Massachusetts' top securities regulator has begun a probe into whether State Street Corp , one the world's biggest institutional money managers, misled pension funds over the risk level of certain investments, according to a spokesman for his office.

A spokesman for Massachusetts Secretary of State William Galvin said the regulator is investigating Boston-based State Street over certain investment products. He cited, for instance, its enhanced index bond fund. The spokesman declined to be identified by name.

He said the fund was marketed as a safe investment to pension funds and retirement plans even though it held many derivatives, swaps, and other securities. These were potentially inappropriate for the funds' mission, he said.

State Street spokeswoman Arlene Roberts declined to comment on the investigation, which was first reported by The Wall Street Journal on Wednesday.

The bond funds at the center of the allegations were the target of past litigation against State Street.

U.S. insurer Prudential Financial Inc filed suit in October 2007 seeking restitution for funds sold by State Street that suffered heavy losses, accusing the money manager of deceptive, imprudent and incompetent investing in products whose returns were linked to 20 subprime U.S. mortgage pools.

State Street responded by saying it would vigorously defend itself.

(Reporting by Ross Kerber and Jason Szep; editing by Carol Bishopric)

Investment