Neither was at the negotiating table, but New York Attorney General Eliot Spitzer and retiring Securities and Exchange Commission Chairman William H. Donaldson played a supporting role in Legg Mason Inc.'s $3.7 billion deal to swap businesses with Citigroup Inc.

In their pursuit of mutual fund industry reforms, Spitzer and the SEC have cracked down on brokerage firms that denied investors discounts they were due and rewarded brokers for putting customers into their firm's own funds rather than competitors' better-performing funds.

By swapping their brokerage and money management units, Legg and Citigroup will be more able to avoid the sorts of real and perceived conflicts of interest that have tarnished the financial industry's image. Though Legg has had few regulatory scrapes, both companies are among dozens that have been caught up in the sweeping investigation, which has resulted in new regulations and tens of millions of dollars in fines since 2003.

Some analysts say the swap between Legg and Citigroup could be the first of many such deals that will reshape how investors buy mutual funds and other financial products.

The regulatory pressures helped convince Legg Chairman Raymond A. "Chip" Mason that it was time to divorce his company from its roots - and his personal roots - in the brokerage business.

"This might be the real point of departure for the industry and the sunset, if you will, for proprietary products being sold to a captive audience," said Burton Greenwald, founder of B.J. Greenwald Associates, a mutual fund industry consulting firm in Philadelphia.

The deal announced yesterday will transfer Legg's 1,540 brokers to Citigroup, transforming Legg into a pure money manager with no in-house brokers to sell its funds. Citigroup will turn its $437 billion money management group over to Legg, getting the banking conglomerate out of the mutual fund business.

"This appears to be what regulators want you to do," Mason said in a CNBC interview yesterday.

Even before negotiations with Citigroup began, Mason had openly raised concerns about the effect the new regulatory environment could have on his firm. Legg was among 15 companies that agreed in February 2004 to pay $21.5 million to settle regulators' claims that they failed to give customers volume discounts on funds they bought.

Citigroup has also had its share of problems. The company agreed to pay $208 million in a settlement with the SEC over allegations that it had pocketed fees that should have gone to mutual fund investors.

Kunal Kapoor, director of mutual fund analysis at Morningstar Inc., pointed out that Citigroup and Legg won't avoid all potential regulatory conflicts by swapping assets. The deal calls for Citigroup to take a 14 percent stake in Legg, which means that Citigroup will still gain if its brokers help steer customers to Legg funds, he said.

Most analysts agree that resolving regulatory concerns took a back seat to the financial reasons for doing the deal.

"While there may be a mix of reasons [for Legg], it appears to be driven by the strategic importance of becoming a more dominant player in asset management," said Gary Gensler, co-author of The Great Mutual Fund Trap and a former senior Treasury Department official.

But the current regulatory environment probably colored the negotiations, Gensler and others said.

That's particularly true for Citigroup, which has received unwanted attention from regulators for financial dealings both at home and abroad. It recently agreed to pay former Enron Corp. shareholders $2 billion for its role in misleading investors about the energy trader's finances before it imploded.

Some analysts think Citigroup's regulatory troubles might have helped Legg at the negotiating table. Legg investors were wildly enthusiastic about the deal, sending the company's shares up 15 percent yesterday, while Citigroup's shares barely budged.

"I think avoiding conflicts of interest has become an increasing theme among the very largest firms," said Frederick C. Lane, chairman and chief executive officer of Lane, Berry & Co., an industry advisory firm in Boston.

Lane said separating brokers from asset managers makes sense from a marketing standpoint. It's tough for brokers to keep customers unless they sell them the best-managed funds, and that means sometimes recommending funds managed by their employers' competitors.

Greenwald, the industry consultant, said more insurance and banking institutions will get out of the asset management business to avoid inherent conflicts of interest challenged by Spitzer and the SEC. This year, MetLife Inc. completed the sale of its State Street Research & Management Co. subsidiary to BlackRock Inc. for $375 million in cash and stock. State Street is an investment management firm.

Bank of America Chief Executive Officer Kenneth D. Lewis recently told American Banker, a banking trade publication, that it might consider selling its asset management business. American Express has sold off portions of its financial services business, and Morgan Stanley is thought to be considering a similar move.

"I think you'll see a flood of them," Greenwald said, referring to deals similar to the Legg/Citigroup asset swap. "I wouldn't be surprised if Merrill Lynch sells off Merrill Lynch Investment Management in a year or two."

Kapoor agreed that others will be taking a hard look at the deal between Legg and Citigroup.

"If Wall Street is famous for anything," he said, "it's lemming-like behavior."