Washington 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.
Several senators and House members of both parties are proposing measures to overhaul the way the $7 trillion industry operates.
SEC Chairman William Donaldson, coping with the worst crisis of his 10-month tenure, faced tough questioning and admonitions at a hearing.
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 recent scandal, they were regarded as safe investments.
"There's a real urgency here," Sen. Richard Shelby, R-Ala., chairman of the Senate Banking Committee, 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 Putnam Investments, a major mutual fund company.
New York Atty. Gen. Eliot Spitzer first raised the charge that preferential trading deals for big-money customers of many fund companies could be siphoning billions of dollars from ordinary investors. He denounced the SEC after the Putnam settlement last Thursday.
Spitzer and Massachusetts Secretary of State William Galvin said the settlement, with civil fines to be determined later, was insufficient punishment. The SEC under Donaldson "is more interested in protecting the fund industry than the investor," Galvin charged.
Donaldson, who defended the Putnam settlement at the hearing, said the accusations were "very counterproductive" at a time when people at his agency "are breaking their neck to address these problems."
The SEC "welcomes collaboration with the state officials," he said.