You couldn't tell from the racket sent up by Spitzer and Massachusetts Secretary of the Commonwealth William F. Galvin over the SEC'S Nov. 13 deal with Putnam Investment Management LLC. They say the feds, in a hurry to stanch the $21 billion outflow from Putnam's funds, O.K.'d a quickie pact that let the Boston-based fund adviser off the hook on charges that six managers milked Putnam funds via rapid-fire trading.SPITZER AND GALVIN FAULT the SEC because its partial settlement didn't bring new charges against individual wrongdoers, didn't set Putnam's monetary damages, and didn't include broader reforms the industry needs. "At this moment of maximum leverage with the company, you don't let it slip away," Spitzer fumes. Adds Columbia University law professor John C. Coffee: "If this is going to be the template for future settlements, I think state regulators could call it a slap on the wrist."
Certainly, the SEC has done a weak job overseeing funds, and it has been pushed into a much more active stance by the aggressive probes launched by Spitzer and Galvin. Even SEC Chairman William H. Donaldson acknowledges that the agency should have moved sooner. And with all the effort state and federal regulators have put into working together more closely, the SEC should have given Spitzer and Galvin more opportunity to weigh in.
But the Putnam settlement, far from being a flop, shows that the agency is turning over a new leaf. The SEC moved rapidly to clean up Putnam while holding the door open to stiff penalties and more charges. It imposed a complete ban on short-term trading by Putnam insiders, a first for the industry. And it overhauled the boards of Putnam's funds, bringing in more outsiders and installing independent board chairs. "This is the new template -- every fund is going to have to answer to these standards," says Jacob S. Frenkel, a former SEC enforcer and federal prosecutor now with law firm Smith, Gambrell & Russell in Washington.
Spitzer applauds these changes. But he says the SEC shouldn't have settled until investigators had gone over the company with a fine-tooth comb. Trouble is, the rapid flight from Putnam's tainted funds is driving up costs and imposing a huge burden on remaining investors. "It's critical that we do something now to protect current Putnam fund shareholders," says SEC Enforcement Director Stephen M. Cutler.THE SEC DID THAT -- without ceding leverage to Putnam. It's still probing and plans to bring more charges, perhaps against the company itself. Putnam has also agreed to restore investors' losses and won't contest its guilt when the SEC sets penalties. "We didn't give up anything" in settling, Cutler says.
What about the SEC's failure to force Putnam to admit guilt? Securities experts say such a plea would only hasten investors' flight and condemn the firm to ruinous losses in the 20-and-counting private lawsuits it already faces. Balancing the need for fast action against the emotional satisfaction of extracting a guilty plea, the SEC opted for investor protection.
Spitzer complains that the SEC didn't force Putnam to cut the fees it charges its funds. Such fund critics as Gary Gensler, co-author of The Great Mutual Fund Trap, argue that Putnam's independent directors should negotiate harder on fees. But the SEC insists that fee-setting and disclosure should happen through industrywide rules, not enforcement cases. "Spitzer has only one tool. Any reform he wants he has to win through enforcement," says a senior SEC official. "We have lots of tools, and they're all in play."
Regulators need to pull together rather than undermine one another. The SEC will be policing funds long after Spitzer and Galvin -- both elected officials -- have moved on. The state regulators have kicked the SEC into action. Now they need to simmer down so the SEC can stay on track. By Mike McNamee