A number of leading fund companies, Fidelity Investments of Boston and Charles Schwab & Co. of San Francisco included, are resisting a proposal that would require them to make a fund's monthly performance available to investors by the third day after the month.
The Securities and Exchange Commission has proposed new advertising rules that include a provision requiring a fund that includes performance figures in its advertisements to also list a toll-free or collect phone number where investors can obtain the latest month's data. Funds must be able to quote the previous month's performance within three days.
Fund companies say that's not enough time to crunch the numbers.
In May, the SEC proposed advertising changes that would require fund sponsors to provide additional and more prominent performance disclosure, particularly more up-to-date performance data [see MFMN 5/20/02]. The SEC is now reviewing comment letters it received through its July 31 deadline. It has not set a timeframe for when the new rules may take effect.
The proposed rule changes were prompted by the regulator's concern that in 1999 and 2000 funds advertised extraordinary performance numbers that potentially misled investors or caused unrealistic expectations. The SEC's new rules were aimed at providing investors, particularly prospective investors, with more complete and balanced fund performance information.
Even though the SEC's regulations will likely be revised before implementation, fund industry insiders don't expect that the new advertising regs will revolutionize how future fund ads look and feel. Moreover, with few funds brave enough to tout their performance right now, the real effects may not be visible for a while.
"There won't be big changes in the ads themselves," said Chris Wloszczyna, a spokesman for the Investment Company Institute (ICI), the mutual fund industry's trade organization "The big change is what funds must do behind the scenes" to provide the most up-to-date figures, he said.
It is this requirement that has the ICI and a number of leading firms in the mutual fund industry greatly concerned.
"We strongly oppose the proposal that performance information would have to be made within three calendar days because it fails to recognize that the time needed to make fund performance information available to investors will differ among funds," said ICI senior counsel Amy Lancellotta.
"Instead, the rule's timeliness requirement should be deemed satisfied if month-end performance is made available as soon as reasonably practical, based upon the particular facts and circumstances," Lancellotta said. In his comment letter, James Grassi, senior attorney with The Northern Trust Company of Chicago, the sponsor of the Northern Trust Funds, suggested that the SEC relax that three-day requirement to at least five days. Grassi also suggested that month-end returns only be required where funds advertise their one-year performance, not when five- or 10-year returns are shown. He reasoned that the short-term month-end performance would not have a significant impact on the longer-term performance of the fund.
Fund sponsors that operate mutual fund supermarket platforms also gave thumbs down to the proposal. "The three-day time limit is unworkable," David Forman, senior legal counsel at Fidelity, wrote in his comment letter to the SEC.
"A rigid standard would be particularly inappropriate for fund companies such as Fidelity that sponsor mutual fund supermarkets with thousands of funds, or that make third-party funds available through retirement plans which they administer or for which they provide recordkeeping services," he said. Since Fidelity must rely on outside companies to provide performance information, it would be impossible to secure, process and disseminate accurate performance figures in only three days, Forman added.
Executives at Charles Schwab agreed that the three-day window isn't realistic. "Schwab in most cases does not receive mutual fund data from its service providers until the seventh business day of the month," said Sandra Burke, vice president and associate general counsel of Schwab in her comment letter.
In turn, Schwab normally takes another two to three days to upload the information, pushing the window on the availability of prior month-end performance data closer to10 days, she said. In addition, Burke argued, the SEC needs to clarify what provisions the regulator would make if, through no fault of a company, performance information being sent from an independent company contained errors or was late.
Many fund companies and other commenters also suggested that the SEC consider allowing funds to provide investors with recent prior month-end information at a designated Web site instead of requiring funds to provide a toll-free or collect telephone number. Many cited the ubiquitous nature of the Web and greatly increasing Internet access among all individuals.
In her comment letter, Vanguard Group Principal of Securities Regulation Heidi Stam, recommended that the SEC not require additional disclosure for ads directed at institutional investors. They have the requisite financial sophistication to review a wide range of performance data and already understand that evaluating a fund's objectives, risks, fees and expenses is also important, Stam wrote. "Adding significant amounts of additional disclosure relating to performance would not help these investors or improve these materials," she said.