The mutual funds industry is worth $7 trillion

The Securities and Exchange Commission (SEC) voted unanimously in favour of a total ban on trading in mutual fund shares after 4 p.m.

The move is designed to stop big investors from buying and selling mutual fund shares overnight at the previous day's price.

The practice, known as late trading, erodes returns for ordinary savers.

The 4 p.m. cut-off point comes in response to revelations that many mutual funds have allowed Wall Street insiders to trade after hours, even though the practice is already illegal.

"This rule would effectively eliminate the potential for late trading through intermediaries that sell fund shares," the SEC said in a statement.

Consultations

The SEC will hold public consultations on the 4 p.m. deadline before holding a final vote on the measure early next year.

The watchdog has been leading efforts to crack down on abuses in the $7 trillion mutual funds industry, which looks after the savings of half of all American households.

The abuses have shaken confidence in the industry, previously seen as squeaky clean, prompting many small investors to withdraw their money.

High-profile casualties of the SEC's investigation so far include Morgan Stanley, which last month paid $50m to settle an SEC probe into its mutual fund arm.

Separately, Putnam Investments, the fifth-biggest mutual fund in the US, has struck a deal with the SEC under which it has promised to make good any losses suffered by its customers.