Oct. 23–Shares of Federated Investors tumbled 13 percent yesterday after the Downtown money manager disclosed it apparently violated the same after-hours trading rules that have put the $7 trillionmutual fund industry into the cross hairs of regulators.

Federated said a few investors were exempted from limits on how often investors can buy and sell Federated’s mutual funds, allowing them to turn a quick profit. The company also said some investors were allowed to buy mutual funds after the market’s 4 p.m. close. The practice, known as after hours trading, has been compared to being able to bet on yesterday’s horse race.

The questionable trading has captured wider attention since New York Attorney General Eliot Spitzer announced last month that a hedge fund agreed to pay $40 million to settle charges it made the same kind of improper trades. Canary Capital Partners did business with several leading mutual fund operators, including Bank of America, Janus Capital Group and Strong Capital Management.

Federated disclosed a few days later that Spitzer had subpoenaed the company for information about trades. Yesterday, Federated disclosed that the Securities and Exchange Commission and the National Association of Securities Dealers have also asked for information.

“Federated is committed to taking remedial actions when and as appropriate, including compensating the funds for any detrimental impact these transactions may have had on them,” the company said in a statement.

Some of the investors who were allowed to make more frequent trades than Federated’s rules allow also made additional investments in other Federated funds, the company said.

It declined to provide more information on the investors involved, what funds they were trading or whether any employees had been disciplined for their involvement.

Money market funds, which account for 73 percent of the money the firm manages, were not involved, the company said.

Federated shares traded as low as $27 following the announcement, ending the day at $27.59, off $4.06.

The disclosure came as Federated reported that third-quarter earnings rose 2 percent to $50.9 million, or 46 cents per diluted share. Per-share earnings increased 7 percent because share repurchases reduced the amount of stock outstanding by 5 percent. Assets under management totaled $194.07 billion, up 7 percent from year-ago levels but down 4 percent since June 30.

Federated said it hired the Downtown law firm of Reed Smith to investigate the matter and that lawyers from Dickstein Shapiro Morin and Oshinsky, a Washington, D.C., law firm, are assisting.

The company spent $1.1 million on the probe during the third quarter, President and Chief Executive Officer J. Christopher Donahue told analysts during a conference call.

Federated said it didn’t set aside reserves in the third quarter to cover possible losses caused by the questionable trading because it doesn’t know enough about the extent of the activities.

Mutual fund trading is governed by a fund’s net asset value, the total value of all the fund’s holdings divided by the number of fund shares. The net asset value, or NAV, is set a few minutes after U.S. markets close at 4 p.m. Investors who purchase fund shares after the close of the market are supposed to be charged the next day’s NAV. Here’s why:

If a company announces better-than-expected earnings or a big acquisition after the close of the market, its stock could jump the following day. That would increase the NAVs of funds that own that company’s stock. After-hours buying gives preferred investors an advantage, letting them purchase fund shares before the good news is reflected in the fund’s NAV the following day.

While after-hours trading is illegal, the other practice Federated is investigating isn’t. Frequently, it involves foreign stocks, which trade on markets that close long before Wall Street does.

While news in the U.S. market can cause foreign stocks to rise or fall, it frequently takes a day for the news to be reflected in the NAVs of funds that own foreign stocks. Cagey investors exploit the discrepancy by purchasing a foreign stock fund on days the U.S. market jumps, then selling it the next day when the good news causes an increase in the fund’s NAV.

Fund companies have imposed trading restriction and redemption fees to thwart the practice, but critics say the effectiveness of the measures has been limited.

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