A couple of recent stories that barely caught a headline should have awakened fund investors to different types of disappointment. Each item was different...

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A couple of recent stories that barely caught a headline should have awakened fund investors to different types of disappointment.

Each item was different and unrelated, but all were about issues big enough that they should not be ignored.
The Securities and Exchange Commission backed down from some of its promised get-tough reforms.

The SEC approved voluntary short-term redemption fees, rather than mandatory charges for investors rolling in and out of funds quickly.

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Commissioners will let fund boards make their own rules about whether redemption fees are necessary, how long they should apply and how much should be paid.

While investors should be gratified that the fees were not made mandatory — because some funds are built for rapid trading and market-timing strategies — they should be disappointed that funds were not given more leeway in making redemption fees bigger.

Redemption fees get paid back to the fund to cover the costs incurred when money comes and goes quickly.

If regulators really want to give fund firms the ability to end rapid trading, they needed to set the ceiling well above the current 2 percent maximum.

A firm that wants to weed out timers should be allowed to charge up to 5 percent on quick-turn trades.

Regulators balk because of a theoretical problem, namely that the fund would profit from a fee that big, which would require paying out a special dividend to shareholders; the long-term holders would actually get something extra from rapid traders.

In practice, however, no trader would use a fund with a ceiling that high. With 2 percent, however, some traders will simply build the fee into their models; if they can make enough money on fast round-trips to cover the fee and make a decent profit, nothing changes.

While the SEC is requiring that funds work with brokerage houses and intermediaries to identify problem traders, the issue won’t go away as long as financial sharpies think they can get away with something.

A mandatory fee would have been wrong, but regulators needed to give management companies the ability to exorcise the demons with a super-size redemption fee that would have sent long-termers the message that “No one is playing games in your fund.”

In the second newsworthy item that barely caught a headline, trustees of the Putnam Funds approved a calculation which determined that the company should pay an additional $108.5 million to fully compensate shareholders for losses they may have suffered from excessive trading. Total restitution will come to $153.5 million.

The new money is interesting, because there was a public perception that Putnam rushed to settle and that regulators eager to close the deal let the firm off the hook too easily.

The final calculation highlights the idea that a fast settlement may not always be the best deal. Most scandal cases lingered longer than Putnam’s, and were closed with a fixed amount of fine and payback.

Putnam agreed to an open-end deal, with more research to be done; in the end, it led to more meaningful restitution for shareholders. The restitution plan has not been released, although Putnam expects to pay current and former shareholders by the end of the summer.

Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.