“Morningstar Inc., the firm that millions of investors rely on to rate the performance of mutual funds, could face civil charges by the Securities and Exchange Commission for failing to promptly correct inaccurate data it published about a mutual fund.,” writes Tom Lauricella in today’s Wall Street Journal.

“The SEC has formally notified the financial-information company that it may have violated securities rules. Joseph Mansueto, Morningstar’s founder and chairman, said in an interview that the firm is in discussions with the SEC about settling the case.”

“The probe raises questions about the systems Morningstar has in place to ensure the accuracy of its core business of tracking and rating about 15,700 mutual funds in the U.S. It also comes at an awkward time for Morningstar, which registered with the SEC for an initial public offering of its own shares in May with a filing in which it called itself ‘one of the most recognized and trusted names in the investment industry.’ “

“The SEC doesn’t have explicit authority over publishers of financial information, but has told Morningstar that, if the firm was reckless in its handling of data, it could be held liable for deceiving investors, Mr. Mansueto said. The SEC’s assertion of jurisdiction appears aggressive and unusual. Morningstar could have chosen to fight the inquiry on those grounds but apparently has decided not to.”

“The SEC, Mr. Mansueto said, has questioned the delay in fixing the information and whether Morningstar took sufficient steps to correct the data.”

“The catalyst for the investigation was incorrect data that Morningstar published earlier this year for the $20 million Rock Canyon Top Flight stock fund, Mr. Mansueto said. The error apparently stemmed from some confusing communications about the impact of a 2003 capital-gains distribution on the fund’s share price and made the fund’s performance appear far better than it was.”

“For about a month beginning Feb. 27, Morningstar published incorrect returns on its Web site and ranked the fund the top performer in its category. A representative of the fund told Morningstar on March 12 that the data were wrong, but Morningstar didn’t fix the problem until March 25, according to Mr. Mansueto and Jonathan Ferrell, manager of the Top Flight Fund.”

“Mr. Ferrell said he was contacted by the SEC in late March, before Morningstar had corrected the information. In a letter to the SEC about the events, he said that even after Morningstar officials acknowledged that the returns it had posted for the fund were wrong, the problem went uncorrected for another week and several subsequent calls to Morningstar weren’t returned. Mr. Ferrell added that no investors put money in the fund during the period in which Morningstar posted the inaccurate returns.”