The SEC's performance advertising case against Van Kampen Investment Advisory Corp. of Oakbrook, Ill. - a case in which the SEC sued a fund adviser for fraud for using accurate but allegedly incomplete performance data - surprised mutual fund lawyers and left them unsure what funds must tell the public when disclosing their funds' past performances.

In light of the Van Kampen case, the standard warning that past performance is no guarantee of future returns will not be sufficient for some funds, lawyers said in recent interviews. Nevertheless, the Van Kampen case, SEC officials' pronouncements and federal securities regulations do not make clear what disclosure is sufficient when funds enjoy outstanding investment performance based on a few key investments, lawyers said.

The SEC on Sept. 8 sued Van Kampen and Alan Sachtleben, Van Kampen's former chief investment officer, for the firm's advertising of the performance of the Van Kampen Growth Fund. The Growth Fund's performance relied heavily on both the purchase of hot initial public offerings and the fund's small size, advantages the fund could not continue to count on, the SEC said. Van Kampen and Sachtleben failed to adequately disclose those facts, the SEC alleged. Van Kampen and Sachtleben agreed to settle the case without admitting or denying the allegations, paying $100,000 and $25,000, respectively.

Because the SEC made no allegation that Van Kampen used inaccurate data in making its performance claims, fund lawyers said the Van Kampen case shows the SEC is pressing its scrutiny of fund performance advertising to a new level. Overall, the Van Kampen case - both because it involves a small fund and IPOs and because of the importance of performance advertising to mutual fund sales - is both novel and significant, lawyers at mutual fund companies and law firms said.

"I think it's new ground," said Robert Zutz, a lawyer in the Washington office of Kirkpatrick & Lockhart, of the Van Kampen case. "I think it raises a whole host of issues."

The paramount issues are what a fund has to disclose about outstanding performance, when a fund has to make that disclosure and where it should make the disclosure - whether in a prospectus, marketing materials or in portfolio manager interviews with the press, fund lawyers said.

The Van Kampen case is notable for several key facts. The Van Kampen Growth Fund posted an investment return of nearly 62 percent while it was an incubator fund - a fund registered with the SEC but not yet offered to the public. During most of 1996, when it was in incubation, the Growth Fund had assets of no more than $380,000. The Growth Fund invested in 31 hot IPOs during its incubation, the SEC said. Those investments ultimately accounted for more than half of the fund's return, according to the SEC.

"Those IPO shares had a magnified impact on the Growth Fund's return because of its small asset base," the SEC said in its order settling the Van Kampen case.

The fund's size and the IPOs made it highly unlikely that the Growth Fund's performance could be sustained as the fund grew bigger, said Richard Walker, director of enforcement for the SEC, in a statement. Indeed, from Feb. 3, 1997, the date the fund opened to the public, to March 14, 1997, the Growth Fund had net sales of $109 million, according to the SEC.

The Growth Fund's prospectus, semi-annual report and marketing materials included the statement that there was no assurance that the Growth Fund would perform as well as it did while it was in incubation. That disclosure was not sufficient, the SEC said. Van Kampen's failure to disclose that a large portion of the Growth Fund's return was attributable to the IPO investments was misleading, the SEC alleged. Van Kampen executives also allegedly made other comments reported in media news stories contending that the Growth Fund's performance was not greatly influenced by IPOs, the SEC said.

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