“Federal officials announced a new front in the investigations into the mutual fund industry on Tuesday, saying they had uncovered widespread instances of brokers receiving undisclosed payments for steering investors toward specific funds,” writes Stephen Labaton in today’s New York Times.

“Officials at the Securities and Exchange Commission described a kind of mutual fund payola — arrangements where a significant number of mutual funds provided cash and other compensation to the brokerage houses that sell fund shares.”

“The findings come from a nine-month examination of 15 of the largest Wall Street brokerage firms by the S.E.C.”

“In one particularly prevalent form of compensation, S.E.C. officials said, the funds steered the trading of the stocks in their portfolios to brokerage houses that would promote the funds to their brokerage clients, in exchange for the trading business.”

“Such arrangements between fund companies and brokerage houses can be legal, if they are fully disclosed to investors. The problem in too many cases, S.E.C. officials said, is that fund investors were kept in the dark about such payments and about their brokers having a financial interest in promoting a particular fund.”

“The officials said that federal securities laws and the industry’s own rules required both the brokers and the funds to disclose such conflicts of interest.”

“The S.E.C. officials compared the issue to the conflicts that became prevalent during the stock market boom, when securities analysts were writing ostensibly objective reports about the companies that were giving investment banking business to the analysts’ firms.”

” ‘A customer has a right to know what the incentives are when the selling broker recommends a particular fund family,’ said Stephen M. Cutler, the head of the S.E.C.’s enforcement division. He said the agency had recently begun investigating 8 broker-dealers and 12 mutual fund families on suspicion that they had not adequately disclosed such arrangements.”

” ‘Even if it is the best-performing fund,’ Mr. Cutler added, ‘a customer has a right to know whether a broker received anything for recommending that fund transaction.’ “

“Details of the S.E.C. examinations remained somewhat sketchy, as the commission declined to identify which brokers and funds might have been involved. But Tuesday’s announcement elevated the mutual fund scandal to a new level, one that has the potential to affect millions of investors directly.”