Lead by Secretary of the Commonwealth William Galvin, the Massachusetts Securities Division is looking at an agreement the Boston-based mutual fund company had to give an expense rebate check of $40,000 a year to the Boilermakers Local 5 in New York union’s retirement plan, the Wall Street Journal is reporting citing a Putnam email.  To offer the rebate to the retirement plan, Putnam employees repeatedly said the company would use marketing and distribution fees it collects from all fund shareholders to cover distribution costs, e-mails show.

This raises red flags in the eyes of the investigators due to previous warning issued by the U.S. Securities and Exchange Commission (SEC).   The SEC has warned the fund industry that rebating such fees to favored customers could be a violation of laws meant to ensure the equal treatment of investors.

However, Putnam’s head legal counsel, Ralph Derbyshire does not think the company did anything wrong.   In a statement, Derbyshire said, “we occasionally reimburse plan sponsors for reasonable plan administrative expenses that could otherwise be charged directly to the plan participants.”   But the “reimbursements are paid out of Putnam’s general corporate assets and not out of” marketing fees “payable by the mutual funds to Putnam,” Derbyshire adds.

In addition, Galvin’s office is examining how the Boilermakers’ retirement plan used the rebate money, which is intended for administrative expenses for the benefit of the plan’s 1,000 covered employees, the Journal report said, citing a person familiar with the matter, saying investigators were examining whether the union trustees of the plan personally benefited from the payments.

Donald McCallion, a lawyer for the trustees of the Boilermakers Local 5 annuity fund, told the Journal that the trustees used the reimbursements only for proper expenses. “Our trustees take their fiduciary responsibilities extremely seriously,” he said. “As far as we know, we are in full compliance with all laws and regulations.”

Other than the two parties in question, Galvin said the potential is there for a very broad investigation, as he said hecould pursue what he Journal dubs “retirement-plan operators.” Specifically, Galvin sees the potential for fraud if “retirement-plan operators” are in fact, steering plan participants to certain funds in return for rebates that they are using for “personal pleasures,” which he considers a form of “payola,” Galvin told the Journal.