In a 10-year-old case involving the manager of several major Washington-area mutual funds, the U.S. Supreme Court agreed yesterday to decide how much evidence the Securities and Exchange Commission must have to impose penalties when allegations of fraud are involved.

The court agreed to hear an appeal in the case of Charles W. Steadman, a Washington investment adviser who manages the Steadman Funds. Steadman has resisted SEC actions that would have barred him from an active role in overseeing the funds.

At issue is whether the SEC must adopt a stiffer rule calling for "clear and convincing evidence" before sanctions may be imposed under fraud provisions of federal security law, or whether a simple preponderance of evidence is sufficient.

The court accepted an appeal from a 5th Circuit U.S. Court of Appeals decision last October upholding the SEC's power to require a preponderance of evidence.

The ruling was in conflict with an unrelated case by the D.C. Court of Appeals, which said that the more stringent test of "clear and convincing evidence" is necessary in fraud cases involving a potentially severe penalty.

Steadman's problems with the SEC began in 1971, and centered around a complaint that he had borrowed heavily and solicited brokerage from banks in which "he caused his investment company cients to deposit large sums in non-interest-bearing accounts." Not only was there potential conflict involved, but Steadman also failed to disclose the facts, adequately according to the SEC.

The SEC action was only against Steadman individually, and not the investment funds. Steadman is the sole voting shareholder of Steadman Security Corp., which manages four Steadman mutual funds and a money market fund with assets of more than $100 million.

A mutual funds is a fund in which investment decisions are handled by the fund's manager rather than the individual and risks are spread over a variety of investments. A money market fund pools individual investments to buy securities such as Treasury bills and large certificates of deposit from commercial banks, which generally require an investment large enough to bar many individual investors.

The SEC had imposed its maximum penalty in the Steadman case, permanently barring him from association with any investment adviser, prohibiting him from affiliating with any registered investment company and suspending him for one year from associating with any securities dealer.

The Supreme Court decision, which isn't expected before the court's next term, could have an impact far beyond the Steadman case. Between 1970 and 1979, the SEC began 864 administrative proceedings under the fraud provisions of federal security law.

Steadman said yesterday he is "very pleased we are in this final forum." According to Steadman, "the issues here are of very broad importance" and may result in a ruling that will "help protect the right of every citizen to conduct business without regulatory tyranny."