MIAMI - The SEC is giving some hints about the fund companies it may examine as part of its special inspection sweep of selected mutual fund companies on their advertising practices.

The types of ads that are most likely to draw agency scrutiny include those in which a fund promotes only one-year performance without disclosing longer-term, less favorable performance, said Patricia Flynn, a branch chief in the SEC's Miami office. Extravagant claims about performance also may generate scrutiny, Flynn said.

Ads that depict investors in opulent surroundings, implying that investments in a particular fund will make shareholders rich, also might attract SEC examiners, Flynn said.

"The commission wants to be sure that funds are telling the whole story" when it comes to advertising fund performance, Flynn said.

Flynn made her comments at The National Investment Company Service Association's annual operations conference here last week. Arthur Levitt, chairman of the SEC, announced the SEC crackdown on fund advertising practices in a speech to mutual fund directors Feb. 17.

Fund compliance executives should take several steps to insure the adequacy of their advertising practices, Flynn said. Those steps include conducting a periodic review of information contained on fund companies' websites and maintaining a log of changes to websites, she said. Firms also should review their procedures on creating hyperlinks to other sites and periodically review the content on the linked sites, Flynn said.

In his Feb. 17 speech, Levitt said the SEC would work with the NASD on fund advertising. The likely result of the efforts between the NASD and the SEC is unclear now, said Thomas Selman, NASD vice president, who also spoke at the NICSA conference. Although there have been general discussions between the SEC and the NASD on current fund advertising issues, it is unclear what changes the NASD might implement as a result of the SEC's current scrutiny, Selman said in an interview. It is also unclear when such changes would become effective, he said.

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