The Associated Press

WASHINGTON - Federal regulators, strengthening their response to the mutual fund scandal, proposed Wednesday to ban special incentive payments by fund companies to brokerages and required that companies provide fund investors more information on fees.

The Securities and Exchange Commission, which has been making a series of changes in rules governing the mutual fund industry, is promising relief to investors from fund abuses by early summer.

The five-member SEC voted in a public meeting to propose a ban on fund companies making special payments to brokerage firms for steering clients toward certain funds - a long-standing practice that critics say creates conflicts of interest and drives up costs to investors. The proposal will be submitted for public comment for several weeks and likely adopted by the agency sometime afterward.

SEC chairman William Donaldson said that in recent years, "It has become painfully clear that the practice of directing ... (fund money) to a broker or dealer as compensation for distribution of the fund's shares presents opportunities for abuse."

The practice is all the more troubling, he said, "because its impact is hidden from investors."

Underscoring the proposal's far-reaching impact, Donaldson said: "This one is going to hit them where it hurts."

The SEC commissioners also voted to adopt a new rule requiring funds to provide investors a twice-yearly "shareholder report" with fuller information on fees and expenses. The report would include the dollar amount of fund expenses paid by shareholders on a $1,000 investment.

The new disclosure will "enable investors to determine the amount of fees they paid on an ongoing basis, as well as to compare the amount of fees charged by other funds," said Paul Roye, head of the SEC division that oversees the mutual fund industry.

Also under the new rule, fund companies will be required to give investors more information every quarter about the stocks the funds invest in.

The SEC move goes beyond a recent agency proposal to require that fund companies disclose such special arrangements to investors. An investigation by the agency found that the practice was rampant in the mutual fund industry and frequently undisclosed - prompting officials to express outrage.