Representatives of the mutual fund and investment services industry appear before the Senate Banking Committee on Wednesday in a full day of hearings on reshaping the scandal-plagued industry.

Issues on the table include the proposed elimination of soft-dollar payments for research, an end to directed brokerage commissions, reform of fee structures and increased disclosure requirements designed to protect investors.

Politics may derail the passage of a blanket reform law, despite the clamor since last autumn's investigation by New York State Attorney General Elliot Spitzer, which uncovered widespread industry abuses, including market-timing and late trading.

While all major players agree that the $7 trillion industry needs fixing, factions disagree on whether it should be left to the Securities and Exchange Commission or to Congress, which could pass laws that reform proponents say go further than the regulatory agency.

But a lengthy reform process offers ample opportunity for derailment, particularly in an election year.

Although the scandal made investment reforms a topic of rare unanimity in Congress, at least one analyst believes legislation is not in the cards this year.

"We believe there is a less than 50% chance that a mutual fund industry reform bill will be passed into law by Congress in 2004," says Crystal Mingione, Washington affairs analyst for the Susquehanna Financial Group, an institutional sales, research and market-making firm that would be heavily affected by new legislation.

"They have a lot of issues on the agenda as it is, and if we don't see legislation passed out of the Senate Banking Committee by May, it's increasingly unlikely we would see anything at all."

But backers say piecemeal fixes proposed by the SEC, such as limits on the use of soft dollars for research payments and restrictions on frequent trading in and out of mutual funds, aren't enough.

Edward Siedle, a former SEC attorney who is now president of Benchmark Financial Services, a Florida company that helps pension funds select investment consultants, says individual investors have already paid for years of abuses at the hands of the fund industry.

"I strongly believe that this is something that should be decided in Congress," he says. "I'm fairly confident that the SEC doesn't have the authority to do it. Even if they had the conviction, they aren't empowered to enact the kinds of changes and prohibitions that would be required to clean up the mutual fund industry. I really don't think there's any doubt about that."

Wednesday's witnesses before the committee include Sens. Susan Collins (R., Me.) and Peter Fitzgerald (R., Ill.), sponsors of competing bills before the Senate, and Paul Haaga, chairman of the Investment Company Institute, the mutual fund trade group.

They are the final group to precede SEC Chairman William Donaldson, who is scheduled to testify on April 8 in the last committee hearing on reshaping the mutual fund industry.

When those hearings end, the next question is whether Congress or the SEC will take the lead in making proposed reforms official. Laws passed by Congress, rather than rules made by the SEC, would likely impose tougher restrictions on industry practices such as soft-dollar payments but might take longer to be put in place.

But supporters also worry that the laborious nature of the legislative process means the chance for major reform will get swept away as Washington is consumed by the presidential election campaign.

The House of Representatives passed a bill in November that addresses most of the mutual reform issues; four bills are now before the Senate, and a fifth, likely sponsored by Banking Committee Chairman Sen. Richard Shelby (R., Ala.), is expected after the hearings.

After Donaldson's testimony, the end to hearings opens a brief legislative window in which the Senate can act on mutual fund reform.

Mingione of Susquehanna says national party conventions and the final phase of the presidential contest will preclude the passage of major legislation.

"Come June, everyone's attention will shift, and then the conventions will be in July, and it's virtually impossible to get anything accomplished during that time," Mingione says.

John Collins, a spokesman for the Investment Company Institute, says that the SEC's proposed rule changes should address most of the issues raised since Spitzer's investigation implicated major mutual fund companies, including Putnam Investments a unit of Marsh & McLennan ( MMC), Alliance Capital Management and Massachusetts Financial Services.

"Many of the proposals for reform do not require the passage of laws but can be done by the SEC saying, 'From this point on, it will be done,'" he says.

The ICI has supported industry reforms, and Collins says retiring president Matthew Fink and Chairman Paul Haaga have worked hard in cooperating with regulators and legislators. Haaga will testify Wednesday in an afternoon hearing.

"This is a very serious development to have, after 63 years without serious scandal, to have this breach of confidence and public trust," says Collins.

When Wednesday's hearings conclude, the Senate will have more testimony from mutual fund executives, views from the independent research industry and a wide sampling of voices who agree reforms must happen but haven't agreed on the methods. It will also have Siedle's estimate that the industry has already cost investors a trillion dollars over the years.

Siedle says his estimate comes from totaling up the spending practices of the fund industry, particularly marketing costs that are paid for by commissions.

"The lion's share of money managers' commissions go for marketing," he says. "If that was abolished, that would require a radical rethinking of how mutual funds were marketed."

He says the use of soft dollars, in which money managers essentially use client assets to pay for independent research, is only one area where investors are abused without their knowledge. Even if they know commissions are used for research, there's no way for the individual investor to accurately compute their costs.

"There's no disclosure of the extent to which soft dollars are reducing your return," he says.

He also said retail investors pay disproportionately higher fees, sometimes twice as much as large institutional investors such as pension funds. After adding his estimates together, he says he'll be making the figure part of the public record for the first time.

"Nobody's ever put a figure on it so that people really understand the impact on the nation's savers," he says. "For many, that's the difference between a comfortable retirement or being elderly and impoverished, bagging groceries at the local supermarket."