Putnam Investments (search) settled charges of improper trading with the Securities and Exchange Commission (search) Thursday, vowing to reform its business practices and reimburse clients, but the settlement deepened the conflict between the SEC and the two state regulators investigating the industry.

Already critical of the SEC's response to the scandal, New York Attorney General Eliot Spitzer (search) and Massachusetts Secretary of State William Galvin called Thursday's deal a betrayal.

"The SEC ... has a history of accommodation and this is convincing evidence of their ineffectiveness," said Galvin, whose office is exploring additional legal action against Boston-based Putnam.

Spitzer, who has not taken legal action against Putnam but has been at the forefront of the investigations into fund companies, said he too was disappointed. "It is inadequate and a misstep by the SEC," he said.

Federal and state regulators separately charged that Putnam, a unit of Marsh & McLennan Cos Inc. (MMC), allowed some of its portfolio managers and certain clients to break company rules by buying and selling mutual fund shares very quickly to profit from stale prices.

Boston-based Putnam, the fifth largest U.S. mutual fund company, agreed to pay back investors who were hurt by the short-term trading. Putnam neither admitted nor denied wrongdoing in the settlement, the SEC said.

"The reforms Putnam will undertake as part of the Commission's order are intended to provide real and substantial protections for mutual fund investors," said Stephen Cutler, Director of the SEC's Division of Enforcement.

The settlement comes after investors withdrew some $14 billion, or 5 percent of Putnam's total assets under management, in the first week of November.

In the $7 trillion mutual fund industry, Putnam's settlement with the SEC is seen as another move by the company's parent to move beyond the scandal that ended the career of Lawrence Lasser, who grew Putnam into a powerhouse in 17 years as the company's president.

In a statement, Spitzer said Putnam's settlement with the SEC represents only a starting point for needed industry reforms, and do not address crucial issues involving restitution to fund shareholders, fines and penalties.

Spitzer said the agreement does not address reforms necessary to ensure investors are charged the lowest possible fees. The fee structure has benefited management companies at the expense of investors, he said, and the agreement completely fails to address this critical governance issue.

Spitzer said his office would continue an investigation of Putnam, which agreed earlier on Thursday to reform its business practices and reimburse clients to settle federal charges of improper trading at the Boston-based money manager.

In Massachusetts, Putnam's home state, Secretary of the Commonwealth William Galvin spoke out against Putnam's deal with the SEC.

Galvin called the uncertainty over a fine, and the lack of any requirement to account for the wrongdoing, inexcusable and a bad signal to send to other fund companies, like Strong Capital Management Inc (search), that have also been targeted by regulators.

"Obviously Mr. Strong and all the fund managers must be having quite a party," Galvin said. "It clearly demonstrates the SEC is more interested in protecting the fund industry than the average investor."

To date, Putnam has been the biggest company to become swept up in the mushrooming probe of the mutual fund industry that involves several state and federal regulators.

Regulators have charged that Putnam failed to supervise several fund managers who engaged in market timing in the funds they helped supervise. Putnam recently fired these four fund managers.

Putnam also agreed to internal structural changes that include a requirement that the boards of trustees that oversee its funds have independent chairmen and that three-quarters of their members are outsiders.

The SEC also said that Putnam agreed to hire an independent compliance officer.

"We are already implementing many of these reforms and will move quickly to implement all of the reforms in the agreement," Charles Haldeman, Putnam's new president and chief executive, said in a statement.

But to outsiders Putnam's efforts may not be far reaching enough, analysts said.

"A lot of the things they agreed to are coming for the industry anyway and at first reading this seems to be a cookie cutter deal for some of the issues in the industry," Bobroff said, adding "This won't take the microscope off them."

Marsh shares closed down 13 cents at $45.41 on the New York Stock Exchange (search) on Thursday.

Reuters contributed to this report.