Morgan Stanley is the second major financial company to settle with regulators in a widening mutual fund industry scandal that has stained a growing list of firms and dismayed many investors.

Charges leveled Monday by the Securities and Exchange Commission and the National Association of Securities Dealers allege Morgan Stanley steered clients toward "preferred" mutual funds in exchange for millions of dollars in commission payments from those fund companies. Morgan Stanley did not tell investors about the practice or the higher fees.

The arrangement constituted a "firm-wide failure" in the Morgan Stanley's disclosure practices, according to the SEC.

"When customers purchase mutual funds, they should understand the nature and extent of any conflicts of interest that may affect the transaction," said Stephen M. Cutler, the director of the SEC's division of enforcement, in a written release.

At a news conference in Washington, D.C., Cutler said Morgan Stanley's "conduct here clearly crossed the line." Asked whether the SEC was considering charges against specific company executives, he would say only that the investigation continues.

The government is conducting a broad probe of the $7 trillion mutual fund business that has already resulted in the departures of executives at several large firms, including Strong Capital Management and Putnam Investments.

Hundreds of subpoenas have been issued by federal, state and industry regulators, with civil charges filed against Putnam Investments and employees at Prudential Securities. Individual employees at Bank of America, Millennium Partners and Fred Alger & Co. also have been charged by the state of New York, with two guilty pleas so far.

Putnam, which has lost about $21 billion in assets under management since the scandal, agreed to a partial settlement with the SEC last week. The amount the company will be fined has yet to be determined; the company has already begun implementing reforms under the agreement.

Charges against many of the firms center on their use of market timing - selective quick trades that skim profits from long-term shareholders.

Morgan Stanley, charged instead with failure to disclose improper payments from mutual fund firms, agreed to the settlement without officially admitting or denying the SEC's findings. But in a statement, the brokerage firm sounded a note of apology.

"I regret that some of our sales and disclosure practices have been found inadequate," Philip J. Purcell, Morgan Stanley's chairman and CEO, said in a written statement. "We take this most seriously because it strains the bonds we have with our clients and our financial advisers."

The settlement calls for the company to pay $50 million - half of it returned profits and interest, the other half a civil penalty. All the money will be placed in a fund to be distributed to investors who bought the "preferred" mutual fund shares from January 1, 2000 to the present, the SEC said.

In addition, Morgan Stanley will add disclosures of its practices to its Web site and in documents provided to investors. For investors who bought $100,000 or more of certain mutual fund shares in question, it will convert them to another class of shares that charge lower fees.

It will also hire an independent consultant to review its practices, and adopt changes recommended. The company will also no longer accept the directed brokerage payments under investigation.

"Today's enforcement actions send a clear message that those who choose to embrace commissions, higher payouts, and extra bonuses over their duty to render conflict-free advice to their customers will be sanctioned in the strongest of terms," Mary L. Schapiro, NASD's lead regulator, said in a written release.

-- Adam Geller, AP Business Writer