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) -- The mutual fund business does not currently appear to be the focus of the

government's investigation

into insider trading, but that doesn't mean the $10 trillion industry won't be dealing with the fallout.

The investigation by the U.S. Attorney for the Southern District of New York is looking at whether third-party consultants called "expert networks" were passing nonpublic information to investment managers. The use of such information is considered a violation of the Investment Advisors Act of 1940, the primary law governing mutual funds.

"At this point it's very hard to say it's an active compliance issue for

mutual funds," says Barry Barbash, a partner the law firm of Willkie Farr & Gallagher and a former director of the

Securities and Exchange Commission's

investment management division. "But it will mean even more pressure on compliance, which has already been ratcheted up."

The insider trading investigation was first reported by

The Wall Street Journal

last weekend, and several hedge funds were searched by the Federal Bureau of Investigation on Monday.

On Tuesday it was reported that two firms that provide money management services to retail investors --

Janus Capital Group


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Wellington Management Co.

-- were contacted by federal investigators in regard to an ongoing insider trading investigation.

Denver-based Janus Capital was contacted by authorities on Tuesday, a company spokesperson confirmed. "Janus Capital Group has received an inquiry calling for general information and intends to cooperate fully with that inquiry," a firm spokesperson said in an emailed statement.

Janus is the 16th largest mutual fund complex and has more than $160 billion in assets under management spread out across four million shareholders, according to the firm.

Although Janus is the only publicly traded mutual fund company that has been reported to have been contacted by authorities, Wellington is a popular "subadviser" to larger retail funds for such well-known brands as



Hartford Financial Services



Subadvisers are firms that are hired to manage all, or part, of a larger mutual fund's portfolio. Approximately 12% of all mutual funds are subadvised, according to consulting firm Strategic Insights.

In fact, Boston-based Wellington has a much larger retail mutual fund footprint than Janus, with $214 billion in mutual fund assets under management and $37 billion in assets it runs for variable annuity providers, according to Financial Research Corp. in Boston.

Although a spokesperson for Wellington Management declined to comment, two of its largest clients say that they are standing behind the firm for now.

"We have a long standing relationship with Wellington, and we are confident in the firm," says a Vanguard spokesman, who added that Wellington currently subadvises 19 Vanguard funds for a total of $175 billion in assets. "It's important to denote that there have not been any allegations of wrongdoing on Wellington's part. We are in contact with the firm and we stand behind that relationship."

"The Hartford Mutual Funds enjoys a long-standing relationship with Wellington Management on behalf of our shareholders," a Hartford spokesperson said in an emailed statement. "While we are following this matter closely, we remain committed to our relationship and the investment services Wellington Management provides our clients."

Larger fund companies that hire subadvisers need to keep a close watch on their managers since they can be held accountable for any compliance issues, says Lynette DeWitt, research director at FRC. "From a regulatory perspective, the firm that hires the subadviser is legally responsible for it actions. Investors need be confident in a firm's due diligence," she explains.

For mutual fund investors, DeWitt adds that another concern is making sure that any questions regarding the insider trading issue don't result in a "crisis of confidence" that causes people to begin pulling their money from a fund. "You want to know the impact on the fund and if there are going to be net redemptions that push expenses up," she adds.

Although money management firms were contacted by authorities for information, that doesn't necessarily mean that they are the focus of the probe or that charges will be brought against any executives, Barbash says. "What

regulators are asking is broad request and general. At the moment, the investigation seems to be focused on the consultants," he says.

However, Barbash explains, the probe should not have blindsided the mutual fund industry, because regulators have been asking questions regarding so-called "expert networks" for several months as part of regular compliance exams.

"People in the

investment management industry have known regulators were looking at consultants for some time, and they were very interested in this," he explains. "So it doesn't surprise me that the story isn't over yet."