Taking Sides: SEC too lenient with Putnam

The settlement the Securities and Exchange Commission reached with Putnam Investments LLC has left many industry observers shaking…

The settlement the Securities and Exchange Commission reached with Putnam Investments LLC has left many industry observers shaking their heads in disbelief.

The SEC settled the case after the Boston-based mutual fund giant had agreed to adopt reforms in three areas: restrictions on employee trading; enhancements of compliance policies, procedures and staffing; and corporate governance, including fund board independence.

The case was closed, however, without Putnam officials admitting wrongdoing. Meanwhile, the commission delayed for six months the question of how much money Putnam will have to pay back to investors.

Why the wait?

To set a clear and proper precedent, and to restore investor confidence, the SEC should have demanded to see compensation quickly from this mutual fund abuse.

The SEC should not have signed a deal until Putnam had acknowledged wrongdoing, provided a full accounting of alleged misdeeds and paid a fine.

To make matters more foggy, the payments outlined by the SEC deal cover only Putnam employees’ trades; they don’t apply to all the other market timing for preferred customers and special insiders.

A day after the deal was announced, New York State Attorney General Eliot L. Spitzer reportedly said: “[I] wouldn’t let the SEC handle a house closing.”

In cutting a quick deal with Putnam, the SEC lost a chance to forge a groundbreaking resolution to protect the nation’s 90 million fund investors.

SEC officials said it had “acted in what we believed was in the best interest of Putnam investors. This was an immediate action to protect those investors.”

The SEC is charged not only with protecting all investors but also with making sure the country’s capital markets thrive. Therefore, the deal cut by the SEC with Putnam falls woefully short.

Massachusetts Secretary of the Commonwealth William Galvin reportedly responded to the settlement by saying: “It’s just convincing evidence of the ineffectiveness of the SEC. They should be more interested in wrongdoing instead of papering it over, which is what this is.”

Mr. Galvin’s office has filed a civil complaint against Putnam. He has promised that new charges will be filed against the country’s fifth-largest fund company.

The understaffed SEC has been playing regulatory catch-up for some time now.

Its chairman, William H. Donaldson, has promised a crackdown on mutual funds. This can be accomplished only by delivering a fair, tough and thorough settlement, showing the public that a fund doesn’t favor big players at the expense of the little investor.