(MONEY Magazine) – Her promotion in December to director of the Securities and Exchange Commission's division of investment management made Marianne Smythe (above) Washington's top watchdog over the nation's mutual fund industry -- and the $1 trillion that Americans have entrusted to it. In an interview with MONEY's Prashanta Misra, Smythe was reluctant, so early in her tenure, to make specific statements about the direction of SEC policy. Clearly, however, her free-market approach to regulation of the fund industry contrasts sharply with that of her outspoken predecessor, Kathryn McGrath, who acted as something of a consumer advocate during her seven-year tenure. Smythe, a former law professor at the University of North Carolina and a seven-year veteran of the SEC, believes that the industry has done a solid job of policing itself, and that investors are better off relying on their critical instincts rather than government controls. In other words, ''buyer beware.''

Q. What do you hope to accomplish in your job? A. My top priority is to deal with the results of the year-long review of the Investment Company Act of 1940 requested by the chairman. We may seek refinements and modernization in the act to reflect changes in the industry. For example, we would like to make it easier for American investors to buy foreign mutual funds by reducing our regulatory barriers; but we want other nations to reduce theirs at the same time. Q. In 1988, the SEC proposed to curb so-called 12b-1 charges, the annual marketing fees that many sponsors levy on funds. The National Association of Securities Dealers, a self-regulatory group, then proposed its own rules. When will the issue be resolved? A. It's very hard to predict. Personally, I'd like to see the fee question addressed by requiring funds to disclose all their charges clearly and intelligibly. I think real, open competition is the best restraint on fund fees. Q. Do you think shareholders will lose money in a money-market fund during this recession? A. I don't think it's likely, but it's certainly not impossible. A few issuers of commercial paper have defaulted, which might have caused funds holding the paper to slip in value. In each case, however, the fund's sponsor stepped in and made the fund whole. But the law does not require the sponsor to do that. That's why it's critical that money fund investors understand that the U.S Government is not insuring what they own (see the cover story on page 68). Q. Are there other areas in which fund investors don't recognize the risks? A. I think investors are learning. The junk bond experience has been a good, if harsh, teacher. It has led investors to be more vigilant. My advice is to be suspicious and don't be shy in asking questions. Too many investors are too | trusting of financial product salesmen. If anybody promises you something for nothing, that person is lying.