“With allegations that now reach the executive ranks of mutual-fund companies, New York Attorney General Eliot Spitzer and the Securities and Exchange Commission are pushing for a major overhaul of the $7 trillion industry,” writes Tom Lauricella in today’s Wall Street Journal.

“As the state and federal regulators fight over who is the toughest reformer, a likely result will be sweeping changes in the way funds operate and treat their investors. In one corner of the turf war is Mr. Spitzer, who two months ago set off a series of investigations by charging that some mutual funds had given traders special breaks on buying and selling fund shares, allowing them to profit at the expense of long-term investors.”

“Meanwhile the SEC, caught off-guard by Mr. Spitzer’s revelations of mutual-fund wrongdoing, is trying to catch up once again. Earlier this year, the New York attorney general forced Wall Street to do away with decades-old conflicts between analyst recommendations and investment banking. Mr. Spitzer pushed the brokerage industry to accept a $1.4 billion settlement, leaving the SEC red-faced.”

“Mr. Spitzer this week began lambasting the SEC for not detecting fund-industry wrongdoing. ‘This has been an outrageous betrayal of the public trust by that agency,’ he said in an interview. ‘The regulators who were supposed to have been watching this industry were asleep at the switch. And I’m going to pull that switch.’ “

“Mr. Spitzer is expected to outline his investigation’s findings, as well as steps to curb abuses by mutual-fund companies, at a Senate hearing on Monday. He is also expected to highlight broader industry problems, such as ineffective boards of directors of funds and high fees charged to investors. Both issues are likely to be addressed as part of settlements his office hopes to reach with mutual-fund companies facing charges.”

“Mr. Spitzer is likely to call for fund-board chairmen to be truly independent from the mutual-fund-management companies that run the funds, according to a senior official in the New York attorney general’s office. He also is considering requiring fund boards to revisit how the fund-management companies are paid.”

“Mr. Spitzer’s office wants money managers to stop charging mutual funds higher fees than they charge for overseeing similar portfolios for a pension fund or other large institutional investor. Currently, most companies charge fund investors substantially more than they do institutional clients.”

“He could also try to force fund companies to make restitution to their shareholders. In an interview broadcast on CNBC Thursday evening, Mr. Spitzer predicted that the fund companies would ‘take a huge, huge hit.’ “