Putnam, Citigroup Settle U.S. Claims

Citigroup Inc. and Putnam Investments will pay civil fines of $20 million and $40 million, respectively, to resolve federal regulators’ allegations that they kept from customers the fact that brokers were paid to recommend certain mutual funds, creating a conflict of interest.

The Securities and Exchange Commission announced the separate settlements Wednesday with Citigroup, the biggest U.S. financial institution, and Putnam, the seventh-largest mutual fund company. Citigroup and Putnam, a unit of Marsh & McLennan Cos., neither admitted nor denied wrongdoing.

The regulators’ moves were the latest enforcement actions over alleged abuses in the trading and marketing of mutual funds in an industrywide crackdown that began in September 2003.

Putnam’s $40-million payment will go into the affected mutual funds, the SEC said. For Citigroup and Putnam, 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.

Citigroup shares rose a penny to $44.45, while Marsh & McLennan rose 43 cents to $30.23, both on the New York Stock Exchange.

In a related move, the NASD disclosed that Citigroup, American Express Financial Advisors Inc. and J.P. Morgan Chase & Co. had agreed to pay a total of $21.25 million for alleged violations in sales of mutual funds.

The NASD, formerly the National Assn. of Securities Dealers, fined Citigroup $6.25 million, American Express Financial Advisors, $13 million, and J.P. Morgan Chase, $2 million.

The investment firms, which also were censured by the NASD, neither admitted nor denied wrongdoing. They agreed to establish a plan to correct deficiencies for about 50,000 households that invested in the fund shares.