Mutual Funds Touched by Insider Trading Probe

NEW YORK (TheStreet) -- 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."

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