The president of the powerful lobbying group for the $7 trillion mutual fund industry said Tuesday that mutual fund managers found to have broken the law should be sent to prison.

In prepared testimony to the U.S. Senate committee on banking, housing and urban affairs in Washington, Investment Company Institute (search) President Matt Fink said he was "outraged by the shocking betrayal of trust exhibited by some in the mutual fund industry."

The industry has been rocked by a growing list of companies caught in an industrywide probe of improper trading. A number of executives have resigned or been fired as a result.

Some fund companies have been accused of allowing a few privileged investors to profit from exploiting inefficiencies in the way mutual funds are priced. This can harm returns for long-term investors.

Fink said government officials must identify everyone who violated laws. "Those who acted willfully against the interest of fund shareholders should be sanctioned severely," he said.

"Those who violated criminal laws should be sent to prison. The law enforcement message must be loud, tough, clear and memorable."

Fink said fund shareholders who had been harmed should be compensated, adding that it was a "particular outrage" that some funds permitted a few large shareholders "to prey" on smaller investors.

The ICI president said this repudiated the most fundamental principle underlying mutual funds — that all shareholders must be treated equally. He added: "There must be zero tolerance of arrangements that violate this principle."

The ICI has proposed that the Securities and Exchange Commission (search) require all mutual fund transactions be received by fund companies by 4 p.m. U.S. eastern time to help prevent the late trading of shares.

It has also asked the SEC to rule that all "long-term" mutual funds impose a 2 percent redemption fee on any sale of shares within five days of purchase to discourage short-term trading.