It might be called the triple crown of regulatory malfeasance.

As of this month, three principal industry regulators had sued mutual fund companies over improper advertising.

The SEC, NASD Regulation and even, for the first time in at least four years, a state, have extracted settlements from two different firms for advertising practices that allegedly were so misleading that they violated state and federal anti-fraud statutes and NASDR investor protection regulations.

On May 10, the Dreyfus Corp. of New York agreed to pay a total of $3 million to the SEC and the New York attorney general over allegations that it provided insufficient and in some cases inaccurate disclosure about how hot initial public offerings were allocated to a high-performing fund whose performance Dreyfus advertised. Dreyfus did not disclose the effect that the hot IPOs had on the performance of the Dreyfus Aggressive Growth Fund in 1995 and 1996, the SEC alleged.

Dreyfus and former portfolio manager Michael L. Schonberg agreed to pay fines of $950,000 and $50,000 respectively to settle the SEC case. Dreyfus agreed to pay New York $400,000 in investigation costs and $1.6 million toward an investor education fund.

Six days after the SEC sued and settled with Dreyfus, Kemper Distributors of Chicago agreed to pay a $100,000 fine over allegations that it used misleading charts in mutual fund advertisements. One of the advertisements consisted of a long line that rose steeply on a diagonal. The text accompanying the chart said, "you are here," at the bottom of the chart and "your future is here" at the top.

Kemper and Dreyfus settled the cases without admitting or denying the allegations.

With the exception of the SEC's advertising case against Van Kampen Investment Advisory Corp. of Oakbrook, Ill. in September, fund industry lawyers could not readily recall the last time regulators sued over mutual fund advertising. The SEC is making it clear that the scrutiny of fund advertisements will continue.

The agency's chairman, Arthur Levitt, is particularly concerned about fund advertising, Paul Roye, director of the sec's division of investment management, said at an industry conference in New York May 15. The SEC will not tolerate the use of investment performance information to mislead investors, Roye said at the conference sponsored by the Practising Law Institute of New York.

"As funds face increased competition, one fear we have is that funds will respond to the competitive environment with overly aggressive advertising," Roye said.

Roye cited the Dreyfus case as an example of the SEC's determination. There are at least two notable factors in the Dreyfus case, fund lawyers said. The first is that New York state regulators were involved. The second is that Dreyfus made some disclosure about IPOs in the Aggressive Growth Fund's communications with shareholders.

Congress passed legislation in 1996 - the National Securities Markets Improvement Act- that took away nearly all substantive roles states play in overseeing the mutual fund business. That was a result long sought by the mutual fund industry and left states to do little but collect fees and monitor fund companies' compliance with some technical sales requirements.

But the 1996 legislation did not eliminate the states' authority to pursue fraud associated with mutual funds, and New York used that authority to settle its investigation into Dreyfus's advertising and IPO practices. The 1996 legislation will not stop New York from pursing fund cases when there is evidence of fraud, said Scott Brown, a spokesperson for Eliot Spitzer, the New York attorney general.

"Whether it's a boiler room operation, mutual fund, stock or whatever, to us it's all the same if people are getting hurt," Brown said. "We're an equal opportunity prosecutor."

Brown declined to comment on whether New York regulators are investigating other mutual fund matters.

Mutual fund industry lawyers and former state regulators viewed the New York action in Dreyfus as an anomaly that probably does not portend additional actions. Allegations in the case included events that took place in 1996, before the markets improvement act was signed in November, fund industry lawyers said. And one of the leading attorneys on the case for New York, William Mohr, has left the department for the private sector, lawyers said.

The New York action in the Dreyfus case does not signify any new press by states to get into the business of closely scrutinizing mutual funds for fraud, said Neal Sullivan, a former state regulator and partner in the Washington office of the law firm of Bingham Dana LLP of Boston.

"With the huge caveat that in a big down market, all bets are off," Sullivan said.

One obstacle to states taking up close mutual fund scrutiny is that since the passage of the 1996 act, states have reassigned attorneys who handled mutual funds matters to other areas or lost them to private practice, said Richard Cortese, vice president for consulting at National Regulatory Services and a former securities regulator in Vermont. NRS is owned by Thomson Financial, publisher of Mutual Fund Market News.

Industry lawyers said the Dreyfus case was noteworthy for another fact contained in the SEC filing outlining the charges. Dreyfus disclosed some information about its initial public offering practices in a semi-annual report Feb. 29, 1996. The report disclosed that the Dreyfus Aggressive Growth Fund had invested in "a number of initial public offerings." The report also stated that the fund's return - which at the time was about 67 percent- "should not be regarded as routine." That disclosure was not sufficient in light of the importance of IPOs to the fund's performance, the SEC found.

The Dreyfus case makes it clear that opaque or obscure disclosure is not enough to satisfy regulators, lawyers said.

"Putting (disclosure) in a semi-annual report is nice, but frankly, it doesn't go far enough," said Carl Frischling, a partner with Kramer, Levin, Naftalis & Frankel of New York.

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