REGULATION & COMPLIANCE
July 31, 2000
The National Association of Securities Dealers Regulation posted guidance on its website July 21 about mutual fund and annuity advertising and suitability screening for multi-class mutual funds.
In what it called an "alert," NASD said it wanted to ensure that graphs in ads fairly depict a fund's increase in value through accurate labeling.
The alert adds new detail to long-standing advertising regulations, said Pamela Wilson, a mutual fund lawyer with Hale & Dorr LLP of Boston.
NASD said it was issuing these guidelines on graphs as a follow-up to its censuring and fining Kemper Distributors of Boston $100,000 on May 11 for running inaccurate mutual fund advertisements and for violating other NASD advertising-related rules. (MFMN 5/17/00)
Kemper published eight ads for the Kemper-Dreman High Return Equity Fund inaccurately depicting the value of a $10,000 investment in the fund with graphs that had unequal distances between plot points, said NASD. As a result, the graphs made it appear that the fund had reached $29,000 in value at one point when the fund, in fact, would have only been worth $22,000, according to the NASD.
NASD's alert directs members and fund companies to clearly label and accurately plot points along graph axes. NASD also wants fund performance charts to use a scale which does not mislead investors.
"Members must ensure that the starting point of a graph fairly reflects the performance of the product without exaggeration," the alert said. "In certain bar graphs that compare performance data, members have used a baseline that is higher than zero [which] . . . may exaggerate the differences between the performance data illustrated."
NASD said it is difficult to dictate what scale a fund company or broker should use. Therefore, the association asked firms to "exercise care in choosing the appropriate scale for presentations of performance information."
The NASD also reminded members of its requirements that firms compare their fund's performances against appropriate indexes.
Many bonus credit variable annuities impose higher mortality and expense charges or longer surrender charge periods than regular annuities, NASD said. Therefore, the NASD alert urged fund companies, insurers and brokers who "prominently promote the bonus credit [to] also prominently explain that fees and expenses may be higher, and the surrender periods may be longer."
Any hypothetical illustrations showing the growth of a bonus contract must also include the impact of the fees and surrender period, the NASD said. They also must not "unduly raise investor expectations as to the variable annuity's future value," the NASD said.
NASD warned that "the department will continue to scrutinize bonus product sales material and require revisions to any material that does not present information about the product in a fair and balanced manner, or that contains illustrations that appear to predict or project the future value of the contract."
Finally, the NASD reminded members to be careful when selecting a share class of a fund with several classes for an investor.
"Although the purchase of certain fund classes may allow an investor to avoid paying a front-end sales load, the cost imposed by a class's higher expenses may outweigh this benefit, particularly with respect to large dollar purchases" and for investors seeking a long-term investment, the NASD said.
"To determine which class may be the most suitable for investors, members should know the advantages and disadvantages of different mutual fund classes," the NASD said. "Registered representatives should ask the investor what are his or her investment goals and objectives, including the investor's time horizon."