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SEC Investigates Wall Street Brokerages Over Possible Leaks

The Securities and Exchange Commission is investigating whether Wall Street brokerage firms are leaking valuable trading information to hedge funds in an attempt to get their business.

The inquiry is still in the fact finding stage, according to Lori Richards, who heads the SEC's Office of Compliance Inspections and Examinations.

Richards told CNBC the SEC is acting as "the cop on the beat," following up on complaints by a wide range of mutual fund companies. The mutual funds claim prices have been moving suspiciously ahead of their big orders, suggesting someone else is learning about the orders ahead of the market.

Richards said the Commission has sent letters to a large number of brokerages, asking for information about trades during the last two weeks in September. But she stressed that this is purely fact-finding, and that staff could be crunching data for months.

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Accroding to the New York Times, which first reported the inquiry, the brokerages include Merrill Lynch, Morgan Stanley, UBS and Deutsche Bank. In London, UBS and Morgan Stanley both declined to comment on the report, according to Reuters. Deutsche Bank and Merrill Lynch were not immediately available, Reuters said.

Richards wouldn't comment on specific firms but told CNBC that the group is much larger than those four.

Mutual funds have complained that brokers leak the trades to hedge funds in an attempt to attract the lucrative business of executing their trades. The hedge funds allegedly then act on the inside information using another broker, and pay the first broker back with subsequent business.

The SEC has limited jurisdiction over hedge funds, but could take action against the brokers if it finds evidence they were dealing in inside information.

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