``There's a continuing interest in whether the allocation of securities between accounts is done fairly,'' SEC Enforcement Director Stephen Cutler said in an interview.

The issue for SEC investigators is whether money managers channeled sought-after shares of initial public offerings to hedge funds rather than funds for customers who pay lower fees. Alliance Capital Management Holding LP, which runs hedge funds and mutual funds, is among the firms being investigated, said a person familiar with the inquiry, who declined to be named.

Two months ago, New York State Attorney General Eliot Spitzer initiated an investigation of improper mutual-fund trading. He alleged that companies including Bank of America Corp. and Janus Capital Group Inc. allowed some clients to make short-term trades of mutual fund shares, practices that weren't available to all customers. Regulators are also examining whether some clients were illegally allowed to trade shares after stock markets closed at 4 p.m. New York time.

Alliance spokesman John Meyers in New York didn't return calls at his office.

`Conflicts'

``There are inherent conflicts of interest throughout this business and many people lost their way in dealing with them,'' said Geoff Bobroff, an independent industry consultant in East Greenwich, Rhode Island, and a former enforcement attorney at the SEC.

Hedge funds -- investment pools for the wealthy that can profit when markets fall or rise -- are one of the most lucrative areas of money management. That's because they generally charge 1 percent of assets under management in addition to 20 percent of any profit. Fees on actively managed mutual funds are ``typically'' about 1 percent, said Jay Ritter, a professor of finance at the University of Florida.

Charges already have been brought against former employees of companies including Bank of America, Putnam Investments, Prudential Securities Inc. and Fred Alger Asset Management Inc. The disclosures have prompted U.S. lawmakers to propose legislation to tighten oversight of an industry responsible for the savings of 95 million Americans.

Spitzer is in talks with Bank of America, Janus, Strong Capital Management Inc. and Bank One Corp. to settle the allegations of improper trading, a person familiar with the matter said. In any settlement, the companies would have to change the way they do business, setting an example for others, the person said, speaking on condition of anonymity.

Quattrone Case

Spitzer used similar tactics to reach a $1.4 billion settlement with 11 Wall Street firms that allegedly misled investors with biased equity research.

Securities regulators also have examined favoritism in how investment banks allotted IPOs during the stock market boom that ended in 2000. Spitzer and the SEC have alleged that Citigroup Inc.'s Salomon Smith Barney Inc. and Credit Suisse First Boston awarded IPOs to corporate executives who were in a position to grant investment-banking business.

Frank Quattrone, CSFB's former top technology banker, faces government charges that he obstructed investigations into how his bank allocated shares in IPOs. He's the first banker facing criminal charges from the investigation.

Now, the SEC is interested in ``whether investment advisers who managed both hedge funds and mutual funds fairly allocated IPOs,'' said SEC spokesman John Nester. He declined to give further information.

Portfolio managers receive larger fees from hedge funds than they do mutual funds, which could create an incentive for a manager to push attractive IPO shares to hedge funds, said Ritter.

Wells Notice

Since July, the SEC has accused money managers with failure to properly disclose how IPO shares were allocated among mutual funds. American International Group Inc.'s John McStay Investment Counsel LP agreed to pay $200,000 to settle allegations that it failed to make disclosures about a procedure for allocating IPO offerings that the SEC said gave an advantage to the Brazos Mutual Funds.

The SEC also lodged an administrative case against Nevis Capital Management LLC and its top executives alleging they ``inequitably'' allocated IPO shares to the Snowdon Limited Partnership hedge fund and one mutual fund, keeping those shares from other clients. Nevis lawyer Joe Goldstein has denied the SEC's allegations.

Alliance Capital has received a Wells notice from the SEC, alerting the company that action may be taken against it, the New York Times has reported, citing unidentified people who have been briefed on the investigation.

Congressional Hearing

Alliance Chief Executive Officer Lewis Sanders said Oct. 30 that the company's internal investigation hasn't ``uncovered any new findings'' since it suspended money manager Gerald Malone and a hedge fund marketing executive on Sept. 30 for conflicts in short-term trading of mutual fund shares. Alliance has said it will ``vigorously defend'' itself against shareholders lawsuits.

The issue of mutual fund managers engaging in improper IPO allocations was raised at a congressional hearing Tuesday by Representative Rahm Emanuel, an Illinois Democrat. Emanuel asked Spitzer if that possibility was under review.

Spitzer said IPO allocations to mutual funds were a ``fertile area'' to investigate and promised to follow up.

In a subsequent interview, Emanuel said he had no specific information about possible IPO abuses by mutual fund managers. But he said he considered the hot IPO market of the late 1990s a potential ``cocktail'' for abuses.

The SEC and other regulators ``should take a look at what was going on and see if this was self-dealing,'' Emanuel said. ``Were funds being distributed to average investors in the account, or to large institutional investors in funds at the expense of average investors?''