Washington The House on Wednesday overwhelmingly voted to toughen penalties for mutual fund abuses and to make sure investors were provided with more information.
The 418-2 vote came as mutual fund scandals escalate, more big-name companies are cited by authorities, and a money stampede continues out of implicated funds.
The legislation would impose harsher penalties for abuses, make directors on company boards more independent from fund managers and require companies to disclose more information to investors about fees and fund operations.
The bill still needs approval in the Senate, where several different versions have been proposed but no action is expected before next year.
Lawmakers of both parties rose in House debate to assure the 95 million Americans who invest in mutual funds -- half of all households -- that the legislation would help them.
The bill "will provide Americans with a clear understanding" of mutual fund operations and fees, said Rep. Katherine Harris, R-Fla.
Mutual funds often are a principal vehicle for retirement savings and college funds and are traditionally regarded as safe investments.
The scandals have exposed "pervasive financial fraud by all segments of the fund industry," including some trusted companies, said Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee.
The aim of the measure, said its author Rep. Richard Baker, R-La., was to "help bring the bright light of truth into fund fees, clean up the way funds are managed, and eliminate the conflicts of interest and utter disregard of (fund directors') duty to mutual fund investors that plague this industry."
In addition, the bill 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.
The two "no" votes were by conservative Reps. Ron Paul, R-Texas, and Jeff Flake, R-Ariz.
Across the Capitol, impatient senators urged the head of the Securities and Exchange Commission a day earlier to end a turf war with state regulators and go after abuses in the $7 trillion mutual fund industry.
The House acted ahead of the SEC, which plans to make changes in how fund companies govern themselves and other areas through new rules it will consider in coming months. The proposed changes include a requirement that board chairmen of fund companies be wholly independent from the companies managing the funds -- a reversal of the SEC's previous position.
Also, three-quarters of the directors sitting on a fund company board would have to be independent, up from the currently required 50 percent of directors, SEC Chairman William Donaldson told the Senate Banking Committee at Tuesday's hearing.
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.
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.
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."