(by Dr. Goldfinger)

SEC sent last month letters to bigest US banks and investment companies Citigroup, Merrill Lynch, Morgan Stanley, Credit Suisse First Boston and Goldman Sachs Group, asking how their mutual funds avoid conflicts in buying shares of bank clients, according to Bloomberg News.

The letters are part of an examination by the SEC into whether bank mutual funds were stuffed with shares of companies that pay the banks millions of dollars in fees for underwriting work and merger advice.

The letters, sent by the SEC’s Office of Compliance Inspections and Examinations, asked the banks to explain procedures required by the SEC to ensure that investment banking activities are kept separate from management of funds sold to the public, according to the person familiar with the inquiry.

``They’re looking for the smoking gun,’’ said Edward Siedle, 49, a former SEC enforcement attorney, now head of the Center for Investment Management Investigations in Lighthouse Point, Florida. ``They’re looking at what procedures fund boards have adopted to see that mutual fund shareholders aren’t harmed.’’

The letters are part of an SEC fact-finding effort in its early stages and short of an investigation that could lead to discipline by the commission, the person familiar with the letters said.

SEC spokesman John Nester declined comment on the agency’s requests to the banks. He said in May the SEC had begun checking possible fund favoritism toward banking clients earlier this year.