Regulators levy fines against financial firms

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 fully disclose to its Smith Barney retail customers that 75 fund complexes made payments for “shelf space,” the SEC alleged. In fact, 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.

Putnam was the first investment firm formally accused of abuses in the fund industry scandal. It agreed in April 2004 to pay $110 million to settle allegations by federal and Massachusetts regulators of allowing improper market timing — rapid in-and-out trades — by favored clients to the detriment of long-term shareholders. Earlier this month, Putnam agreed to pay an additional $83.5 million to current and former fund shareholders to resolve the allegations, the result of new calculations by a Harvard business professor hired to tally investor losses from trading abuses.

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 purchase 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.”

David Kanihan, a spokesman for American Express Financial Advisors, said the company was pleased to resolve the matter and that, “We are confident that our policies governing the sale of Class B shares will serve our clients well.”

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