(MONEY Magazine) – Pair Eliot Spitzer with anyone and you're guaranteed a lively discussion. In this case, the New York State attorney general and Stephen Cutler, director of the enforcement division of the Securities and Exchange Commission, were interviewed by MONEY columnist and CNBC host Ron Insana. Wall Street's top cops, who have been busy pursuing a wide variety of financial services-related scandals, engaged in a spirited debate.

Will there be more financial scandals?

ELIOT SPITZER: I'm asked all the time, "Are we done? Has the spasm of cases run its course?" I believe that we are on the descending slope of the bell curve. Does that mean that there will not be new theories, new issues, new cases that emerge? Of course there will be new cases.

STEPHEN CUTLER: I share Eliot's sense that we're on the downslope. Then I look at our inventory of cases and think maybe not. We still have a huge number of cases where household-name companies are accused of financial reporting irregularities. I'm struck by the number of cases that involve foreign companies.

E.S.: We're still looking at some major sectors, but we also have a lot of reforms we need to implement, especially in the mutual fund arena. Late-trading and timing issues are probably gone; people aren't going to be stupid enough to play those games now. But we still need to confront the larger issues regarding mutual fund boards and the structure of fees.

Will the Grasso case go to trial?

RON INSANA: Let's talk about the case against Dick Grasso over his compensation as CEO of the New York Stock Exchange. It was reported that you might again be open to a settlement with Dick, and Dick might be open to a settlement with you.

E.S.: I can tell you absolutely flat out, no way, no how, absolutely inconceivable that I'm settling it now. We will win this case. I tried for months to settle it and was met with a brick wall. I will not settle at this point. I'm sick of it. I'm ready for trial.

R.I.: Steve, how come you're not there with Eliot on this one?

S.C.: We investigated this along with Eliot, but this is really a case involving New York not-for-profit law and whether the compensation Mr. Grasso got was excessive. That's not a violation of federal securities laws last I checked.

Are mutual fund fees too high?

E.S.: Fees have to be driven down, and not because regulators are trying to set fees. Just the opposite--fund boards have to negotiate and get competitive bids. The behavior of fund boards and the fees that flow through the industry are the greatest issue confronting that sector. Until we confront that, the American investor will be fleeced every day.

MELLODY HOBSON, ARIEL CAPITAL: I tense up when I hear the word fleeced, knowing that my colleagues and I work very hard for our shareholders every day. Why is the fund industry inherently different than any other industry when it comes to fees? Customers have a choice. They can go to Vanguard and pay very little, or they can go to other companies and pay more. You can buy a Ford or a Mercedes.

E.S.: Let me increase your discomfort. I'll use the word again. Investors are being fleeced. There is a gross disparity between what fund companies charge their institutional investors and what they charge retail investors for identical services. There's a simple reason for that: Institutional investors negotiate. Mutual fund boards don't negotiate on behalf of retail investors. Where there is competition, individual investors actually get charged what they should get charged. But in 90% of that market there is no competition.

M.H.: I want to raise one more point on this issue, because I just can't stop here. We have retail clients and we have institutional ones. The businesses are fundamentally different. Any of the 500,000 fund customers that we have can call us any day of the week and request information, get individualized statements and lots more than just investment management. We also have a large corporate pension fund that's a client. The 400,000 people in that company's pension plan are never expected to call us and ask for that same information. Those are fundamentally different levels of service expectations.

E.S.: I hate to say it, but you're wrong. We've done apples-to-apples comparisons and found that in relative terms retail investors pay more than institutional investors for identical services. Putnam itself calculated a several-hundred-million-dollar differential on an annual basis for identical services. That brings me to one of the disagreements Steve and I had over the Putnam settlement. [Putnam paid $110 million to settle charges of insider trading and, after being sued by regulators and watching investors flee, cut fees and improved disclosure.] I thought the settlement was premature and should have included a fee discount.

S.C.: Our challenge is to make sure investors can look at a single piece of paper or a single document and say, "Okay, I know exactly how much this is costing me."

Is regulation stifling new funds?

RON MUHLENKAMP, MUHLENKAMP & CO.: Fifteen years ago, we brought out a mutual fund that happens to have my name on it. It took us two years to get up to a million dollars. We have three trustees, including me. The other two are independent. For the first 10 or 12 years, they served without pay. Based on the new proposals, I don't think I would be able to bring out a fund today. My fear with some of the new proposals--such as the one requiring outside chairmen--is that you shut off new ideas and new blood. And what has always been great about this industry is that you could get into it with a relatively modest amount of money.

Second, I'm the biggest individual investor in our fund. All my family's money is in it. So I find it somewhat offensive when someone says that my outlook is different than that of other shareholders and implies that a fund manager is out to get rich quickly by screwing shareholders as opposed to getting rich over the long term by building a business.

S.C.: We certainly don't want to shut off new ideas. The problem is that there are fund managers out there who aren't thinking about the long term, and that's why we've had the problems we've had. You can still innovate in this business. You can form new funds using outside chairmen. That shouldn't be such a high hurdle. But I agree that we have to be sensitive to the impact regulatory changes have on capital markets.