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Firms fined over mutual funds

For failing to tell customers that brokers were paid to recommend certain mutual funds, Citigroup, Putnam hit with millions in fines.

WASHINGTON - In three unrelated cases, federal regulators fined Citigroup Inc. and Putnam Investments $20-million and $40-million respectively and a smaller brokerage firm $100,000 to resolve allegations that they concealed from customers that brokers were paid to recommend certain mutual funds, creating a conflict of interest.

The Securities and Exchange Commission announced the separate settlements Wednesday with Citigroup, the biggest U.S. financial institution; Putnam, the seventh-largest mutual fund company; and brokerage Capital Analysts Inc.

Citigroup, Capital Analysts and Putnam, a unit of Marsh & McLennan Cos., neither admitted nor denied wrongdoing as part of the agreements. The SEC also alleged that Citigroup sold a type of mutual fund shares known as Class B shares to certain large-scale customers who could have earned a higher return from another type of shares.

Capital Analysts, a brokerage firm based in Radnor, Pa., agreed to pay a civil fine of $100,000 and $350,000 in restitution plus interest.

In a related move, the National Association of Securities Dealers disclosed that Citigroup, American Express Financial Advisors Inc. and JPMorgan Chase & Co. had agreed to pay a total of $21.25-million for alleged violations in sales of mutual funds.

The NASD, which is the brokerage industry's self-policing organization, fined Citigroup $6.25-million, American Express Financial Advisors $13-million and JPMorgan Chase $2-million. The investment firms, which were censured by the organization, neither admitted nor denied wrongdoing. They agreed to establish a plan to correct deficiencies for 50,000 households that invested in the fund shares.

The regulators' moves were the latest enforcement actions over alleged abuses in the trading and marketing of mutual funds in an industrywide crackdown that began in September 2003.

"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," SEC enforcement director Stephen Cutler said.

The $40-million that Boston-based Putnam is paying will go into the affected mutual funds, the SEC said. For Citigroup, Putnam and Capital Analysts, what is at issue are so-called "shelf space" arrangements between fund companies and brokerage firms, under which the funds pay brokers for slots on lists of recommended buys for customers. The practice appears widespread in the securities industry, regulators have said.

Citigroup failed to disclose to its Smith Barney retail customers that 75 fund complexes made payments for "shelf space," the SEC alleged. It said the company offered for sale only the funds of the complexes that made the incentive payments.

Similarly, Putnam had such arrangements with more than 80 brokerage firms from 2000 through 2003 but did not adequately disclose the potential conflict of interest to Putnam's board or shareholders, the SEC said.

The SEC alleged that Citigroup also recommended and sold, through Smith Barney, so-called Class B mutual fund shares to certain large-scale customers who generally would have gotten a higher rate of return had they bought Class A shares - allowing them discounts on sales charges for investments of $50,000 or more.

That was not properly disclosed to customers, and Citigroup reaped heftier commissions from sales of the Class B shares than it would have earned from selling Class A shares of the same funds, the SEC said.

Typically, investors in Class B fund shares don't pay an upfront sales commission when they make a purchase, but often pay higher fees and a commission when they sell the shares. Class B shares have been criticized because some investors buy them on the incorrect belief that they are commission-free.

The NASD's cases against Citigroup, American Express Financial Advisors and JPMorgan Chase involved similar allegations related to sales of different classes of fund shares. NASD said the three companies "did not consistently consider that large investments in Class A shares of mutual funds entitle customers to ... discounts on sales charges, generally beginning at the $50,000 investment level, which are not available for investments in other share classes."

[Last modified March 24, 2005, 01:19:16]