Marsh & McLennan is under the regulatory gun again, and although the new probe is not related to business at its mutual fund unit, Putnam Investments is sure to suffer some fallout, industry experts say.

This time around, New York Attorney General Eliot Spitzer is targeting Putnam's parent company for rigging bids for insurance contracts and steering clients to insurers that would pay the firm lucrative "contingent commissions."

These commissions were in addition to normal sales commissions and were said to be for "market services," but were actually a reward for Marsh and its independent brokers for steering business to insurance companies, Spitzer said. These arrangements distort and corrupt the insurance marketplace and cheat clients, he said. The New York attorney general's office is looking to end the bid rigging and the quid pro quo contingent commission arrangement, which many in the industry currently consider acceptable. It is also seeking disgorgement of the improper payments, restitution and punitive damages.

Last week MMC said that it has suspended the use of market services agreements (MSAs), which is what the industry calls contingent commissions. In 2003, revenue from the commissions tallied $845 million, or about 12% of MMC's risk and insurance services revenue, and 7% of the firm's total consolidated revenue. Through the first half of this year, revenue from the commissions totaled $420 million, or 11% of risk and insurance services revenue. MSA "revenue has been part of overall compensation for Marsh's services," the firm said in a release. "The suspension of MSAs will negatively impact near-term operating income."

As for the bid rigging, Spitzer claims the firm's employees solicited fake bids in order to deceive customers into thinking that the process was truly competitive. Again, it appears to be a case of a company saying one thing and doing another, according to Spitzer, as MMC claimed in its public statements that it always considers what's best for its clients.

Most think the impact on Putnam and its employees will be indirect, since the insurance and mutual fund units are distinct and operate independently.

Mark Lane, an analyst who covers specialty insurance and asset management for William Blair & Co., said the MMC probe is another hit to Putnam's reputation as it struggles to regain its footing following the bombardment of negative press and massive outflows in the wake of revelations of corporate malfeasance last year. Spitzer saying he will not negotiate with the management of MMC and that he is prepared to take the case to trial is a troubling sign for the firm.

"I do not think it helps Putnam's reputation being associated with the parent company, particularly given the seriousness of the allegations," Lane said. "Putnam still continues to lose money, and that's a sign of the lingering damage to their franchise. Being associated with a parent company that has very serious issues cannot help their fundamental business."

In addition to curbing any potential gains, Justin Fuller, a Morningstar stock analyst covering MMC, said danger also lays in headline risk for Putnam. "Overall, the probe could hurt Putnam's progress because it's caught under the headline risk, and the investment management unit could suffer a little bit," Fuller said. "But this investigation seems to be confined to the insurance brokerage unit."

Others seem to think the impact will come from MMC's now lowered financial outlook and potential pressure from the parent on Putnam to produce better results. "Given the pressure on the brokerage, I think it does increase the pressure on Putnam to pick up the slack a little bit," Lane said.

The overall company has seen its outlook drop dramatically. MMC's stock price has taken a beating since revelations of the newest Spitzer probe, and is less than half of its September 2003 value and about 50% lower than it was just a few weeks ago.

Several analysts have revised their outlook for the company downward. UBS Investments lowered its 2005 earnings per share estimate from $2.85 to $2.15. This action was due to the elimination of the $845 million in contingent commissions and an estimated $731 million reduction in Marsh's reinsurance brokerage operations. UBS also dropped its 12-month price target from $39 to $28. "We believe contingent commissions flow largely to the bottom line, so their elimination has an outsized negative impact on earnings," the firm wrote in a research note.

"One could speculate that the board wants to see a certain level of return on invested capital, which might imply all parts of the empire might be under pressure," said Don Cassidy, a senior analyst at Lipper. However, Cassidy doesn't expect that will happen. MMC putting its "thumb on Putnam to make it up seems hard to envision short term," Cassidy said. "At Putnam, the emphasis is on cleaning up the image and restoring confidence, so trying to cut to the bone to increase margins will be tough."

But the news is not all bad for Putnam, some say. Roy Weitz, industry critic and publisher of, said that it is unlikely that the majority of average investors will make the connection between Putnam and MMC. And Putnam's separation from the parent will help distance the firm, as well. "Putnam is run pretty autonomously," he said. "It might as well be a separate company."

Cassidy agrees, adding that socially conscious investors who would be alarmed by the parent's activity most likely already vacated the fund when revelations about Putnam surfaced last year. "I really doubt that the insurance problems at MMC will have virtually any impact on Putnam's reputation or business," he said. "It is a very large company, and what happens in one division is unconnected to what happens elsewhere. I just don't think the average consumer of mutual funds, or probably even the typical broker or planner who sells Putnam funds, will remember or make a connection."

A Putnam spokeswoman said the lawsuit brought by Spitzer earlier this month is unrelated to his separate inquiries regarding Putnam, but declined further comment. A spokeswoman for MMC did not return calls seeking comment as of press time.

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