Two Former Putnam Execs Avoid Draconian' Charges

Two former fund managers at Putnam Investments will pay $1.5 million to settle allegations they improperly traded mutual fund shares, the SEC and Massachusetts regulators announced Monday. Justin Scott and Omid Kamshad neither admitted nor denied the allegations.

Scott is paying disgorgement of $489,439 plus $159,474 in interest and a civil penalty of $400,000, for a total of $1,048,913 to be split evenly between the SEC and the Secretary of State of the Commonwealth of Massachusetts. Scott has also been suspended from working at any investment adviser for 12 months.

Kamshad is paying $57,157 in disgorgement, plus $13,709 in interest and a civil penalty of $400,000, for a total of $470,866, also to be split between the two regulators. Kamshad has also been suspended for 12 months.

Scott's attorney, Jack Silvia of Mintz Levin, told the Boston Globe: "Mr. Scott is pleased to have this matter resolved, while Kamshad's attorney, James J. McGuire, called the settlement "the lightest and least Draconian" of any stemming from the mutual fund timing and late-trading scandal.

"We believe the SEC's offer reflects the strength, or lack thereof, of the case against Mr. Kamshad. Mr. Kamshad is very pleased to put this matter behind him."

Rather than charging the two with market timing, the SEC characterized their actions as excessive "short-term trading" of mutual funds between 1998 and 2003.

For Many Janus Investors, Check is Not in the Mail

A proposed plan to repay Janus investors whose holdings were affected by market timing would require two-thirds of them, those who are owed $10 or less, to actively seek compensation.

That's because an independent consultant who advised the Securities and Exchange Commission on the recompense plan, University of Florida Professor Christopher James, said that because the losses are so small, it doesn't make sense to mail out checks to investors. About one-third are owed an average of 64 cents, and another 10% would get $28. Only 66 people would get $36,000.

Although Janus paid $100 million in fines, James found that investors actually lost $21 million. Nevertheless, the SEC is not going to reduce the fine.

The plan is posted on the SEC's website to give the public 30 days to comment.

Fixed-Income ETFs Seen As Next Big Thing

At the beginning of this year, Barclays Global Advisors was the only investment management company with a bond exchange-traded fund, the Financial Times reports. Today, however, there are nearly two dozen fixed-income ETFs from the likes of State Street and Vanguard, with more on the way from Bear Stearns and Ameristock.

"The income space is ripe for ETF innovation," said P. Michael Jones, chief investment officer at Wachovia Securities. "And it's not just narrowed down to bonds. To the extent that we can create income-oriented solutions that are lower cost, they will take off like a rocket," Jones said.

With the market now flooded with niche equity ETFs, firms are looking to fixed-income for fresh ideas. Scott Ebner, senior vice president of the American Stock Exchange's ETF Marketplace, agreed that bond products are a ripe opportunity for ETF providers.

As to why bond ETFs are so late to the table, one reason, certainly, is that the SEC exemptive relief process can take up to several years. A second is the sheer complexity of bond ETFs; due to maturing bonds, they must continually be replaced.

Nonetheless, with Bear Stearns and Ameristock coming to the marketplace this year, Anthony Rochte, senior managing director of State Street Global Advisors, believes that will prompt the SEC to speed up its approval process and competitors to come out with innovative products.

"The core building blocks of fixed- income are now in place," Rochte said.

Citigroup to Keep FRC After Acquiring BISYS

Putting to rest rumors that Citigroup would sell Financial Research Corp. after acquiring BISYS, a Citi official said that the company would not do so, Reuters reports.

"It's a hot property and a property that we will maintain because of its need in the industry," said Andrew Smith, head of Citigroup's North American funds and securities services. "It's very unique. It's very focused on a very specific operation."

Smith added that to be thought of as a "trusted adviser and [a] one-stop shop for our customers, it's important that we provide some level of research, as well."

Man Group Plans to List Hedge Fund on NYSE

The world's largest asset manager, Man Group, plans to list a hedge fund on the New York Stock Exchange for the first time, in a ploy to get more money from U.S. investors, according to The Wall Street Journal.

A trend is occurring in the industry that has hedge fund managers increasing their assets through closed-end fund vehicles that can be bought by both institutional and individual investors and bypass regulatory restrictions on direct hedge-fund investments.

The Securities and Exchange Commission wants to raise the bar for hedge fund investors, and is proposing that individuals have $2.5 million in investable assets, instead of the current $1 million requirement.

