Numerous Probes

This, meanwhile, is not Spitzer's first investigation involving the mutual fund business.

Earlier this summer, Spitzer joined with Massachusetts Secretary of the Commonwealth William Galvin in an investigation of allegations that Morgan Stanley (MWD:NYSE - commentary - research) pressured brokers to sell the firm's in-house mutual fund products at the expense of other funds.

The Securities and Exchange Commission and NASD also have set their sights on Wall Street and the mutual fund industry. Both regulatory agencies have been investigating hidden fees charged by mutual funds and allegations that some Wall Street firms push their customers to buy shares in more expensive mutual fund offerings.

The SEC, for instance, is trying to determine whether Morgan Stanley brokers pushed customers to buy shares in its in-house mutual funds. The SEC investigation focuses specifically on whether Morgan customers were urged to buy so-called Class B shares in those in-house mutual funds. In recent years, Class B shares increasingly have drawn scrutiny from regulators at the SEC and the NASD because they tend to be the most costly mutual fund products.

On the surface, Class B shares often look like a good investment because investors generally don't pay any upfront sales charge, or "load." But investors in Class B shares often pay higher annual fees than on shares with upfront sales charges, fees that often exceed any initial savings an investor might reap. Additionally, brokers often waive or reduce the upfront fees on so-called Class A "load" shares for large investors.

The NASD, meanwhile, has been waging its own investigation into the sale of Class B shares and issued an investors advisory warning to mutual fund customers to avoid most Class B offerings pushed by Wall Street firms.

Spitzer declined to comment on how the investigation into Canary began. But he said it is unrelated to another investigation his office launched earlier this year into the $500 billion hedge fund business.

During the past year, hedge funds also have come under scrutiny in the aftermath of several big failures and allegations of fund managers manipulating the value of their assets in order to deceive investors.