WASHINGTON - The regulators who oversee the mutual fund business and the lawyers who advise fund companies are battling about how far the SEC ought to go in regulating mutual fund advertisements.

SEC lawyers, fearing triple-digit returns last year for more than 150 funds will not be repeated, are continuing to pressure the fund industry to tone down its performance ads. In response, mutual fund lawyers now are suggesting that the SEC is on the verge of over-regulating fund ads.

The latest back and forth in that debate took place at a conference for securities lawyers here March 3rd and 4th. The SEC made it clear that it was going to make the substance, and to some extent the tone, of fund ads one of the key priorities for SEC examiners and litigators this year.

Funds that have extraordinary performance and suggest in their ads that by investing in them, people will live prosperously ever after, are more likely than other firms to be subject to special SEC audits, SEC lawyers said. And fund companies that use ads that include accurate performance claims but do not explain how that performance was achieved stand to get sued, SEC lawyers said. For example, a growth and income fund that had outstanding performance because of investments in hot IPOs, would have to disclose that the hot IPOs were the source of that performance.

That message brought a sharp response from one former SEC commissioner. The SEC runs the risk of becoming a "big brother" in monitoring fund advertising, Richard Roberts, a Washington lawyer and SEC commissioner from 1990 to 1995, told the SEC's top mutual fund lawyers.

"There is a censoring aspect to it," Roberts said.

In addition, the SEC may not be as qualified to review advertising as is NASD Regulation, the self-regulatory body that already reviews fund ads, Roberts said. The SEC's scrutiny of fund ads appears to be an "ill-fitting exercise" for the agency in light of the NASDR's oversight and expertise, Roberts said. Furthermore, there appears to be no similar level of scrutiny of advertisements in other industries comparable to what the SEC now is conducting on fund ads, he said.

It might be better for everyone if the SEC left the regulation of fund ads to NASDR and brought its force to bear in cases of fraudulent advertising by suing fund firms, Roberts said

"If the ad is accurate, it ought to be fine," he said. "If it isn't, they ought to bring an enforcement action."

Roberts made his comments at a conference on securities regulatory matters sponsored by the Practicing Law Institute of New York .

There is no doubt that the SEC has both the authority and expertise to oversee fund, ads, SEC lawyers said in response to Roberts' comments. Fund ads are part of a fund company's efforts to sell securities, an act that the SEC is mandated to regulate, SEC lawyers said. In addition, the SEC has access to information that NASDR does not have, said Barry Miller, an SEC associate director.

The SEC is completely within its authority to raise questions about the tone as well as the substance of fund ads, said Paul Roye, the director of the SEC's division of investment management and the agency's top mutual fund official.

"It's perfectly appropriate for the chairman (Arthur Levitt) to raise the issue of funds not creating unrealistic expectations," Roye said in an interview.

In a speech Feb. 17, Levitt challenged fund companies and fund directors to tone down aggressive performance ads. The SEC's scrutiny of fund ads became an issue in September when the agency sued Van Kampen Investment Advisory Corp. of Oakbrook, Ill. over allegedly misleading advertising practices Van Kampen used in marketing one of its funds. The SEC alleged that Van Kampen performance ads and marketing materials, which were accurate, still violated federal securities laws because the ads did not disclose that factors that caused the fund's performance were not likely to be repeated. Van Kampen neither admitted nor denied the allegations in settling the case.

SEC lawyers at the conference repeated what they described as the core message of Van Kampen - it is not sufficient for funds only to be accurate.

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