SEC Reviewing Fund Ads That May Mislead
The Securities and Exchange Commission is stepping up scrutiny of mutual fund company advertisements to determine if they are distorting fund results by using selective time periods, officials said Monday.
“We’ve seen a few situations that have given us concern,” SEC investment management director Paul Roye said. “It’s possible we could go after someone for misleading ads even if they met the four corners of the rules.”
Fund ads that contain deceptive information or that omit significant data might be considered fraudulent even if they contain the most recent yearly results required under SEC rules, Roye said.
Even fund companies that adhere to these requirements can be subject to regulatory action if their ads are nonetheless misleading, Roye said. That stance has drawn criticism from the fund sector.
“The SEC’s standards are unclear in this area, and that’s why you can expect funds to try to highlight the most favorable performance record,” said Richard Phillips, a partner in the Kirkpatrick & Lockhart law firm in Washington and who represents many fund companies.
John Collins, a spokesman for the Investment Company Institute, the mutual fund trade group, said the group is “not aware of any widespread problems in this area.”
The agency’s concerns focus on ads that use figures through the most recent quarter, as required, without also citing more current results if their stocks have since fallen sharply. Regulators have expressed concern, for example, about how funds with Internet companies in their portfolios have advertised performance through the first quarter of 1999, considering that a number of Net-related stocks, such as those of Yahoo Inc. and America Online Inc., fell significantly in May and June, after the quarter ended.
“Internet stocks are an unusual example because the quarter ended in March and they got hit in May, so the regulators’ concerns may be well-placed,” said John Rekenthaler, research director of fund tracker Morningstar Inc. “But most consumers of Internet stocks know they’re volatile.”
The SEC also may consider changing its rules to require print ads to disclose more complete results, describe fund volatility or say why a certain period was picked, Roye said. The commission also is intensifying exams of fund companies’ internal allocation of hot new stocks received from brokerage underwriters during initial public offerings, Roye said.
Some companies, instead of spreading the shares around evenly, may be giving a disproportionate number to favored funds. These may include new or small accounts whose performance figures the fund is seeking to boost, or those in which the fund manager has a personal financial interest, SEC officials said. These allocations, unless disclosed, could be improper because they aren’t benefiting investors in a company’s less-favored funds, Roye said.
