The Securities and Exchange Commission has stepped up the frequency and intensity of its mutual fund inspections, senior agency staff told the Senate Banking, Housing and Urban Affairs Committee.

In testimony before the committee today in Washington, Paul Roye, the SEC's chief of enforcement, said the agency "has embarked on a dramatic overhaul of the regulatory framework in which mutual funds operate." The aim is "restoring the trust and confidence of investors that are crucial to the continued success of the mutual fund industry and preserving their key role in our country's economy," according to a transcript.

Last year's budget increases allowed the SEC to raise its inspection staff by about one-third, leaving 500 people to oversee about 8,000 mutual funds run by about 900 fund complexes, as well as about 8,000 registered investment advisers.

Lori Richards, director of the office of compliance inspections and examinations at the SEC, told the Senate committee that even the improved ratio of staff wasn't enough to keep tabs on the entire industry.

Under a more aggressive inspection regimen, the SEC will inspect firms it deems higher risk more often and more closely, and perform more "targeted mini-sweep" inspections that would focus on finding problems with particular trading practices, such as payment by mutual fund companies for "shelf space," use of soft dollars by index funds, bond fund valuation and pricing, as well as investment consultant practices.

"We are moving aggressively to implement the lessons learned from the recent market timing abuses, and more broadly, to enhance our ability to detect abuses in the fund industry," she told the committee.

She also said a few firms will get "comprehensive 'wall-to-wall' examinations of a select number of firms to test the assumptions used in our risk-based exams" to make sure the SEC is looking for the right abuses among fund companies.

The agency also admitted that its procedures failed to catch some of the market-timing funds, because the arrangements were often made by individuals and were against company polices.

The SEC will step up its examination of email when it does its inspections, to be more attuned to possible illegal arrangements, according to an agency report. It also proposed creating an office of risk assessment that will try to discover new forms of abuse.

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