US mutual funds face pressure to reform

The company said it had uncovered signs of improper trading by staff at its US Trust subsidiary, and said regulators were examining its trading practices.

Schwab is the first retail firm to be pulled into the scandal, in which funds are accused of favouring big clients.

More than half the households in the US invest in mutual funds.

The funds pool investors' resources to maximise their investment potential, and control shares worth hundreds of billions of dollars.

Especially given the imminence of a Presidential election next year, the widespread use of mutual funds by ordinary Americans has given the furore resonance beyond that felt in previous financial scandals.

On the way out

The backlash has already cost two senior mutual fund bosses their jobs, with the two founders of Pilgrim Baxter & Associates (PBA) - a unit of South African financial services giant Old Mutual - stepping down after an internal investigation into market timing.

The SEC is quickly becoming nothing more than a ministry of the status quo Eliot Spitzer, New York Attorney-General

There, as elsewhere, the allegation has been that funds traded after the market closed in defiance of their own regulations, so as to benefit key clients at the expense of the mass of ordinary investors.

And Putnam, the US's fifth-biggest fund, has promised "far-reaching reforms" after two of its fund managers allegedly piled up hundreds of thousands of dollars for themselves through short-term trading on their own funds' performance.

Investors are voting with their feet, as the giant Fidelity Investments said it had slashed its holdings in major US mutual funds in the three months to September.

Into the fray

Now the regulators are stepping up their own action.

William Donaldson, chairman of the powerful market watchdog the Securities and Exchange Commission (SEC), met both Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan on Friday to discuss the problem.

"Chairman Donaldson at the SEC is very focused on cracking down on wrongdoing," Mr Snow said in a statement after the meeting.

"I am confident that the reforms he has initiated will help to protect mutual fund investors, and that wrongdoers will be punished to the fullest extent of the law."

But New York Attorney-General Eliot Spitzer, who has been a far bigger thorn in Wall Street's side than the SEC in recent years, said he feared a whitewash.

"The SEC is quickly becoming nothing more than a ministry of the status quo," he told a Reuters conference in New York.