Rule Calls for Fund Ads to Reveal More

Mutual funds must include in advertisements information on how investors can get the latest numbers on a fund’s performance and expenses, the Securities and Exchange Commission decided Wednesday.

Chairman William H. Donaldson said the move was “the first of several initiatives that we will be taking in the coming months to enhance the information that mutual funds provide to their investors about the very significant issue of fund expenses.”

The SEC proposed the disclosure rule in May 2002 after investor complaints that fund companies hyped their performances during the stock boom of the late 1990s. The SEC vote also follows the start of a probe by state and federal regulators into allegations that some fund companies allowed favored investors to engage in illegal or improper trading of fund shares.

In ads, many funds emphasize their most impressive performance figures, though the numbers may be years old, SEC officials said.

Under the new rule, fund companies that use dated figures would have to display the time period more prominently and direct investors to the most recent figures through a toll-free telephone number or a Web site.

The rule, which applies to print and broadcast ads, also says ads must advise investors to consider a fund’s objectives, risks and fees. And the ads must disclose clearly the dates covered by the quoted performance. The new disclosures must be in a type size at least as large as that used for performance data.

The rule also gives funds more flexibility in marketing their portfolios because it eliminates a requirement that restricts ad content to information contained in a fund’s prospectus.

Mercer Bullard, a University of Mississippi law professor and an investor advocate, said he didn’t believe the rule would be very helpful to investors.

“The commission has criticized short-term performance ads for years, but these rule changes will not really address that issue,” Bullard said. “The problem is not whether short-term info is current, but whether it should be relied on at all.”

Paul Roye, director of the SEC’s fund oversight division, said funds could be accused of fraud if their ads follow the letter but not the spirit of the new rule.