As we predicted last week, legislation imposing new regulation on the mutual fund industry is moving through Congress. The first measure, H.R. 2420, the �MUTUAL FUNDS INTEGRITY AND FEE TRANSPARENCY ACT OF 2003,� was actually passed under Suspension of the Rules on November 19th. After an effusive display of bipartisan self-congratulation led by House Financial Services Committee Chairman Mike Oxley (R-OH), the bill was approved with nary a recorded vote.

The measure requires, among other things, that the SEC impose �fair value� methods for determining net asset value of funds. We expect to see the House measure fall into a very full �In Box� in the Senate, but that does not mean that the congressional assault on the fund industry is over. Far from it. Look for full-scale federal regulation of the industry, with audit and fiduciary rules for directors that mirror the Sarbanes-Oxley legislation. The question is whether the mutual fund lobby, once one of Washington�s most powerful influence blocs, can regroup and counter-attack before the Senate takes up the House-passed measure or its own proposal.

Members of both parties are already talking about additional legislation to criminalize malfeasance by fund managers and directors. Rep. Barney Frank (D-MA) said during the debate: �I have spoken with the Attorney General of New York, Mr. Spitzer, the Secretary of the Commonwealth of Massachusetts, Mr. Galvin. They have further ideas about how we can improve the protection of the investing public.� Those ideas include a steady procession of fund world names through the prosecution meat grinder with the national press dutifully documenting the carnage. It is significant that Chairman Oxley moved quickly to get the bill, which was introduced back in July by subcommittee chairman Richard Baker (R-LA), out the door, putting down the first marker. The provisions Oxley added for fair value pricing seem to have support on both sides of Capitol Hill. The real question is whether the attractive demographics of mutual fund owners, some 90 million voting age Americans, will be sufficient incentive for the Senate to reconcile the different proposals floating around before the 2004 Election Year madness begins in earnest.