To paraphrase George Orwell’s science-fiction classic, Nineteen Eighty-Four, in which the government takes mind control of all citizens — the same could happen to mutual fund advertisements in 2012. That’s when past performance could go down "Memory hole."

The 884-page Financial Reform Conference Report contains a provision on page 474 that MME warned readers about back in April. Section 918, "Study Regarding Mutual Fund Advertising," states that the U.S. Comptroller General will conduct a hard-hitting study on mutual fund ads that could even bring standard Securities and Exchange Commission consumer protections into question. (See "Senate Financial Reform Bill Hits Mutual Fund Ads," and "Geithner Urged to Exclude Funds From Financial Overhaul," MME 4/22/10 and 4/26/10.)

The bill would require the U.S. Comptroller General to conduct a fresh study of the impact of performance data in advertisements with an eye toward potentially removing them altogether.

While the SEC has always precluded investment advisors from using past performance on funds that have merged, the government will take extra special care with use of data on incubated, back-tested or institutional shares.

If these new regs are passed, they must go into effect no later than 18 months after the passage of the bill. Knowing how Congress works, FinReg doesn’t stand a chance of passing until year-end. That means the new rules could take effect in 2012. Like "1984," 2012 could be the year of serious reckoning for the mutual fund industry.

Realistically speaking, how can the government ask the mutual fund industry to remove performance data on products that are performance-oriented? Past performance is no guarantee of future returns. We all know that and accept it as fact. Fund companies might even agree to dispense with misleading mountain charts.

But this serious business of money, people’s money and the fund industry’s money, is driven by performance — past, present and future. The bill also returns to the SEC/FINRA 2004 effort to create point-of-sale disclosure forms for brokers and advisers for mutual funds but no other retail financial product.

Funds undoubtedtly are waging a campaign to fend off these Orwellian rules that would, once again, unfairly stymie this industry on points that leave others off the hook. Not to mention, educating Washington on why returns, like holdings, are vital when talking to investors.

To read the full text of the FinReg bill, go to:

 http://financialservices.house.gov/Key_Issues/Financial_Regulatory_Reform/conference_report_FINAL.pdf

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.