest to the Putnam Board and the Putnam Shareholders. "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. Financial arrangements that benefit a fund adviser at the potential expense of fund shareholders must be adequately disclosed to the fund's board," said Ari Gabinet, District Administrator of the SEC's Philadelphia Office, which investigated the case. The Commission's Order finds that Putnam willfully violated Section 206(2) of the Investment Advisers Act of 1940 (Advisers Act) and Section 34(b) of the Investment Company Act of 1940 (Investment Company Act). Section 206(2) prohibits an investment adviser from engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon its client. As a fiduciary, Putnam had a duty to disclose effectively to the Putnam Board any potential conflict of interest created by the use of fund brokerage commissions to satisfy the Preferred Marketing Arrangements. Section 34(b) prohibits any person from making materially misleading statements or omissions in a registration statement. Neither the Putnam Funds' prospectuses nor Statements of Additional Information adequately disclosed that Putnam directed fund brokerage commissions to satisfy the negotiated Preferred Marketing Arrangements. Putnam has agreed to settle this matter, without admitting or denying the findings in the Commission's Order. The Commission's Order censures Putnam and orders it to cease-and-desist from committing or causing any violations of Section 206(2) of the Advisers Act and Section 34(b) of the Investment Company Act. In addition, Putnam has undertaken to direct a senior level employee to implement and maintain policies and procedures with respect to (1) its Preferred Marketing Arrangements, including, among other things, the selection of broker-dealers that also sell fund shares, and (2) its disclosures to the Putnam Board and Putnam Shareholders. Finally, Putnam will make a nominal disgorgement payment and will pay $40 million in civil penalties. Pursuant to the Fair Funds provision of the Sarbanes-Oxley Act of 2002, Putnam will distribute the penalty to the Putnam Funds in accordance with a distribution plan approved by the Commission. Administrative Proceeding Contacts: Arthur S. Gabinet, District Administrator Elaine C. Greenberg, Assistant District Administrator Philadelphia District Office (215) 597-3100 http://www.sec.gov/news/press/2005-40.htm Home | Previous Page Modified: 03/23/2005