SEC Tightens Rules on Mutual Fund Disclosure : Investing: Prospectus or annual report would have to include a comparison of fund’s performance to a benchmark.

Federal regulators adopted a rule Thursday that would require mutual funds to provide more information on their past performance and to identify portfolio managers.

The Securities and Exchange Commission also, as expected, proposed a rule that would allow “off-the-page” sales of mutual funds through magazines, newspapers and direct mass mailings to customers who have not received prospectuses.

The SEC also voted to allow the National Assn. of Securities Dealers to launch a price reporting system for the junk bond market.

Under the tighter disclosure rules, a mutual fund would have to provide in its prospectus or annual report a graph comparing its performance to a benchmark to clearly show how it performed compared to an average.

The SEC likened the stricter requirements to recent rules it adopted that force companies to disclose information on executive pay in proxy statements.

The graph would require the fund to track its performance over 10 years on a hypothetical $10,000 investment to show whether the fund is “beating, matching or under-performing” the broader market, SEC Chairman Richard Breeden said.

A per-share table would also need to clearly show the total return for each of the last 10 fiscal years.

“Reading a prospectus is one thing,” SEC Commissioner Carter Beese said. “Understanding what you read is a whole different ballgame.”

The rule is expected to become effective July 1.

The beefed-up disclosure rule would also require funds to discuss factors and strategies that affected their performances during the latest fiscal year.

The commissioners debated when a mutual fund must notify investors that a manager may no longer be investing for a fund.

The SEC is likely to require that investors be told within a month or a quarter when a manager departs.

The portfolio manager disclosure section would also require funds to list the manager’s business experience during the previous five years.

The proposal to allow “off the page” sales would eliminate a step from the current process and effectively act as “summary prospectuses.”

Bank products such as certificates of deposit and money market accounts are already sold in much the same way.

Regarding the price reporting system for junk bonds, the NASD plans to begin providing up-to-the-minute quotes on about 35 of the most actively traded issues by September. The NASD expects to add 15 more issues by late 1994.

Supporters of the price reporting system believe that it will improve the credibility of the market for high-yield issues, which was badly damaged by the 1990 collapse of Drexel Burnham Lambert Inc.