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. Last Updated: 07/27/2016

SEC Finds Widespread Mutual Fund Trickery

WASHINGTON -- U.S. Federal regulators painted a picture of widespread trading abuses in the $7 trillion mutual fund industry on Monday as New York Attorney General Eliot Spitzer threatened to slap funds with stiff penalties.

The Securities and Exchange Commission told lawmakers that more than a quarter of top brokerage firms have allowed customers to illegally trade mutual fund shares after hours and 10 percent of top fund groups may also have been involved in late trading.

Once seen as a safe haven for average investors, the mutual fund industry has become "the world's largest skimming operation," said Senator Peter Fitzgerald, chairman of the Senate Subcommittee on Financial Management.

The Illinois Republican described the industry as "a $7 trillion trough from which fund managers, brokers and other insiders are steadily siphoning off an excessive slice of the nation's household college and retirement savings."

Half of all U.S. households have money in the nation's mutual funds, investment pools regulated by the SEC but recently the subject of probes by state regulators.

The SEC examined documents from 34 brokerages and 88 top fund groups as part of a probe into questionable trading practices including late trading and market timing.

Late trading is illegal and involves trading in fund shares after the close of trade at the closing price. Trading after the close is supposed to happen at the next day's price.

"We have opened up a window into a morass of conflicts of interests," Spitzer testified to the subcommittee.