The Securities and Exchange Commission may soon change fund performance advertising rules to ensure that investors are better informed about the most recent performance data available.

In an open meeting on May 14, the SEC's Division of Investment Management recommended several amendments to fund advertising regulations. The SEC will consider the recommendations following a comment period from the industry ending July 31.

Specifically, the division is recommending that advertisements that showcase performance be required to include the most recent month-end returns, rather than data for the most recent quarter. The new rules would also require fund advertisements to direct investors either to a toll-free phone number or a Web site where they could obtain even more recent performance figures.

In addition, the SEC would require fund advertisements to display performance dates more prominently. Although the SEC did not say that it would require fund advertisements to include expense fees, it said it would require funds to "direct investors" to these fees.

Right now, funds that display performance numbers are required to provide the past one-, five- and 10-year performance figures ending on the date of the most recently ended calendar quarter. The SEC believes that providing investors with a fund's most recent performance data would present a more balanced picture for prospective investors.

Under the proposed changes, funds whose ads run between the fourth and last day of each month would need to provide month-end performance figures as of the last day of the previous month. Funds with performance ads running within the first three days of a month would be required to provide month-end figures from two months prior.

Funds would also be required to provide additional narrative disclosure stating, "Past performance does not guarantee future results. Current performance may be lower or higher than performance quoted in the advertisement."

In making its recommendations, the division did allow fund advisors more flexibility in their advertising content by eliminating the legal requirement that the information and language in fund advertisements match its prospectus. This would allow fund advertisements to include language putting fund performance in the context of current events and economic conditions.

But while the SEC may give fund advisors a bit more latitude in terms of the language they can use in their advertising, the regulator also proposes extending a rule governing prospectuses to all advertisements.

This rule requires a fund advisor to be sure that its prospectus does not contain any false or misleading information. The SEC is now considering extending this rule to all of a fund's advertisements to make it crystal clear it will not tolerate any information that is false or misleading to investors in any way.

The SEC's concerns about ads being either misleading or raising unrealistic expectations escalated when many technology and Internet funds advertised their record performance figures from 1999 and 2000.

In the past, the SEC has taken funds to task, charging and fining them in instances of misleading advertising.

In September 1999, the SEC charged that Van Kampen Investments of Oakbrook, Ill., had run misleading ads for the Van Kampen Growth Fund. As an incubator fund, before it was made publicly available, more than one-half of the fund's performance was attributed to hot initial public offerings, a fact not disclosed to prospective fund investors, according to the SEC. The firm and a former executive agreed to pay a $125,000 fine.

In May 2000, Dreyfus Corp. of New York agreed to pay the SEC $2.7 million for failing to adequately draw attention to the performance boost derived from IPOs in the Dreyfus Aggressive Growth Fund. The SEC also charged that Dreyfus failed to disclose that the fund's level of performance was not sustainable.

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