In a bid to regain some investor trust, Putnam Investment Management said Monday that it will impose a redemption fee on short-term trades in all of its retail mutual funds. Beginning in the first quarter of 2004, Putnam will impose a 2% fee on any fund shares in retail accounts that are exchanged or sold within five days of purchase. The fee also will apply to redemptions on all Putnam-administered 401(k) plans. The fee won't apply to money market, closed-end or variable annuity funds. Putnam, a unit of insurer Marsh & McLennan ( MMC), was one of the first mutual fund companies sullied by the sweeping investigation launched by New York State Attorney General Eliot Spitzer and the Securities and Exchange Commission. On Oct. 28, Putnam settled with the SEC, which found that since 1998 at least six Putnam investment managers engaged in excessive short-term trading of Putnam funds in their personal accounts. The SEC noted gross negligence on the part of Putnam for failing to take adequate steps in curtailing this behavior, and has prescribed a list of remedial actions the firm must take. At the same time, the Massachusetts Secretary of the Commonwealth launched civil charges alleging violations of the state's securities law antifraud provisions, stating that Putnam permitted fund managers to engage in activities contrary to Putnam's stated policy against market-timing and short-term trading. Putnam is also alleged to have breached its fiduciary duty to Putnam fund shareholders by allowing such employee conduct. Redemption fees are implemented by mutual funds for the sole purpose of discouraging short-term trades, which skim profit off the top of the fund and away from long-term investors. Unlike back-end loads -- which are sales fees paid when fund shares are sold, rather than purchased -- redemption fees are paid directly to the funds to offset the transaction expenses generated by the short-term trading.
Last month, Putnam began imposing a 1% redemption fee on shares exchanged or sold within 90 days for all taxable high-yield mutual funds, as well as all the funds in the 401(k) plans administered by Putnam. Prior to that, in March 2001, Putnam had imposed a 1% redemption fee for shares of global and international funds exchanged or sold within 90 days. The latest 2% fee for shares sold or exchanged within five days of purchase will be in addition to any existing redemption fees.