Regulators Approve Rules on Fund Ads : Securities: The industry and consumer groups praise the SEC changes. Rankings are at issue.

New truth-in-advertising rules for the booming mutual fund industry were approved by government regulators Wednesday, a move consumer activists called a welcome step toward ending hype and distortion.

“Mutual fund advertising and disclosure needs major improvement,” said Jennifer Kohn, consumer advocate with the New York City Public Advocate’s Office.

The rule changes concern what mutual funds can say in advertisements about their performance and how they are ranked by major analytical services such as Morningstar, Lipper Analytical Services or Money magazine.

The rules, approved by the Securities and Exchange Commission, require fund companies to make specific disclosures when they include rankings in their advertisements.

For instance, they cannot claim in a headline or prominent statement that a fund was a best performer in a category unless it was actually ranked No. 1.

Funds must fully describe the criteria on which the ranking is based, whether sales charges known as “loads” are figured into the rankings, and whether fees were waived or expenses deferred during the period in which the fund was ranked.

Mutual funds are pools of money that are invested by professional money managers with specific goals. The managers buy stocks, bonds or other financial products with investors’ funds.

Mutual funds have grown rapidly in size and number in recent years as interest rates declined, leaving investors looking for alternatives to money market and other accounts that ended up paying annual returns of about 2%.

There are now more than 4,000 mutual funds nationwide, and one out of every four U.S. households owns shares in one.

R. Clark Hooper, a vice president at the National Assn. of Securities Dealers, said the new rules are aimed at making fund ads “reasonably well understood by someone without an in-depth knowledge of the mutual fund industry.” The NASD, an industry self-regulatory group, developed the rules for the SEC’s approval.

Regulators have brought enforcement cases against mutual fund companies for misleading ads. The New York City Department of Consumer Affairs last summer charged Dreyfus, Franklin and Charles Schwab with deceptive advertising in print ads or brochures.

The three fund companies settled the charges last fall by agreeing to revise the offending ads, said Kohn, who participated in the settlements.