SEC Including Mutual Funds in Sub-Prime Probe

The Securities and Exchange Commission is looking at mutual fund companies’ trades of securities backed by sub-prime mortgages, the Associated Press reports. The SEC is also taking a close look at the practices of lenders and ratings agencies.

“We look at all the players to determine whether there were missteps in accounting and disclosure and possible insider trading,” said Walter Ricciardi, deputy enforcement director at the SEC.

But it’s become apparent that it’s hard to trace the complicated transactions between borrower to lender to the creation of collateralized debt obligations by investment banks and the ultimate investments in them.

“They’ve thrown this staggering dragnet out, trying to find out what these relationships are,” said James Cox, a securities law professor at Duke University.

In particular, the SEC is looking at the five biggest collateralized debt obligation issuers: Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley.

“Given the recent events in the mortgage and credit markets, and their potential impact on financial institutions,” the SEC is looking at these five firms’ balance sheets “with greater frequency than during periods of normal market stress,” Erik Sirri, director of the SEC’s market regulation division, recently told Congress.

The SEC issued letters to the nation’s 25 largest mutual fund companies asking them about their sub-prime holdings, worried that they may be overvaluing them now that the $3.5 trillion global sub-prime mortgage market has collapsed.