Middle America relies on savings in mutual funds
Massachusetts' state pension fund has sacked scandal-hit Putnam Investments as manager of $1.7bn of its assets.
Putnam, which is the fifth biggest mutual fund in the US, has been charged with improper trading by the Securities and Exchange Commission (SEC) and Massachusetts financial regulators.
New York federal prosecutors subpoenaed trading documents from Putnam on Thursday, raising the possibility of that Putnam could face criminal charges as well as civil ones.
While Putnam - which denies any wrongdoing - is the only mutual fund to face charges so far, there is a growing clamour among US financial regulators for a crackdown on some industry practices.
Half of all US households have savings in mutual funds.
Massachusetts Treasurer Tim Cahill said the state's pension fund was acting to protect its retirees.
New York Attorney General Eliot Spitzer began investigating the mutual funds industry last summer, partly in tandem with Massachusetts regulators.
Mr Spitzer has criticised the SEC for slackness in overseeing the $7 trillion mutual funds industry.
SEC Commissioner Harvey Goldschmid recently conceded that a "a major rule-making must take place" and that the SEC would need to be more "aggressive".
Mr Spitzer says a practice known as "market-timing" is widespread among staff of mutual funds and must be halted to protect small investors.
"Market timing" involves profiting from short-term trading in mutual fund shares, and can damage the value of the fund for long-term investors.
The practice is not illegal but breaches codes of conduct at most funds.
Mr Spitzer takes his crusade to Washington next week, where he will give evidence to Senate and House committees on Monday and Tuesday, followed by the Senate Banking Committee on 13 November.
"The regulators who were supposed to have been watching this industry were asleep at the switch," Mr Spitzer told the CNBC TV channel on Thursday, adding: "I'm going to pull that switch".
The SEC has charged two dismissed Putnam fund managers, Justin Scott and Omid Kamshad, with securities fraud, and served Putnam with an administrative order.
Mr Spitzer is investigating several other mutual funds. His office has refused to comment on reports that it is investigating the chief executive of one firm.
Mr Spitzer won financial settlements from major US investment banks over their advice to investors during the dotcom boom.