Putnam shakeup has small ripples for local broker

by Eric Olson

SBJ Reporter

eolson@sbj.net

The weeks following the Securities and Exchange Commission's Oct. 28 fraud charges against Putnam Investments have been tumultuous for the Boston-based mutual fund manager and its brokers nationwide.

While investors have pulled $32 billion 12 percent of Putnam's assets between the SEC's filing for improper trading and a Nov. 13 settlement, the reaction has been minimal locally, according to Nadia Cavner of US Bancorp in Springfield.

Cavner, who manages a total of nearly $400 million, invests about $90 million with Putnam. In recent years, Cavner has been named Putnam's leading broker worldwide.

Cavner said only three of her clients have withdrawn their funds from Putnam. She called the national reaction "knee jerk."

"We have seen minimal withdrawals compared to what I manage," Cavner said. "It's been three people." She could not disclose the amounts withdrawn.

Still, the phones have been ringing, and Cavner is booked with client meetings to explain the turn of events.

Clients are asking: How many people were involved? What is market timing? Was it on the institutional side? Was it on the retail side? How am I affected?

These questions and others were asked of Cavner as clients became wary of the fifth-largest U.S. fund company that was managing their money. At the time of the SEC filing, Putnam reported $277 billion in assets. During the SEC investigation, assets under management have dropped to $245 billion.

"Ninety-nine percent of the clients that have come to us want to know more details than what the media has been able to portray," Cavner said. "They have been wanting to know the facts, just an explanation of what is going on. I assured them that (for) any damage to clients' accounts, Putnam is making restitution."

Cavner said Putnam brokers are instructed not to sell Putnam funds until the investigation is finalized. "We can add to the existing accounts, but we're encouraged not to solicit new business until the investigation is over," she said.

The restitution is part of an SEC settlement reached with Putnam Nov. 13. In financial terms, the fraud charges do not have a significant impact on individual client accounts, Cavner said. While the impact is not specifically known at this time, Cavner said the financial impact comes down to a few cents per shareholder.

The settlement admitted no guilt and has been sharply criticized for being too light by New York Attorney General Eliot Spitzer and Massachusetts Secretary of the Commonwealth William Galvin. Cavner believes it is a step in the right direction, both for Putnam and the entire mutual fund industry.

According to the SEC order, Putnam will "undertake significant and far-reaching corporate governance, compliance and ethics reforms" for failing to disclose improper trading practices of personal accounts by some employees. The order states Putnam "failed to take adequate steps to detect and deter such trading activity through its own internal controls and supervision of investment management professionals."

Putnam is not alone as the overhaul of the mutual fund trading industry continues. Other companies charged by either the SEC or state regulators for trading fraud include Bank of America Securities, Invesco Funds, Millennium Partners, Morgan Stanley, Prudential Securities and Strong Funds.

"Clearly, it is a much more industry-wide problem than the regulators even dreamed of," Cavner said, adding that she believes the SEC is after Putnam to set an example.

The charges led Putnam CEO Lawrence J. Lasser to step down. Ed Halderman, Putnam's senior managing director and co-head of investments, has replaced Lasser as president and CEO.

Cavner had a strong business relationship with Lasser and was surprised by his resignation. Lasser visited Springfield May 2, 2002, to speak at Cavner's client-appreciation dinner.

"Knowing Lasser and the company man that he is, I think he did it for the good of the company," Cavner said. "He made a mistake by not letting these people go."

The employees in question have since been dismissed, Halderman said in a company news release.

SEC regulations

In an effort to curb market timing and after-hours trading, practices leading to scandalous times for mutual fund companies, the SEC voted 5-0 on Dec. 3 to propose new mutual fund industry trading regulations. Among the new rules proposed is a 4 p.m. Eastern Time deadline for fund orders to be received. This rule would effectively eliminate late trading through intermediaries that sell fund shares, the SEC said. After-hours trading is illegal, while market timing is simply viewed as unethical.

The SEC also voted to adopt a compliance rule that will require funds and advisers to have compliance policies and procedures, annually review them and designate a chief compliance officer who, for funds, must report to the board of directors. Another proposal requires that fund companies disclose market timing policies and procedures and practices regarding fair valuation of portfolio securities.

The SEC is accepting public comment on the proposals for 45 days following their publication in the Federal Register.

In Putnam's case, the SEC imposed new employee trading restrictions, enhanced employee trading compliance and oversight by an independent third party. Among the new rules is a requirement that employees who invest in Putnam funds hold those investments at least 90 days.

"I'm very encouraged by the SEC resolving the situation," said Cavner. "It was really just a handful of employees. I really truly believe that Putnam as a firm will come out very strong. I think we will be stronger as an industry. We can't help but to, because we have all these checks and balances now."

Putnam invests domestically and internationally for more than 12 million individual investors and more than 1,300 institutional investors. It is a subsidiary of Marsh & McLennan Companies, a global professional services firm publicly traded under MMC.