The mutual funds industry is worth $7 trillion

Securities and Exchange Commission chief William Donaldson told Congress he would improve scrutiny of the funds, which handle billions in household savings.

He said the SEC may ban after-hours trading in mutual fund shares, a practice which has hit small investors.

Funds may also have to spell out how they prevent so-called market-timing.

Market-timing involves rapid trading in fund shares to take advantage of out-of-date prices, a tactic only available to major investors.

The crackdown follows revelations of widespread irregularities in the mutual funds industry, which handles the savings of more than 50 million households in the US.

Savers lose

Investigators say dubious trading practices have allowed Wall Street insiders to rack up hefty profits at the expense of long-term savers.

On Monday, Morgan Stanley agreed to pay $50m to settle an SEC investigation into its mutual fund business.

Putnam Investments, a major mutual fund, has also struck a deal with the SEC under which it has agreed to make good any losses suffered by its customers.

But Mr Donaldson, who was giving evidence to a panel of US senators, came under criticism for failing to take action promptly enough.

"Whether due to a lack of resources or other pressing priorities, mutual fund abuses simply did not receive adequate attention from the SEC," said Republican senator Richard Shelby.

The SEC has also come under fire from New York attorney general Eliot Spitzer, who is conducting his own investigation into mutual funds.

Mr Spitzer has accused the SEC of being too quick to settle with the mutual fund organisations it has been probing.