WASHINGTON - The Securities and Exchange Commission staff is expected to issue a legal bulletin next month warning mutual funds that they may run afoul of the securities fraud laws if they advertise returns based on the end of the previous calendar quarter and their performance has dropped significantly since then, sources said.
The bulletin will urge funds to take steps to ensure their advertisements are not misleading, either by providing updated performance data or including statements in the ads that make clear the performance information is dated and that the market may have changed since the last quarter.
The bulletin will be designed to clarify that the antifraud provisions of the securities laws apply to mutual fund advertising and should be looked at in conjunction with a section of the Securities Act of 1933 that gives funds incentives to advertise their performance.
Rule 482 of the act, which deals with offerings, permits funds to advertise their performance without first providing investors with a copy of their prospectus, if they comply with the conditions of the rule. To qualify, funds must calculate their one-, five-, and 10-year total returns in a standardized manner as of the latest completed calendar quarter.
Funds that include the standardized performance data can also include additional non-standardized performance information in their ads.
At the same time, however, the antifraud provisions make it unlawful for funds to include any materially false or misleading information in their advertisements.
"Just because you comply with the '33 act rule doesn't mean you don't have to comply with the antifraud provisions," one commission source said yesterday.
SEC Commissioner Paul Carey highlighted concerns about mutual fund ads at a speech given here earlier this month at the Practicing Law Institute's SEC Speaks conference. He suggested these concerns are particularly relevant given the current market volatility.
Carey said he became upset when a fund in a troubled sector that had experienced a downturn published an advertisement showing spectacular performance. "Upon closer inspection of the ad, I realized that the fund performance highlighted was calculated as of a date two months earlier, before the market had taken a sharp downturn," he said. "Clearly, an investor could be misled by this advertisement."