However, individuals are able to buy shares in exchange-traded companies, and a slew of closed-end companies and mutual funds, which individuals can invest in, use hedge fund-like techniques such as leverage and derivatives, to potentially enhance their return.

In September, shares in Man Dual Absolute Return Fund will be offered at $20 each, with a minimum order of 100 shares. Plans for the initial public offering have just been filed with the SEC.

FundQuest Helps Convert Fee-Based Accounts

FundQuest has created a service to help assist firms with the conversion of fee-based brokerage accounts to comply with recent court rulings.

The U.S. Court of Appeals for the District of Columbia Circuit has recently ruled that firms operating fee-based brokerage accounts must move these to either an advisory account or traditional commission account.

"There is a lot at stake for any firm with fee-based brokerage accounts," said Bob Del Col, chairman of FundQuest. Thus, the firm has "assembled a team with expertise in compliance, operations, technology, advisor training and investment due diligence which can consult on a conversion plan and assist with operational execution to ensure successful account conversions," Del Col said.

FundQuest has automated many processes to help firms with the transition, such as an online creation of client agreements to facilitate straight-through-processing and electronic generation of investment policy statements.

Hedge Funds Scramble To Find Unique Short Sales

As the number of hedge funds continues to expand, the opportunities to short stocks is shrinking, MarketWatch reports. According to some estimates, the percentage of shares sold short on the New York Stock Exchange has doubled since 2000 to about $500 billion a year.

Thus, rather than short a stock because of a belief that its fundamentals are deteriorating, hedge fund managers are taking riskier bets that the company might simply miss profit forecasts or have a couple of bad quarters.

"These are the types of positions that can kill hedge fund managers on the short side," said Jeff Bernstein, co-founder of Keel Capital Management. "There's no smoking gun, but they tend to pile into these types of positions."

Mark Sellers discovered that when he founded his hedge fund, Sellers Capital, in 2003, his clients were skittish about his plans to short stocks. So, he invests in undervalued companies, instead. "I've found that I'm not very good at shorting," Sellers said. "If I was good at it, I would do it. But I tend to find out about them after everyone else, and by then the trade is crowded and it's hard to borrow the stock. Shorting is such a tough game to play. There are so few ideas out there."

The spread between the most highly valued stocks and the most undervalued is also the thinnest in 55 years, according to Praesidium Investment Management.

"Today, the amount of money dedicated to [short] strategies and the percentage of shares sold short are at the highest levels ever recorded, yet valuation spreads and the opportunity set are the smallest in over five decades," according to Praesidium.

Yet another factor making shorting so challenging is the current leveraged buyout craze, making companies that were good short targets now good LBO targets. "Shorting single stocks has really hurt a lot of people because they were shorting things that ended up being acquired," said Cynthia Nicoll, chief investment officer of Tremont Capital Management. So now, in addition to assessing a stock for its value as a short position, managers have to also "evaluate businesses in terms of their ability to be bought out in an LBO."

New Account Openings Fall Dramatically in China

New securities account openings in China have plummeted from two months ago, primarily due to the government's recent tripling on the stock trading tax pushing stock prices lower, Bloomberg reports.

Since the government increased the trade stamp from 10 basis points to 30 basis points on May 29, the China Shanghai Index has fallen 12%, wiping out $300 billion of market value. Subsequently, in the first week of June, investors opened up 240,485 accounts, down from a peak of 1.08 million new accounts in the last week of April, according to data from the China Securities Depository & Clearing Corp.

BenefitStreet, Barclays Offer ETF 401(k) Platform

BenefitStreet and Barclays Global Investors have partnered to create a 401(k) platform offering Barclays' iShares exchange-traded funds.

The platform allows participants to invest directly in the ETFs, rather than through a collective trust, thereby minimizing commission costs and providing fee transparency.

"We developed this new platform in response to the regulatory changes taking place in the 401(k) industry calling for lower fees and more fee transparency in defined contribution plans," said Ken Weida, co-founder and senior vice president of BenefitStreet.

"This is a breakthrough in the delivery of iShares funds to the sizable 401(k) U.S. market at a time when transparency and low total cost are critically important to plan sponsors and advisers," said Michael Latham, managing director and head of iShares in North America.

At the outset, BenefitStreet is offering only iShares, but other ETFs will be included over time.

Thailand Regulator Warns Of Illegal Mutual Funds

The Thailand SEC Secretarial Office is warning investors that 20 illegal mutual funds in the nation are touting high returns but actually losing large amounts of money. More than 30 people have reported being scammed.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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