WASHINGTON (AP) – In response to mutual fund scandals, senators are proposing to outlaw long-standing practices by fund companies and brokerage firms that they say create conflicts of interest and drive up investors’ costs.

The proposals would significantly change the way mutual fund companies conduct business with investors and the brokers who sell funds. They are part of legislation outlined Monday that would require fuller and clearer information on fees and operations.

The sponsors – Sens. Peter Fitzgerald, R-Ill., Susan Collins, R-Maine, and Carl Levin, D-Mich. – are in the early stages of gathering support, and they indicated that formal drafting may not occur until early summer.

Still, Vanguard Group founder and former CEO John Bogle has endorsed it. Bogle, who has called for an overhaul of the fund industry after revelations of widespread abuse, described the legislation as “the gold standard in putting mutual fund shareholders back in the driver’s seat.”

The House in November passed legislation requiring mutual fund companies to disclose more information about fees and operations, but it is not as far-reaching as the new Senate proposal, which would ban fund companies from paying brokerage firms to steer investors toward certain funds. That is likely to stir opposition on Wall Street, where investment houses receive billions of dollars annually from the mutual fund industry to sell its funds.

“We’re taking the brokerage community off the gravy train,” Fitzgerald said.

The Securities and Exchange Commission has been changing rules governing the fund industry. It is expected to propose Wednesday the same ban on such incentive payments to brokers.

The proposal would end the practice of letting mutual funds use shareholders’ money to pay for advertising and marketing costs, known as 12b-1 fees.

The SEC, meanwhile, promised relief to investors from mutual fund abuses by early summer through its ongoing rule changes.

SEC spokesman Herb Perone said the agency still is writing rules to protect investors. “These reform initiatives launched last fall should be in place by early summer and will provide mutual fund investors with relief this year,” he said.

SEC officials hadn’t yet reviewed the new proposal, he said, but “we hope that their efforts are consistent with the initiatives already underway” at the SEC.

Sen. Richard Shelby, R-Ala., chairman of the Senate Banking Committee, did not endorse Monday’s proposal. He has said he first wants to hear from all interested parties.

The Investment Company Institute, the fund industry’s lobbying group, said it supported some provisions of the new measure but also criticized what its leader called “many ill-defined new legal standards that could change mutual funds’ essential structure.”

“These changes could produce major dislocations and unintended consequences that would deter innovation, diminish competition, breed litigation and as a result, harm current and future generations of mutual fund shareholders,” ICI President Matthew Fink said.

AP-ES-02-09-04 1905EST