NEW YORK - Sometimes just the threat of the government meddling in your business can do a lot more to spur change than if it ever got involved. That could be exactly what happens in the crackdown on mutual fund fees.

Those lofty fees charged by many fund companies eat away at investors' returns, and the problem is that most shareholders don't really know what all these costs cover since the details don't have to be disclosed.

New York Attorney General Eliot Spitzer already has gotten one fund to lower its fees as part of a broader settlement over its improper trading practices, and he says he's ready to force more to do the same.

Maybe he won't have to.

To date, fees are determined by each fund's board of directors, who are expected to set rates that are considered fair and reasonable based on such costs as managing the fund, keeping track of accounts and mailing annual reports.

Fees average about 1.48 percent on stock funds and about 0.98 percent on bond funds, according to research firm Lipper. They reduce a fund's annual return by that amount.

The mutual fund industry has long defended its fees, saying investors get what they pay for.

But that view has come under attack by critics who claim that high fees are a product of the same corrupt corporate culture that permitted the trading abuses now in the spotlight to go on.

That's, at least, what Spitzer is charging in his quest for fee reductions.

He won a big victory - an industry first, in fact - when he got Alliance Capital Management to cut its fund fees by 20 percent and freeze the fees at that lower rate for at least five years. The amount of revenues the company will give up as a result is estimated to be $70 million a year - or $350 million over five years.

It came as part of a settlement announced last week to resolve allegations of questionable fund trading at Alliance, which also agreed to pay $250 million in penalties and restitution.

The Securities and Exchange Commission, which negotiated the penalties and restitution with Spitzer but not the fee cuts, lashed out at the move. It said that it had turned down a similar offer because "we see no legitimate basis for the Commission to act as a 'rate-setter' and determine how much mutual fund customers should pay for the services they receive in the future from Alliance Capital."

The SEC believes that competitive markets should dictate prices, and instead is pushing for the fund business to improve fee disclosure and increase the number of independent directors.

That might be the better approach.

There are times when government intervention can help, and there are places where it won't work at all. Trying to set fees for thousands of funds would clearly be a daunting task and could very well hurt more than it would help.

Determining a fair rate could only be done one fund at a time, since costs vary because of factors like management expertise and compliance structure. And then, of course, those factors change over time.

Requiring price cuts on a percentage basis doesn't really work, either. Consider the case of Alliance Capital.

Fees average about 1.79 percent on its stock funds and 1.34 percent on Alliance's bond funds, both well above industry averages, according to Lipper. So even knocking 20 percent off doesn't make all Alliance funds cheap.

"It is like saying that all cars should be priced the same way ... but a Chevy is different from a Ford," said Jay Baris, a partner specializing in securities law at the New York firm of Kramer, Levin, Naftalis & Frankel. "Setting fees is very complicated. It's about considering the nature and the quality of the services that the adviser is providing. It has to do with adviser's performance, profitability and personnel. It's not black and white."

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