Securities regulators are trying to determine why First Chicago Corp. took so long to purge problem securities from a money market mutual fund, and if the fund was properly priced before the bailout.

The inquiry, disclosed by the banking company last week, could result in sanctions if securities rule violations are found. The inquiry also highlights the continuing concern over the management by banks of money funds and trust funds billed as safe investments.

Eight other banking companies have announced bailouts of money funds and trust funds this year, including First Hawaiian Bank and BankAmerica Corp. Furthermore, a money market fund run by a consortium of community banks is the subject of litigation and an SEC probe following its liquidation in September at a loss to investors.

First Chicago said it had lost $7.2 million on a total of $158 million of structured notes the bank holding company purchased from investor portfolios. The portfolios were the $120 million-asset First Prairie Money Market Fund, Government Seties; a cash portfolio managed for an unnamed institutional investor; and three commingled trust funds that were not named.

A First Chicago spokeswoman said the values of the problem securities dropped when markets for them became "illiquid" and interest rates rose.

The banking company downplayed the financial impact of the action. "The losses resulting from the purchases of these notes are relatively small," said First Chicago executive vice president W.G. Jurgensen in a press statement.

He added that First Chicago covered all the losses, so investors lost nothing. "All affected funds have been made completely whole," Mr. Jurgensen said.

Nonetheless, First Chicago said it has dismissed an unnamed portfolio manager, and introduced a "series of Corrective measures" which were not detailed. Under securities laws, mutual fund managers need not disclose the names of portfolio managers for money market and index funds.

The press statement added that the Securities and Exchange Commission had begun an "informal inquiry" into the bailout, and that the banking company had "initiated discussions" with the Office of the Comptroller of the Currency and the Federal Reserve Board "concerning the circumstances surrounding the events."

The First Chicago spokeswoman declined to elaborate on the inquiry and discussions, SEC officials, citing agency policy, declined to comment, as did spokesmen for the banking regulators.

But according to a source close to the inquiry, who asked not to be named, securities regulators want an explanation of the timing of the money market fund bailout.

Specifically, on June 30 the SEC's division of investment management asked money market mutual funds to shed certain securities deemed too risky for those funds.

The source said regulators want to find out why First Chicago waited until Oct, 27 to get permission for its bailout.

The source added that regulators also are examining the pricing of securities in the money fund portfolio.

Specifically, they want to know if fair market values were assigned to all securities or if improper pricing helped keep the fund value at a dollar per share.

In the third quarter the First Prairie government fund's gross yield before expenses of 4.96% annually was the highest of any money fund in the country, according to researcher IBC/ Donoghue Inc., Ashland, Mass.

The First Chicago spokeswoman said the holding company has already sold some of the structured notes at a loss and continues to hold others that are "appropriately hedged."

Half of the loss on the structured notes was charged against First Chicago's third-quarter earnings.

The remaining loss will be charged against fourth-quarter earnings, the spokeswoman said.

Observers predicted that the SEC inquiry and the bailout will have little or no affect on First Chicago's reputation with investors.

"If they stand behind it and bail out the fund, there shouldn't be any problems," said Mary McAvity, a consultant with Cerulli Associates Inc., Boston.

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