IN THE recent wave of scandals sweeping the mutual fund industry, Putnam Investments was the first fund company formally charged with wrongdoing by the Securities and Exchange Commission and the first to reach a settlement with federal regulators.
Putnam is still facing charges in Massachusetts, but last month it became the first fund company to voluntarily adopt sweeping operational and disclosure standards, and there's a good chance its moves will become the model for others.
The interesting thing about Putnam's move was that the Boston-based company, which has seen billions of dollars taken from its funds in recent months, made concessions that many people in the fund industry had fought against for years.
It was a tacit admission that information and policies that critics have been craving for years have been possible all along, and that fund companies will give up the information if it helps them save their franchises.
Putnam's changes include cutting costs and sales charges, and limiting the amount investors are permitted to put into B shares.
It also is providing increased disclosure to show the kind of stake its managers and trustees have in a fund, the compensation incentives for the fund manager and more.
Combining the measures creates an interesting picture.
Putnam is cutting costs on all of its funds to a level "below industry-average expense ratios for their peer groups." (Currently, roughly 95 percent of Putnam's funds meet this standard.)
It also is limiting expense ratios for the six international and global funds implicated in the trading scandal that led to the SEC charges, so that investors who have stuck with the funds will not pay a higher tariff to make up for money Putnam lost when others bailed out and the funds shrunk.
The cost-cutting idea is good, although it's not a model the rest of the industry can follow because there's no way everyone can have "below-average costs." Linking fees to performance would be a big step up.
The message of the cost-cutting is terrific.
For years, fund company executives have fought virtually every type of additional disclosure that critics have called for.
The reason has always been the same: Increased information comes only with extra costs, an expense that many ordinary investors might not want to pay for data they haven't necessarily missed in the past.
Now, here comes Putnam promising additional disclosures while voluntarily limiting its fees and, in some cases, cutting them. That's proof that the cost associated with greater transparency of funds is hardly going to wipe out a management company's profits.
Management, as Putnam is showing, can provide a better look inside the fund while cutting costs.
Former Putnam Chief Executive Officer Lawrence Lasser used to compare his company to a luxury car, meaning "costly, but worth it." Current management's move to increase disclosure while cutting costs suggests that maybe customers got taken for a ride.
Fee cuts and ceilings are likely to become a regular part of the settlements that management companies reach with regulators.
Putnam's other huge concession to investors involves disclosing how managers are compensated. Investors will not learn how much money managers make, but they will know whether a manager's bonus depends on the fund's total return, its rank against peers, its after-tax return or other factors.
You can assume a manager will work to achieve that bonus, so aligning your investment choices with a manager's incentives makes sense.
If you want a fund for a taxable account, for example, you might look for a manager who can maximize his bonus by putting the fund atop its peers in after-tax performance.
Putnam's other added disclosures -- including the total value of holdings that employees and trustees have in a fund and stepped-up cost information -- are in line with proposed rules changes or legislative fixes. The manager-incentive disclosure has been a fringe issue in those discussions.
"Putnam wanted to be ahead of the curve from an information standpoint and wanted to show a softer, more investor-friendly side to itself," says fund management consultant Geoff Bobroff of East Greenwich, R.I.
"What they have done is set the stage for everyone else, and we know that there are 40-plus firms that will have to play mea culpa and adopt a similar attitude toward showing customers that they want things to be better now."
Lower fees and better disclosures are a start, but they should not make investors forget what has happened and should not earn a fund company any praise.
After all, it took shame and scandal to force firms into these changes.