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NASDR Warns Funds on Performance Ads


For the second time in a month, regulators have issued a warning to mutual fund companies on their advertising practices.

NASD Regulation, the self-regulatory organization, said late last month that mutual funds must provide more details than they customarily have about their investment performance in advertisements when the performance suffers a sudden, significant drop.

Failing to disclose an abrupt change in performance runs the risk that an ad is unfair and misleading, NASDR said in its quarterly newsletter, Regulatory and Compliance Alert, issued June 30. On June 10, in a speech at the Investment Company Institute's Mutual Fund Compliance Conference in Washington, D.C. (MFMN 6/14/99), Lori Richards, director of the SEC's office of compliance, inspections and examinations, warned fund compliance executives about advertising practices. She said fund companies must use end-of-quarter performance figures in advertising and not performance data as of dates selected to optimize their funds' performances.

The newsletter notice reiterated a directive which NASDR provided to some of its members last September and October about keeping performance figures current at times when markets are volatile and performance drops suddenly, said Thomas A. Pappas, director of disclosure and investor protection for NASDR. The notice in the newsletter was to advise all members of NASDR's requirement that performance figures be updated when performance changes significantly for the worse, Pappas said.

NASDR reviews every new advertisement its member companies run. Securities regulations require that fund performance advertising be current through the most recent quarter. After stock markets dropped last August, NASDR warned all members who submitted ads for review that performance figures through June 30, 1998 had to be updated or supplemented to show adverse performance during August and September. Not all NASD members submitted advertisements during September and October and NASDR issued directives to the firms that did not, Pappas said. The newsletter makes NASDR's advertising directive known to all members, he said.

NASDR's notice does not break new ground, but suggests that NASDR may see the beginning of a trend in funds using advertising that does not adequately disclose changes in performance, said Ming Wong, director of the regulatory compliance consulting group for PricewaterhouseCoopers of New York. The notice is a way of discouraging such practices quickly, Wong said.

There have been no recent enforcement cases regarding fund advertising, Pappas said. NASDR as a matter of policy does not comment publicly on particular advertisements, he said.

Mutual funds that have a sudden, negative change in performance must either revise the performance figures they use or add a statement clearly explaining that current performance is less than the figures shown in the advertising, NASDR said in the newsletter. Even though an advertisement is factually accurate, it still may be misleading if performance has changed dramatically for the worse between the end of a quarter and the date on which an advertisement appears, NASDR said.