US mutual funds face pressure to reform

The Securities and Exchange Commission (SEC) financial watchdog said Putnam would make up losses suffered by investors.

Putnam also agreed to make changes to its board and tighten up its internal controls, the SEC said.

The deal came after the SEC charged Putnam with improper trading.

Widening scandal

The scandal over market-timing spread further through the US mutual funds industry on Thursday.

The two founders of Pilgrim Baxter & Associates (PBA), a unit of South African financial services giant Old Mutual, stepped down after an internal investigation into market timing.

Market timing is the practice of short-term trading in mutual funds' own shares which, though not illegal, breaches industry codes as it harms the interests of long term investors.

New York attorney general Eliot Spitzer has mounted a campaign to stamp out the practice; the SEC has followed suit. About half of US households have mutual fund savings.

Managers step down

PBA chairman Harold Baxter and chief operating officer Gary Pilgrim resigned on Thursday from running the firm they founded and sold to Old Mutual.

PBA's new chief executive, David Bullock, said an internal review, had revealed conduct inconsistent "with the highest standards of professional behaviour".

Mr Pilgrim had traded in PBA shares with Mr Baxter's knowledge, the firm said.

About 30 people have lost their jobs or been suspended in the US mutual fund industry since Mr Spitzer adopted the issue in the summer.

"It is becoming a weekly, if not daily, revelation of wrongdoing, and who knows who's next or who will be implicated," said Geoff Bobroff, a independent consultant on the fund industry.

Reforms

Two other funds also flagged up problems.

FleetBoston said on Thursday it had received subpoenas from financial regulators.

Janus said on Wednesday it had uncovered 12 short-trading arrangements, adding that only a small portion of its total assets had been involved.

Neither the SEC nor Putnam have said how much Putnam will pay to reimburse investors.

Putnam is expected to change its board structure to ensure its trustees have an independent chairman, a measure which Mr Spitzer has demanded for the industry in Congressional hearings.

"The reforms Putnam will undertake as part of the Commission's order are intended to provide real and substantial protections for mutual fund investors," said SEC enforcement director Stephen Cutler.