Massachusetts' top securities regulator is investigating whether leased office space and other services that investment banks provide to hedge fund traders have created a conflict of interest that could hurt investors.

Secretary of State William Galvin said in an interview yesterday that Switzerland-based UBS AG was cooperating with his request for documents that he hopes will show whether hedge funds are paying higher than normal brokerage fees to compensate the investment bank for office space.

Galvin declined to say whether he had requested such information from banks other than UBS, or from hedge funds. But he said he was examining such lease arrangements industrywide, including services such as receptionists provided to traders in so-called "hedge fund hotels."

At issue is whether such enticements to win hedge funds' trading business lead to higher management fees that investors pay the funds, and whether the fees are adequately disclosed to investors.

"This is about special privileges for special customers," Galvin told The Associated Press. "It's really about fairness to average investors and openness in the financial services industry."

Galvin said his investigation was at a preliminary stage, and it was too early to say whether the probe might lead to enforcement actions resulting from any findings of securities law violations.

Rohini Pragasam, a spokeswoman for UBS in the firm's U.S. headquarters in New York, said the bank was cooperating with Galvin's investigation. She declined to comment further.

Galvin said information from UBS would be presented under oath. He said he did not issue a subpoena because UBS is voluntarily cooperating in the probe, which was disclosed in stories in The New York Times and The Boston Globe yesterday.

UBS leases space to hedge fund traders in a downtown Boston office tower, serving as a so-called "prime broker" handling trading services for hedge funds. The space comes with receptionists, espresso machines and consultants to manage information systems, the Times said.

The Times said UBS leases 400,000 square feet of space to hedge funds in a number of cities.

Galvin's investigation involves only lease agreements in Massachusetts.

He said he had not heard of regulators in other states or at the Securities and Exchange Commission looking into the same issues his office is investigating, although the SEC has recently put the hedge fund industry under tighter scrutiny.

Phone messages seeking comment from the SEC and securities regulators in other states were not returned yesterday. SEC offices were closed in honor of the national day of mourning for former President Gerald Ford.

Hedge funds are an increasingly popular form of investing that operate under minimal government supervision. U.S. hedge funds traditionally have catered to the rich, as well as pension funds and university endowments, but are increasingly luring less wealthy investors.

Unlike mutual funds, which generally hold stocks and bonds, hedge funds can invest in anything from commodities to real estate. Some funds even buy whole companies, while others buy and sell stocks like day traders - but with billions of dollars at stake.

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