“In a financial world rife with conflicts and confidence games, the mutual fund industry holds itself out as a haven for investors. But that image was badly tarnished 11 days ago when Eliot Spitzer, the New York attorney general, said he had discovered disturbing and unfair practices at a handful of mutual fund companies,” writes Gretchen Morgenson in Sunday’s New York Times.

“So are the practices uncovered by Mr. Spitzer anomalies, as the industry argues? Or will a continuing investigation of the fund business turn up additional mischief?”

“Those questions are unanswerable now. But a growing number of investor advocates, securities lawyers and former fund executives argue that docile mutual fund boards and passive securities regulators have left shareholders more vulnerable than they may realize. These critics say that the disclosure of fund board activities is deficient and that directors’ pay at certain fund companies is so large as to raise doubts about board independence.”

” ‘The Investment Company Act says that the interests of fund shareholders must be placed ahead of all others, but the interests of managers have taken precedence,’ said John C. Bogle, founder of the Vanguard Group and a fund shareholder advocate. ‘And it is the modus operandi for the industry: “How can I be doing anything wrong when everyone is doing it?” ‘ ”

“Some 95 million Americans have entrusted nearly $7 trillion of their money to the nation’s mutual fund managers. But who is watching over the managers to ensure that their shareholders’ trust is not misplaced?”

“A fund’s directors are the first line of defense against misbehaving, me-first managers, according to the industry. The Investment Company Institute, an industry lobbying group, states on its Web site that this unique ‘watchdog’ role does not exist in any other type of American company.”

“In addition, there are the regulators at the Securities and Exchange Commission who enforce the Investment Company Act of 1940. The act was created to keep investors safe from the unsavory practices of the 1920’s that gave mutual funds — then known as investment pools — a bad name.”

“But if mutual fund boardrooms are populated by such ferocious guard dogs, why didn’t directors at Nations Funds, Strong Funds and Janus uncover and eliminate the questionable practices before they were uncovered by Mr. Spitzer?”

” ‘Mutual fund directors sit on too many boards, and they are paid too much money for the time they can devote to each individual portfolio,’ said Lewis D. Lowenfels, an expert in securities law at Tolins & Lowenfels in New York. ‘Under existing law, the investment adviser is able to exercise a pervasive influence over the board.’ “

“According to Mr. Spitzer, a handful of funds struck special and lucrative deals with a hedge fund called Canary Capital Partners. The deals allowed it, among other things, to buy and sell fund shares after they had stopped trading, a convenience not available to other investors. Mr. Spitzer warned that he would bring other mutual fund mischief to light as his investigation continued.”

“And what about the S.E.C.?”

“The commission, having been upstaged by Mr. Spitzer, is now working with him in his investigation. That the S.E.C. was not first to identify the funds’ practices came as no surprise to Edward A. H. Siedle, president of Benchmark Financial Services in Lighthouse Point, Fla.”

“Mr. Siedle, a securities lawyer and former S.E.C. official in fund regulation, looks for fraudulent activity among pension fund managers. He said that the S.E.C. had not been tough enough on money managers and that it had allowed too many violations by managers to go unpublicized.”

” ‘There is this incredible body of secrecy about the money management industry in general and the mutual fund industry in particular,’ Mr. Siedle said. ‘The mutual fund industry is not an industry that has a pristine record. It is an industry that has very carefully and skillfully kept from the public its history of transgressions.’ “