A better mutual fund reform.(Forward Observer)

The American mutual fund has been the most successful investment mechanism of all time. In 1970, there were 361 funds with a total of $48 billion in assets; at the end of 2003, there were 8,124 funds with $7.2 trillion in assets. That's as much as all the mortgage loans outstanding in America. It's the equivalent of $70,000 per household. It's two thirds of the Gross Domestic Product.

Invented exactly 80 years ago this spring, the mutual fund is a simple idea: a company that owns a portfolio of stocks, bonds, or cash managed by a professional. Individuals purchase shares of the company and thus own pieces of the portfolio--perhaps 100 or so different stocks, in a typical case.

Few investors could construct such a portfolio on their own, and nearly all investors lack the time and expertise to manage it--buying and selling stocks, handling the bookkeeping, filing the reports. For these services, the average fund charges investors about $125 a year for every $10,000 in assets they own. Some funds also charge investors a one-time commission, usually around 5 per cent, which goes to the broker or adviser who sells the fund.

For more than ten years, I've written a financial column geared to small investors, and I consider mutual funds an awfully good deal. The public thinks so too. There are lots of other places they could put their money, yet 91 million Americans in 53 million households own funds (roughly half the nation).

Given this success, it's hard to believe that anyone would want to tamper with the industry, which has largely evolved on its own. But regulators on Capitol Hill, and their friends, can't sit still.

In early September of last year, the attorney general of New York, Eliot Spitzer, announced that several mutual funds had allowed large investors to profit from practices that were either illegal or actively discouraged by the fund's own published policies. The practices--called late trading and market timing--allowed privileged investors to benefit from all-but-certain price changes in stocks on foreign markets that close before the U.S. ones do. The harm to investors was negligible, but Spitzer was right to pursue them and unearth the scandal.

Now comes Stage Two--the part where the ...