The Securities and Exchange Commission (SEC) formally notified the Chicago-based investment research firm it may have violated securities rules, the Wall Street Journal reported. Morningstar founder and chairman Joseph Mansueto told the Journal the two sides are discussing a settlement of the matter.

While the SEC doesn’t have explicit authority over publishers of financial information, regulators have told Morningstar that the company could be the target of civil charges for deceiving investors if it was found to be reckless in its handling of data, Mansueto told the Journal.

The probe raises questions about the systems Morningstar has in place to ensure the accuracy of its core business of tracking and rating about 15,700 US mutual funds and comes at an awkward time for Morningstar, which registered with the SEC for an initial public offering of its own shares in May.

The spark for the investigation was incorrect data Morningstar published earlier this year for the $20-million Rock Canyon Top Flight stock fund, Mansueto said. The error apparently stemmed from some confusing communications about the impact of a 2003 capital-gains distribution on the fund’s share price and made the fund’s performance appear far better than it was.

For about a month beginning February 27, Morningstar published incorrect returns on its Web site and ranked the fund the top performer in its category. A representative of the fund told Morningstar March 12 that the data were wrong, but Morningstar didn’t fix the problem until March 25, according to Mansueto and Jonathan Ferrell, manager of the Top Flight Fund. The SEC, Mansueto said, has questioned the delay in fixing the information and whether Morningstar took sufficient steps to correct the data.

Ferrell said he was contacted by the SEC in late March, before Morningstar had corrected the information. In a letter to the SEC about the events, he said that even after Morningstar officials acknowledged that the returns it had posted for the fund were wrong, the problem went uncorrected for another week and several subsequent calls to Morningstar weren’t returned. Ferrell added that no investors put money in the fund during the period in which Morningstar posted the inaccurate returns.

Mansueto told the Journal that the SEC contacted Morningstar in April with a request for information about returns on the Top Flight fund. But it wasn’t clear that Morningstar was the subject of the investigation until after the firm had filed its registration statement for its IPO on May 6, he said.

Although Morningstar’s analysts have long criticized individual funds for poor performance and fees and from time to time spoken out on industrywide issues, the firm raised eyebrows by recommending investors sell funds run by companies caught up in the share trading scandal that emerged a year ago.

Recently, Morningstar was critical of ING in a  statement posted on the Morningstar Web site for not being more forthcoming with details of its findings over possible trading violations and recommended investors delay investing in ING funds (SeeING Discloses Trading Practices Problems ).