Nov. 19–There they go again.

Securities and Exchange Commission chairman William Donaldson and top securities regulators in New York and Massachusetts are still arguing over how to handle the mutual fund scandals. At a Congressional hearing yesterday, the brawl almost upstaged discussion of the funds’ misdeeds, and some observers wonder whether the whole brouhaha is undermining investor confidence instead of bolstering it.

“We can’t have you and Mr. Spitzer and the guy in Massachusetts screaming at each other in a public forum every day,” Sen. Christopher Dodd (D-Conn.) told Donaldson. He was referring to dueling op-ed pieces by State Attorney General Eliot Spitzer on Monday in the New York Times and Donaldson on yesterday in the Wall Street Journal, and Massachusetts Secretary of the Commonwealth William Galvin’s public criticism of the SEC’s settlement last week with Putnam Investments as too lenient.

Donaldson called the public conflict “counterproductive” but “it gets a little bit frustrating to be working with somebody in partnership and then to read in the newspaper the next day that they’re attacking your agency.”

Juanita Scarlett, a spokeswoman for Spitzer, said Spitzer had no comment on the article Donaldson wrote in yesterday’s Wall Street Journal that called criticism of the SEC’s settlement with Putnam “misguided and misinformed.”

“We brought the first mutual fund case,” Scarlett said, referring to Spitzer’s early September allegations that a hedge fund received special trading privileges from mutual funds. “We have reached out to the SEC to work with them. We were not notified of the Putnam settlement.”

Brian McNiff, a Galvin spokesman, said Galvin believes the Putnam settlement should have required the company to admit wrongdoing, and he is still pressing separate civil charges against that company and two of its executives.

So what does all this mean for investors? Marc E. Lackritz, president of the Securities Industry Association, said the argument, which he called the “noise out there,” undermines investor confidence.

Gregory Bruch, a former member of the SEC’s enforcement staff who now works at the Washington-based law firm Foley and Lardner, said it was “just astounding” to him that the SEC’s settlement would be criticized by state regulators in what he called a “very damaging” and “cynical” fashion.

Donaldson “has to respond, and if anything, the SEC’s response is long overdue,” Bruch said.

Barbara Roper, director of investor protection for the Consumer Federation of America, said, “my personal view is that Eliot Spitzer is right, at least to a certain extent.” For the SEC to settle so quickly with a company that was “picking its shareholder’s pockets” shows that “it’s the same old SEC that hasn’t been effective in dealing with fraud in the past.”

Chief economic correspondent Jim Toedtman contributed to this story.

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