About 95 million Americans invest part of their paychecks in mutual funds, sending off checks often on trust that their money will be invested fairly and that no hidden costs will drain the value of their investments. This relatively new class of investing has been watched closely by the Securities and Exchange Commission, but, not surprisingly, the lure of so much mutual-fund money (a total of about $7 trillion) has led some funds to act less than scrupulously. Though the SEC is pursuing reforms, Congress should make sure tough standards are in place to keep the funds honest and investors informed.

Those standards would be in the form of the Mutual Reform Act of 2004, sponsored by Sens. Susan Collins, Carl Levin and Peter Fitzgerald, who are expected to testify today before the Senate Banking Committee about the bill. Their bill would require the industry to include independent accounting and auditing, codes of ethics and whistleblower protections. It would require disclosure for all types of fund expenses and costs and make sure investors saw these by putting them prominently on the investors’ account statement instead of buried in the brokerage mailings that so few people read.

Sen. Collins, a former commissioner of the Maine Department of Professional and Financial Regulation, also wants to make these numbers easier to interpret by including with generalized data – such as the transaction cost per 1,000 shares of a fund – the specific amount paid by the investor who was charged. That is a small but important change to make the numbers more meaningful and was also recommended by the General Accounting Office in its review of the industry. The change is needed not because calculating the specific from the general data is difficult; it is because so many people are thoroughly unfamiliar with the basic terms of investing, so they often do not understand the significance of the data being presented.

Other portions of the act may be less apparent to investors but are equally crucial. They would, for instance, eliminate “shadow transactions” – revenue sharing or soft money, the money a fund manager pays a broker for added information for choosing stocks that can quickly create conflicts of interest. And it would strengthen rules governing market timing – the rapid trading of a fund – a practice that recently landed several funds in trouble.

Recently a coalition of investment consumer groups, including Fund Democracy, Consumer Federation of America and Consumers Union, reviewed the legislation and concluded, “It addresses significant gaps in the SEC’s proposals to improve fund governance, dramatically enhances the quality of mutual fund cost disclosures and prohibits distribution practices that create unacceptable and poorly understood conflicts of interest.” If the reform does, in fact, achieve all this, it would also improve the level of trust in the market, which is essential to everyone’s investment strategy.