WASHINGTON Proposals would tighten mutual-fund rules

Lawmakers are considering harsher penalties for mutual-fund abuses.
WASHINGTON (AP) -- Lawmakers are agitating for action in Congress and by federal regulators as the mutual-fund scandal escalates, more big-name companies are cited by authorities and the money stampede continues in an investor revolt against implicated funds.
Impatient senators urged the head of the Securities and Exchange Commission on Tuesday to end a turf war with state regulators and go after mutual-fund abuses.
At the same time, Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow cautioned Congress against passing mutual-fund reforms that could cost investors more in fees and diminished returns.
It was the first public statement by Greenspan and Snow on proposed legislation to deal with mutual-fund abuses. In a legislative flurry, several senators and House members of both parties are proposing measures to overhaul the way the $7 trillion industry operates.
The stakes are high. Some 90 million people have money in U.S. stock mutual funds. Half of all American households invest in them, and they often are a principal vehicle for retirement savings and college funds. Before the scandal erupted in early September, they were traditionally regarded as safe investments.
What's happening
The House was voting today on legislation by Rep. Richard Baker, R-La., to implement harsher penalties for mutual-fund abuses, and approval appeared certain. The legislation also would make directors on company boards more independent from fund managers, and would require companies to disclose more information to investors.
The bill also would prohibit short-term trading by fund insiders, a practice under scrutiny in many of the recent cases. The quick trades, known as market timing, aren't illegal, but most funds don't allow them because they skim profits from longer-term shareholders.
SEC Chairman William Donaldson, coping with the worst crisis of his 10-month tenure, faced tough questioning and admonitions at today's hearing of the Senate Banking Committee.
"There's a real urgency here," Sen. Richard Shelby, R-Ala., the panel's chairman, told Donaldson.
State regulators in Massachusetts and New York have sharply criticized the SEC's handling of trade abuses and its recent partial settlement of civil fraud charges with Boston-based Putnam Investments, the nation's fifth-largest mutual-fund company.
The money exodus continued at Putnam, meanwhile, as the nation's largest pension fund, the California Public Employees' Retirement System, withdrew $1.2 billion.
The decision late Monday was a further blow to Putnam, which has seen investors remove about 8 percent of assets under management since allegations of trading abuses surfaced last month.
Also Monday, the SEC announced an accord on mutual-fund practices with another big financial company, the Morgan Stanley brokerage. The brokerage agreed to pay a $50 million fine and change its business practices.