Senate Banking Committee Chairman Chistopher Dodd (D-Conn.)’s financial overhaul bill takes issue with performance information in mutual fund advertisements and asks for a review of the practice by the comptroller general.
A recent study by three professors at Wake Forest University and Arizona State University found that despite the standard disclosure that “past performance is no guarantee of future returns,” investors can still be unduly swayed by the performance figures mutual fund companies populate their ads with.
The professors go so far as to say no performance figures should be permitted in fund advertisements.
“Ads appear in bull markets [and are] really encouraging bad investment behavior,” Wake Forest Professor Ahmed Taha told Dow Jones.
Dodd first weighed in on mutual funds in November 2003, when the trading scandal broke. Along with then-Sen. John Corzine (D.-N.J.), who was chairman of Goldman Sachs until 1999, Dodd introduced a bill bolstering oversight of the mutual fund industry. It called for stricter governance, better cost and fee disclosures and, last but not least, a crackdown on abusive late-trading and market-timing practices.
Commenting on the proposed examination of mutual fund advertisements, Investment Company Institute spokeswoman Rachel McTague said: “Mutual funds are the most regulated and transparent investment products available. Advertisements are subject to strict SEC and FINRA requirements, making it one of the most heavily regulated areas for mutual funds. In particular, narrative disclosure required in advertisements is just one of a number of protections in place for investors to help ensure ads are balanced."