Regulatory pressure and recent volatility in the securities markets are causing mutual fund companies to add new language to advertisements that promote the investment performance of their funds.

Fund companies that include their investment performance figures in advertisements have begun adding statements warning that fund performance on the day the advertisement is published may differ from the performance included in the ad because of recent market volatility. The additional disclosure comes after regulators warned fund companies last summer that fund ads might be misleading even though they are accurate because of market volatility.

The volatility this month in the NASDAQ market - which dropped 25 percent from April 10 to April 14 - has further spurred fund companies to include the volatility warning in recent ads, according to fund executives, lawyers and consultants.

Disclosure about the possible effect of volatility on advertised performance is likely to become increasingly common, said Roger Joseph, a partner with Bingham Dana LLP of Boston. Funds whose performance has dropped precipitously in recent weeks have faced a choice - whether to add disclosure, stop advertising or change their advertising focus, he said.

Federal securities regulations require that fund ads cite performance information through the most recent quarter. In June 1999, however, NASD Regulation warned fund companies that ads that use performance through the most recent quarter still may be misleading if a fund's performance has fallen dramatically between the end of the quarter and the time the fund ad is published.

The Warburg Pincus Funds of New York in April began including language in ads for some funds that the advertised performance may differ from the current performance because of market volatility.

"Due to current market volatility, the performance of the fund may be less than the figures shown above," the disclosure reads.

Warburg Pincus added the language because of the market's volatility, said Leslie Mayock, a spokesperson for the funds. The disclosure is included in advertisements for funds that invest in volatile sectors such as technology, she said.

The MainStay Funds of Parsippany, N.J. began adding disclosure about market volatility and its possible effect on advertised performance in February, said Eric Disend, managing director of marketing for MainStay Investments, the funds' manager. The company this year has been running an advertising campaign that chronicles the returns of four funds, including the MainStay Small Cap Growth Fund, which was up 101.02 percent last year. MainStay began adding the warning that volatility may reduce the current performance below that advertised on the advice of the firm's compliance executives, Disend said.

"Due to recent market volatility, current performance may be less than the figures shown," Mainstay said in an April 10 advertisement in The Wall Street Journal.

Market volatility also is having another effect on performance advertising. It is decreasing its use. MainStay is changing the focus of its ads this month to de-emphasize performance and build awareness of the firm's brand name, Disend said. The Aim Funds of Houston, Texas, have stopped an advertising campaign in which the firm listed in detail the performance of its funds. (MFMN 1/31/00) The firm decided to abandon the campaign in April because of the volatile markets, said John Roehm, a spokesperson for the firm.

Decisions to abandon performance advertising are likely to become increasingly common, according to fund executives, lawyers and consultants. Volatile markets make advertising performance a tricky proposition, they said. Performance can change quickly. Investors attracted by hot performance are more likely to redeem when the performance fades, they said.

"There is no doubt that the amount of performance-related advertising has been diminishing as a result of what we're seeing in the market recently," said Burton Greenwald, president of B.J. Greenwald Associates of Philadelphia, a financial services consulting firm.

Recent advertising campaigns by Janus of Denver, Colo. and the Strong Funds of Menomonee Falls, Wis. are examples of fund companies trying to build brand identity rather than accentuate performance, Greenwald said. Janus is promoting its research capabilities in a television campaign. Strong is providing biographical descriptions of portfolio managers in a print campaign. Both campaigns are efforts to build interest and loyalty among investors for reasons other than performance, Greenwald said.

Meanwhile, regulators' scrutiny of fund ads that are accurate but not necessarily current to the day is frustrating some industry lawyers.

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