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By John Waggoner,
USA TODAY
March 23, 2005 11:15 a.m.
The Securities and Exchange Commission Wednesday
announced settlements with Citigroup (C) and Putnam
Investments (MMC) as part of its continuing crackdown
on pay-for-promotion arrangements.
Putnam agreed to pay a $40 million fine for failing
to tell investors that it paid to be put on brokerages'
"preferred lists" — the funds that
brokers recommend to clients. Those arrangements,
called revenue sharing, are legal, but funds and
brokers must disclose them.
Putnam had more than 80 revenue-sharing agreements
with brokerages, the SEC says in its complaint.
The Boston-based fund company paid about 20 of the
brokerages in cash.
Putnam, a unit of insurer Marsh & McLennan,
paid the rest by directing trades from its mutual
fund portfolios to those brokerages. By doing so,
the payments came out of shareholders' pockets,
rather than through Putnam, which manages the funds.
In a typical arrangement, a brokerage would get
0.1% to 0.35% of a fund's sales for having a Putnam
fund on its preferred list. Putnam also paid 0.015%
to 0.15% for assets that remained in the fund.
"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," says Ari Gabinet, district
administrator of the SEC's Philadelphia office,
which investigated the case.
Citigroup agreed to pay a $20 million fine, in part
because its Smith Barney division didn't disclose
revenue-sharing arrangements with 75 fund complexes.
Another reason for the fine: Smith Barney brokers
recommended investors buy class B shares of mutual
funds, even though investors would have been better
off in lower-cost class A shares.
B shares don't levy an upfront sales charge, or
load. Instead, they charge higher annual fees. Investors
who cash out within the first few years pay a redemption
fee.
Class A shares do charge an upfront load but have
lower ongoing expenses. Those who invest higher
amounts pay lower sales charges. The sales charge
on Smith Barney Aggressive Growth, for example,
drops to 4.25% from 5% if you invest $25,000. B
share commissions don't fall.
The SEC says Citigroup brokers were selling B shares
to wealthy customers without explaining that they
would have paid less — and gotten higher returns
over time — with A shares.
In a similar move Wednesday, the NASD disclosed
that Citigroup, American Express (AXP) and J.P.
Morgan Chase (JPM) had agreed to pay a total $21.5
million in fines for mutual fund sales practices.
None of the companies admitted or denied wrongdoing.
© Copyright 2005 USA TODAY, a division of Gannett
Co. Inc.
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