The federal agency is examining whether Milken, the one time king of junk bonds who agreed to a lifetime ban from the securities industry, is violating the terms of that ban in his dealings with Guggenheim, which manages $170 billion and led a consortium last year that bought the Los Angeles Dodgers.

Milken has been a longtime client of the firm and at times has had as much as $800 million invested with Guggenheim, some of it in a hedge fund run by the firm’s president Todd Boehly. News of the investigation, as well as his relationship with Milken — who in the past sometimes spoke to Boehly multiple times a week — is contained in a cover story about Guggenheim in the March 18 issue of Fortune. (You can read the story here: Guggenheim is flexing its $170 billion muscles)

Milken’s settlement with the SEC for his role in the 1980s Wall Street scandals allows him to manage his own money. But he is banned from acting as an investment advisor or broker. The SEC is looking at whether Milken is violating that ban by effectively acting as a manager of Guggenheim investments beyond his own, according to sources familiar with the investigation. The question is: Has Milken provided advice in exchange for some form of compensation? The SEC is looking at a number of transactions that Milken has done with Guggenheim. In one instance being investigated, Milken and the firm jointly invested in an energy company called Milagro, which says the infusion helped it buy the Gulf Coast operations of Petrohawk Energy for $825 million in 2007.

Boehly has been subpoenaed by the SEC and the firm has handed over tens of thousands of documents, including trading records and emails, to investigators. SEC investigators are in regular contact with Guggenheim, but so far the probe — which has been going on for two years — hasn’t resulted in any formal action.

Guggenheim denies that Milken has managed others’ accounts. “Mike doesn’t have an ownership or managerial role of any kind at Guggenheim,” says its CEO, Mark Walter. “The firm’s interaction with him is no different than it is with a number of its clients, including during 2008-09 when many called several times a week at various times.”

SEC spokeswoman Christina D’Amico declined to comment.

Milken, 66, has spent years rehabilitating his image following a 22-month prison stint in the early 1990s after he pleaded guilty to federal charges of securities and tax fraud. He also accepted a ban from the industry as part of an SEC settlement. A few years after he left prison, the SEC alleged that Milken had violated his ban by advising Ron Perelman and Rupert Murdoch on deals. In 1998 Milken settled the SEC’s claim for $47 million without admitting or denying wrongdoing.

A prostate cancer survivor, Milken has led charity efforts involving cancer research and education. (Guggenheim’s Boehly is active in Milken’s prostate cancer foundation.) In 2004, Fortune published a cover story about Milken titled, “The Man Who Changed Medicine.”

A spokesperson for Milken provided the following statement: “For the past 20 years, Michael Milken has devoted the overwhelming majority of his time to philanthropic initiatives, especially in education and as an advocate for medical research on a wide range of life-threatening diseases. He and the non-profit organizations he leads have raised hundreds of millions of dollars directly for research that has been further leveraged by many billions of dollars of private-industry and government investment in follow-on studies. More than a mere supporter of research, he has been widely credited with changing the approach to the development of improved therapies and cures as well as disease prevention. He does spend time on his and his family’s personal investments, including working with many investment advisors and money managers. He discusses investments with these advisors from time to time, but only as an investor of his funds and those of his family. During this entire time, he has had no desire to be in the securities business in any capacity and has strictly avoided doing anything that could be interpreted otherwise. In 1998 Mr. Milken did settle an SEC investigation into certain consulting activities. He had been paid fees for consulting on three separate transactions after being advised by his attorneys that he was permitted to engage in such consulting activities. He was battling cancer at the time and decided to resolve the matter by returning the fees paid on two of the three transactions. There was no fine and no finding, admission, or denial of wrongdoing.”