WASHINGTON - The SEC will continue to pay attention to mutual fund advertising, but it is potential scrutiny of fund ads by plaintiffs' lawyers that is giving some industry participants pause.

The SEC's recent enforcement case against Van Kampen Investment Advisory Corp. of Oakbrook, Ill. provides an invitation to plaintiffs' lawyers to file class action lawsuits against mutual funds when performance drops, according to Richard D. Marshall, a lawyer in the New York office of Kirkpatrick & Lockhart LLP of Pittsburgh, Pa. Plaintiffs' lawyers, citing the Van Kampen case, will argue that fund advertisements are fraudulent because the ads describe past investment performance but omit allegedly significant facts that would show that the performance was unlikely to be repeated, Marshall said.

A quote in an SEC statement attributed to Richard Walker, the enforcement director for the SEC, will appear in the complaints plaintiffs file against funds, Marshall said. When the Van Kampen case was filed, the SEC issued a statement quoting Walker as saying that the Van Kampen case, "demonstrates that it is wrong to raise shareholder expectations of future gains by advertising spectacular past returns when it is highly unlikely those returns can be sustained as the fund grows in size." That statement and the SEC's allegations in the case will serve as fodder for class action complaints, Marshall said.

Plaintiffs' lawyers "all went out and bought Rolls Royces when this case came out," Marshall said.

Marshall made his comments about the case at a conference on mutual fund regulation sponsored by the American Law Institute-American Bar Association here last month.

The SEC on Sept. 8 sued and on the same day settled with Van Kampen over allegations that the firm used accurate but incomplete information in advertising the performance of its Growth Fund. The Growth Fund's performance was strong thanks to a combination of the fund's small size - assets of less than $500,000 - and the fact that there was a significant percentage of hot initial public offering shares in the fund's portfolio. Van Kampen advertised performance but did not disclose information about the hot IPOs and their effect on performance. Van Kampen neither admitted nor denied the SEC's allegations in settling the case for $100,000.

The SEC will continue to scrutinize mutual fund advertising, said Elizabeth Osterman, assistant director of the Division of Investment Management at the SEC, at the conference. The Van Kampen case should not be interpreted too broadly, however, she said.

"This is not the SEC's frontal attack on fund advertising," Osterman said.

If funds advertise performance that cannot be duplicated or advertise performance which was obtained based on a hidden investment strategy, funds must disclose those facts when advertising performance, Osterman said.

Cases based on allegedly false mutual fund performance advertising have been rare. Federal securities laws set certain minimum standards of what information an ad must contain, such as a statement that past performance is not a guarantee of future results. In addition, NASD Regulation must approve fund advertisements in many cases.

But federal securities laws also require that funds not omit any important facts. The Van Kampen case makes it less clear just what constitutes important facts that need to be disclosed, according to mutual fund industry lawyers.

The concern of mutual fund industry lawyers is overblown, according to Jonathan Alpert, an attorney with Alpert, Barker & Rodems of Tampa, Fla. Changes to federal securities laws in 1995 make it difficult to bring a class action fraud suit successfully, Alpert said. The securities laws now require that plaintiffs in securities cases have substantial evidence that the issuer of securities engaged in fraud when making a statement, Alpert said. Standard disclosure in fund advertisements should make it difficult for plaintiffs to supply that evidence, Alpert said.

"I don't see that the (mutual fund) industry has anything to be concerned about," Alpert said.

Indeed, in some instances, mutual funds appear to be going well beyond the minimum requirements in federal securities laws in advertising performance. For example, the high performing Amerindo Technology Fund has not only advertised its performance but it has also provided details about how that performance was achieved. The fund noted in an advertisement in The Wall Street Journal Oct. 25 that it had what the advertisement described as a heavy concentration in two stocks, Yahoo! and eBay, during the time of the fund's 253.78 percent one-year performance. The fund also told investors that technology stocks had outperformed the market as a whole.

Funds advertising performance usually make broad disclosures about the risks and do not note specific holdings by name. It was unclear when Amerindo began including the detailed information in its ads. Officials at Amerindo with knowledge of the advertisement's disclosure were not available for comment.

Whatever comes of the debate over the implications of Van Kampen, SEC officials and fund lawyers said it represents the most significant SEC enforcement action involving mutual funds in the SEC fiscal year that ended Sept. 30.

"The best thing about the Van Kampen case is that it's causing everybody to think really hard about their advertising," Osterman said.

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