MFS Investment Management and Putnam Investment Management have agreed to pay fines of $50 million and $55 million respectively in separate agreements with the SEC.
The Putnam agreement arose from an SEC finding last year that at least six Putnam investment managers engaged in excessive short-term trading of Putnam mutual funds in their personal accounts. The SEC says four of the managers traded funds in which they had investment decision-making responsibilities.
"Putnam's $55 million payment-all of which will be placed in a restitution fund for the benefit of investors-makes clear that self-dealing by mutual fund managers will be severely punished," says Stephen M. Cutler, director of the SEC's Division of Enforcement.
MFS Investment Management has agreed to pay a $50 million fine after an SEC probe found it failed to disclose it paid brokerage commissions in return for the marketing and distribution of MFS Funds.
The SEC announced that the MFS agreement marked the first enforcement action against a mutual fund manager for failure to adequately disclose such "shelf-space" arrangements.
The action is part of an industry-wide crackdown on such practices by the SEC and other regulatory agencies in the nation. In November, Morgan Stanley DW Inc. agreed to pay a $50 million fine for failing to inform customers of shelf-space payments it received from mutual funds.
"A mutual fund manager's use of fund brokerage commissions to pay for the marketing and distribution of the fund creates a conflict of interest that must be fully and fairly disclosed," Cutler says.
Added Merri Jo Gillette, associate district administrator in the SEC's Philadelphia District Office, "This case underscores the fundamental disclosure obligation that investment managers, as fiduciaries, owe to their clients. In this case, the conflict arose because MFS used brokerage commissions, which are paid out of fund assets, rather than its own assets-in other words, cash-to satisfy the strategic alliances."
The $50 million will be distributed to the MFS Fund, according to the SEC.
The SEC found that from at least January 1, 2000, to November 7, 2003, MFS negotiated "strategic alliances" with 100 broker-dealers, in which brokerage commissions were paid in return for "heightened visibility" within the brokerage firms' distribution networks.
MFS paid commissions ranging from 15 to 25 basis points on mutual fund gross sales, and 3 to 20 basis points on assets held more than one year, according to the SEC.
The SEC noted that MFS has permanently discontinued the use of brokerage commissions for shelf-space guarantees and has hired an independent counsel to conduct a review of such practices.
In a statement, MFS officials said it neither admitted nor denied any wrongdoing in its agreement with the SEC.
The company called the strategic alliances a "common practice."
"Our settlement with the SEC reflects our eagerness to put this matter behind us, and to focus on the meaningful pro-investor reforms we have put in place to strengthen fund governance," says Robert C. Pozen, non-executive chairman of MFS Investment Management.