The US Securities and Exchange Commission (SEC) failed to do enough to curb at least one of the mutual fund trading practices under investigation by the New York attorney general, academics and investor advocates said.
Attorney General Mr Eliot Spitzer said last week he is investigating two types of trading in mutual fund shares. One is an arbitrage-style of market-timing, which is not technically illegal. The other is after-hours trading, in which shares in mutual funds are bought and sold after the market closes. That is against the law.
A top SEC lawyer acknowledged the agency has known about the market-timing practice and said the commission has urged the fund industry to put a stop to the problem - with some success.
But sources close to the SEC said it may also have known about after-hours trading and failed to take action - a more serious criticism.
Market timing has been under SEC scrutiny for years. The agency wrote a letter in April 2001 to a fund industry group urging funds to address the problem. But the SEC has not brought an enforcement action.
Market timing exploits the use by some fund companies of stale data in making daily adjustments to mutual fund share prices.
Sources close to the SEC said the agency may also have known that intermediaries - possibly including, but not limited to, hedge funds - have been doing after-hours trades.
The SEC announced last week it too was investigating trading practices in mutual fund shares, as it raced to expand the investigation begun by Mr Spitzer.
The agency has also been working on new rules to require mutual funds to disclose more about fees they charge and their links to Wall Street investment banks.