Mutual funds that tout their past performance in advertisements would have to provide more information to investors under rule changes proposed last week by the Securities and Exchange Commission.
Regulators are concerned about mutual fund ads that don’t clearly explain that strong performance may have been caused by unusual factors, such as first-time sales of a company’s stock.
Currently, if mutual funds choose to highlight performance in ads, they must show returns through the latest quarter, but that might not include the most recent months. Under the proposed rules, mutual funds advertised four days into a month must include results as of the end of the previous month instead of the current quarterly results. For example, a June 4 ad displaying performance figures must include performance figures for the period ending May 31, while an ad that runs on June 3 can display figures for the period at the end of April.
A disclosure to draw attention to a fund’s charges and expenses also would be required.
“Our goal is to move toward documents that are readable and understandable,” said Paul Roye, director of the SEC’s investment management division, who said he hoped the proposals would be adopted by the end of the year.
SEC Chairman Harvey Pitt called the proposals “good changes” but expressed concern that they may be “dictating standards” and could excessively narrow investors’ focus to short-term performance.
The Investment Company Institute, the fund industry’s trade group, said it still had to fully study the proposals, which appeared to have included similar suggestions the ICI had proposed to the SEC last July.
“It looks indeed as if the SEC has focused on providing in the rule for timely information, which is important for the whole spirit of advertising performance,” ICI spokesman John Collins said.
