Congress has discovered the mutual fund investor, the latest constituency requiring reassurance and attention from Washington. The congressional witch hunt started by the Enron debacle continues and grows. Indeed, we hear cheerful reports of a growing mood among the oldest criminal class to impose a new layer of bureaucracy on investment funds.

With NY attorney general Elliot Spitzer and other doomsayers decrying the �widespread� nature of illegalities inside Fund World, we foresee the possibility of a sister-organization for the Public Company Accounting Oversight Board created by the Sarbanes-Oxley (�SOX�) legislation last year. It might be named the Mutual Fund Securities Oversight Board, as long-time banking committee watcher Bob Feinberg proposes, or maybe something else � but it will cost investors a pretty penny no matter what you call it. When Spitzer labels the SROs �failed organizations,� you�re hearing the end of self-regulation on Wall Street � a fact we highlighted in a previous issue. Indeed, the de facto alliance between Spitzer and SEC enforcement chief Stephen Cutler is going to lead a broad inquisition throughout the mutual fund industry.

The legislative risk scenario looks something like this: House Banking Committee Chairman Mike Oxley (R-OH) and Capital Markets Subcommittee chairman Rep. Richard H. Baker (R-LA) will probably ram through some type of legislation regulating mutual and hedge funds quickly with press releases and congratulations for all. The Senate will let it sit in the inbox awhile, as it usually does. When the time is propitious, for example due to a scandal that's getting lots of headlines, the same players who brought you SOX will stampede a bill through both houses, perhaps before the 2004 convention adjournment. Just as they did with SOX, Oxley, Baker et al, plus Democrats led by Maryland Senator Paul Sarbanes, will strike when the political iron is hot. Look for legislation to include regulation on mutual and hedge funds, mandatory transparency of fees charged investors, and disclosure of payments to independent research shops � meaning the end of soft dollars. Funds may be forced to publicly disclose all payments for outside services.