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SEC Plans to Continue Scrutinizing Ads


BOSTON-The SEC is concerned that increasing competitive pressures the mutual fund industry faces could lead it to engage in misleading or overly aggressive advertising, said Paul Roye, director of the SEC's division of investment management.

As a result, the division and the office of compliance, inspections and examinations will continue their special review of fund marketing, Roye said. The review includes websites, sales literature and advertisements and seeks to determine whether statements on funds' websites, prospectuses and in advertising "are consistent with" funds' actual portformance, he said. SEC chairman Arthur Levitt requested the review, which began in February.

Roye spoke at a meeting of the American Law Institute and the American Bar Association here June 15.

The SEC has already found that a number of fund companies are promoting one-year return numbers beginning or ending on dates when a fund's net asset value reached a new high, Roye said. Such manipulation of performance figures is troubling to the commission, he said. Funds are required to show one-year, and, if available, five-year and 10-year returns as of the most recent quarter, Roye said.

"There clearly was cherry-picking of performance numbers," Roye said. In some cases, funds are not offering current performance figures, he said. In addition, the SEC has found that a number of fund companies issue graphs and charts that exaggerate performance, Roye said.

The SEC has also found that some funds drift from their intended investment style "to boost sagging performance," particularly among value portfolio managers, Roye said.

The SEC has attempted to convey, particularly with its proceedings against Dreyfus of New York (MFMN 5/15/00) that it "will not tolerate the misuse of performance information to mislead investors," Roye said.

At the same time, the SEC will continue to try to enable the mutual fund industry to invent new types of funds, such as exchange-traded funds, Roye said. The commissioners realize it is important for the SEC to grant exemptions to the 60-year-old Investment Company Act to allow such innovation, Roye said.