Secretary of State William Galvin confirmed yesterday that his staff has launched a probe into possible improper fund trading at Putnam Investments in Boston.
The Putnam inquiry is Galvin’s latest investigation into mutual fund trades and comes as the industry faces probes from other state and federal regulators.
Galvin said his staff sent several subpoenas to Putnam last Thursday to learn about possible improper market timing – that is, making short-term trades of fund shares, often at the expense of long-term shareholders.
“This is not a fishing expedition,” Galvin said. “We obviously have probable cause of some kind to make these inquiries.”
The probe is focused on trades in one of Putnam’s international funds, according to a source in Galvin’s office.
When asked about the probe, Putnam spokeswoman Nancy Fisher said: “We received an inquiry from the state of Massachusetts and are responding.”
Galvin recently filed civil charges against Morgan Stanley, claiming brokers there didn’t disclose that they were paid more to pitch in-house funds to investors.
Also this summer, Galvin’s securities staff began investigating market-timing practices at Prudential Securities’ Boston office.
That probe came to light two weeks ago as New York Attorney General Eliot Spitzer accused several big fund firms of making deals with a hedge fund to allow improper market timing of fund shares. Spitzer’s probe continues, and it helped spark a nationwide Securities and Exchange Commission investigation.
“This effort is about (making) sure that the average investor, especially in mutual funds, is treated fairly,” Galvin said.
Though market timing isn’t illegal, the practice is often publicly discouraged by fund firms because they say it can hurt fund performance for long-term investors. Regulators are, among other things, focusing on trades that take advantage of the lag between the once-a-day pricing of funds and the value of their underlying stocks.
Putnam, a unit of New York-based Marsh & McLennan Cos., issued a statement last week claiming that it has had a policy to protect its funds from excessive trading and market timing since 1997. Putnam said its controls include short-term trading fees, a technique known as “fair value pricing,” daily monitoring of trading activity and revoking the trading privileges of people who violate its policy.
Galvin’s probe comes at a bad time for Putnam, as investors continue to pull money out of its funds despite the recent stock market surge. Putnam had the largest net outflows of fund assets of any of the 25 biggest fund firms through July 31, with nearly $7.3 billion leaving Putnam’s funds in that time, according to Financial Research Corp. data.
But Fisher said Putnam’s net outflows improved from last year and the rate at which Putnam investors are taking money out of the funds for other uses is well below the industry average.
Putnam’s funds have suffered more than most companies’ funds because many managers at Putnam bet heavily on high-tech stocks that later crashed, Morningstar analyst Matt Scholz said. “They’ve had a lot of problems in the last year or two,” he said. “If it turns out that there are certain improprieties going on there, they might be impacted worse than other fund families.”
