GAO faults SEC's oversight of mutual fund industry

WASHINGTON -- Congressional investigators have questioned the adequacy of inspections of mutual funds by the Securities and Exchange Commission, a few months after finding that the agency failed to uncover trading abuses throughout the fund industry that cost investors billions of dollars.

Congress's Government Accountability Office, in a report released yesterday by two House lawmakers, said the SEC has fewer examiners covering the sprawling $8 trillion mutual fund industry than it should, and funds deemed to be lower risk may not be inspected for 10 years or more.

A GAO report issued in April said the SEC's inspectors should have detected the market timing abuses before September 2003, when regulators began an industrywide crackdown after New York Attorney General Eliot Spitzer exposed the violations. That assessment brought a bipartisan attack on the agency by the chairman and senior Democrat of the House Judiciary Committee.

This time it was two Democrats, Representatives Barney Frank of Massachusetts and Paul Kanjorski of Pennsylvania, who seized on the report to criticize the SEC, now run by Christopher Cox, who left Congress to become the agency's chairman this summer.

''This GAO report . . . confirms my long-held suspicions: More can be done and more should be done to protect American investors," Kanjorski said in a statement preceding the release of the study. ''We need to ensure that the SEC's oversight of the mutual fund industry is adequate to protect consumers' investments and prevent abusive practices from developing again in the future."

The SEC has shifted resources from routine inspections of mutual funds to so-called targeted examinations linked to specific risks, with comprehensive exams only conducted on funds considered high risk, the new report found.

The agency also is responsible for inspecting sales of funds by brokerage firms, an area in which it has discovered undisclosed arrangements between fund companies and brokerages that create potential conflicts of interest.

The SEC division that oversees mutual funds and hedge funds is without a permanent head following the recent departure of Paul Roye.