Fund companies need to practice caution when advertising closed funds and processing assets raised for those funds, said mutual fund analysts and lawyers. Certain practices in handling of the funds could spark lawsuits and may prompt the SEC to establish guidelines on the practice, they said.

The most important question raised by advertising a closed fund is what fund companies do with the checks that are sent in for the funds, said Geoff Bobroff, president of Bobroff Consulting of East Greenwich, R.I., a mutual fund consulting firm.

At least one fund company that advertises its closed funds - Janus Capital Management of Denver, Colo. - has been depositing money investors wanted placed in those funds, in money market funds. The practice has caught the attention of the SEC. Other companies, including American Century Investments of Kansas City, Mo. and Strong Funds of Menomonee Falls, Wis., have service representatives contact investors who send in checks to invest in closed funds, to inform them the fund they want to invest in is closed. The representatives try to sell investors a similar fund and will send checks back if the investors do not want to invest in those alternatives, representatives from both companies said.

Janus started placing checks ear marked for closed funds in money market accounts March 16, according to Shelley Grice, a spokesperson for the company.

"The reason is to save shareholders time," she said. "We found that investors that send money to Janus want a Janus product." The company contacts investors by phone and mail and tries to offer those who have sent money for a closed fund, a similar fund. If the investor wants his money back, Janus sends it back with the interest earned in the account, Grice said.

The SEC recently called Janus seeking a clarification of its policy, Grice said. SEC officials declined to comment.

Janus needs to be careful how it advertises its closed funds because there is a potential for legal problems as well as increased SEC scrutiny, said Pamela Wilson, a mutual fund lawyer with Hale & Dorr LLP of Boston.

"You could call it some kind of bait-and-switch," she said. "It's not the easiest private cause of action (to try), but there is another risk that the NASD and SEC don't like what you're doing and bring enforcement proceedings and you wind up on the cover of The Wall Street Journal. I'm not saying what they are doing is wrong, but it's what makes lawyers nervous."

Fidelity also places investors' checks sent for a closed-fund in a money market fund until the company can get in touch with the client, said Johanna Thonblad, a spokesperson for the company. But the company has never run an advertisement listing the performance of a closed fund, she said.

The practice of advertising the performance of a closed fund is not uncommon in the fund industry. Advertisements by Strong Funds, AIM Funds of Houston, Texas, American Century and Van Kampen Funds of Oakbrook Terrace, Ill., have recently included performance figures for funds that were closed to new investors at the time the ads ran.

In the March 23 edition of The Wall Street Journal, American Century advertised the performance of four of its global and international funds, including the International Discovery Fund which closed to new investors January 28.

"We'll showcase a number of funds and one might be closed but the broader impression is that this is a center of excellence for the company rather than the individual numbers," said Chris Doyle, a company spokesperson.

But, investors today are preoccupied with impressive returns and are not likely to read the small print explaining how those returns were achieved, Wilson said. American Century's advertisement includes a footnote revealing that the International Discovery Fund is closed to new investors.

NASD regulations require fund companies to disclose the fact that a fund is closed in all advertisements regardless of whether performance figures are listed, said Nancy Condon, a spokesperson for the NASD.

Another advertisement that was placed in USA Today in late March by Strong Funds highlights the performance of a fund that has been closed to new investors since March 19, 1993. The advertisement was created to promote the money management of the fund's manager, Dick Weiss, and is designed to bolster the company's brand name, said Melissa Murphy, a spokesperson for the company.

Advertising funds that are not available to new investors will probably prompt SEC action and lawsuits by plaintiff's lawyers, said Burton Greenwald, president of Burton J. Greenwald Associates, a mutual fund consulting firm in Philadelphia.

"I think the SEC will lay down some ground rules on this," he said. "You wouldn't put up with this anywhere else."

"I think you have to live by what shareholders' expectations are," said Wilson of Hale & Dorr. "If they send in money to a closed fund, they expect to get their money back. I think that's the baseline expectations of a shareholder. To overcome that expectation, an investment company needs to come up with very powerful disclosure. Most things you can put in a prospectus and that's fine, but why would anyone send out a prospectus for a closed fund? So, the normal avenues for disclosing things are not there."

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