Wall Street firms continue to cough up big bucks to settle investigations into abusive mutual fund sales practices.
In the latest regulatory actions,
Putnam Investment Management
J.P. Morgan Chase
are paying a total of $81 million in fines to the
Securities and Exchange Commission
Putnam, a division of scandal-tarred
Marsh & McLennan
, is paying the stiffest fine, a $40 million penalty to the SEC. Regulators charge that the Massachusetts-based fund company did not disclose it routinely paid brokerage firms to tout the company's funds to investors.
The practice of paying brokers to hawk a fund company's offering is known as "paying for shelf space" on Wall Street. It's one of the tawdry practices that regulators have cracked down on the past two years in a far-reaching investigation into the mutual fund industry.
Last June, Putnam paid $110 million in fines and restitution in a settlement with securities regulators over its role in the mutual fund trading scandal. Of course, Marsh, Putnam's parent, is a central player in the insurance industry scandal.
The next-biggest fine was levied against Citigroup, which is paying a total of $26.5 million in penalties to the SEC and the NASD. The SEC charged Citigroup with taking shelf-space payments from 75 mutual fund companies without disclosing that to its customers.
In addition, both the SEC and NASD charged Citigroup with pushing wealthy customers to buy so-called Class B shares of the firm's in-house mutual funds. The NASD alone fined the financial planning arms of American Express and J.P. Morgan a total of $15 million for similar B-share violations.
On the surface, Class B shares often look like a good investment, because investors generally don't pay any upfront sales charge, or "load." But investors in Class B shares often pay higher annual fees than investors who buy shares with upfront sales charges -- fees that often exceed any initial savings an investor might reap. Additionally, brokers often waive or reduce the upfront fees on so-called Class A "load" shares for large investors.
In recent years, Class B shares increasingly have drawn scrutiny from regulators at the SEC and the NASD because they tend to be the most costly mutual fund products.
In November 2003,
paid $50 million to regulators over B-share mutual fund violations.
A few year ago, the NASD issued an "investor alert'' warning investors to shy away from Class B mutual fund shares unless their broker had fully discussed the risks associated with them. In the June 25 advisory, the NASD cautioned investors that some brokers like to push Class B shares because they ''receive higher commissions from the sale of Class B shares than other classes of fund shares.''
"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,'' said Stephen Cutler, the SEC's director of enforcement.