(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Putnam to Pay $55 Million in Market Timing Case

The SEC announced the final settlement of an enforcement action against Putnam Investment Management LLC. In this case, the SEC ordered Putnam to pay a $50 million civil penalty and $5 million in disgorgement for violating federal securities laws by failing to disclose improper market timing trading by Putnam portfolio managers. All of the money obtained by the Commission will be distributed to investors harmed by the market timing trading.

This order supplemented an earlier order entered in November 2003, under which Putnam agreed to undertake extensive corporate governance, compliance and ethics reforms. In the earlier order, the SEC found that, beginning as early as 1998, at least six Putnam investment management professionals engaged in excessive short-term trading of Putnam mutual funds in their personal accounts. Four of those employees allegedly engaged in such trading in funds over which they had investment decision-making responsibility. The 2003 order further found that although Putnam became aware in 2000 that several investment management employees were engaging in potentially self-dealing short-term trading of mutual fund shares, Putnam failed to disclose this potentially self-dealing securities trading to the boards of the mutual funds it managed and the funds' shareholders.

In the earlier order, the SEC censured Putnam and ordered it to cease and desist from violations of the antifraud provisions of the Investment Advisers Act and other provisions of the federal securities laws. The order left open the amount of civil penalty and other monetary relief Putnam would be required to pay. Stephen M. Cutler, director of the SEC Division of Enforcement, said, "the significant monetary sanctions we announce today complete the settlement process initiated last November when we imposed far-reaching governance and compliance reforms designed to protect Putnam's mutual fund shareholders." He added that "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."

According to the director, "this case demonstrates the Commission's continuing commitment to investor protection in its enforcement efforts through a combination of tough monetary sanctions, forward-looking structural relief and victim restitution." David P. Bergers, associate district administrator for the SEC's Boston District Office, said that "Putnam's failure to disclose market timing trading by its investment professionals in mutual funds they managed constituted a serious breach of fiduciary duty." He added that "the penalty imposed in this case reflects the egregiousness of Putnam's conduct and sends the message that such behavior will be firmly punished."

The order calls for the appointment of an independent distribution consultant to develop a plan for distributing the $55 million in disgorgement and penalties to harmed investors. The $55 million will be distributed to investors in order of priority. Initially, compensation would be paid to investors for losses attributable to excessive short-term trading and market timing trading activity by Putnam employees. The next priority would then be compensation for advisory fees paid by mutual fund clients who suffered such losses, stated the SEC.