WASHINGTON, D.C. - Market volatility has quickly diminished some funds' returns and may require those funds to advertise more recent performance data than that of the most recent quarter's, said Doug Scheidt, associate director of the division of investment management of the Securities and Exchange Commission.

The SEC is concerned because funds may be complying with rule 482 of the Securities Act of 1933, which sets the standards for performance advertising, and still not be complying with other SEC regulations, Scheidt said.

There have been recent examples of funds that have advertised over 50 percent returns as of the most recently completed quarter and have had negative returns subsequent to that quarter which are not reflected in the funds' ads, he said.

"The question is, is mere compliance with 482 enough in that circumstance?" he said. "You'll have to ask yourself, as we did, if that's materially misleading."

Scheidt made his comments here earlier this month, at "The SEC Speaks in 2001," a conference sponsored by the Practising Law Institute of New York.

The SEC will release guidance on the issue in the form of a legal bulletin in the next few weeks, Scheidt said.

Even though an advertisement may be 100 percent compliant with rule 482, the SEC could still consider the ad to be fraudulent, Scheidt said.

"When ads are examined [to determine] if they are materially misleading, you have to look at the four corners of the ad," he said. "Just because the numbers have been updated doesn't mean that the ad is not materially misleading."

And it may not be enough to simply add a disclosure stating that a fund's actual performance may be lower than the advertised performance, especially when the fund is advertised in a daily newspaper in which the ads are placed a few days before they run, Scheidt said.

"I'd argue that when they put that performance information in the ad, they knew that performance information was wrong," he said. "It wasn't a question that it may be lower, they knew that it was lower."

In situations in which funds are advertised in monthly publications, funds' performance data should include the most recent data available and possibly include a note that refers investors to a 1-800 number or website where they could find the most recent performance data, he said.

Adding more recent performance information can be complicated by advertising lead times which require funds to submit materials as much as 60 days before the advertisements appear in a publication, said Marilyn Miller, a senior vice president and director of marketing with AIM Management Group of Houston.

Advertisements that include recent performance figures are monitored on a regular basis to insure that they reflect the actual performance of a fund, Miller said. If there is a "significant" discrepancy between the figures in the advertisement and a fund's most recent performance, AIM will replace it with an ad that does not cite performance figures, she said.

But what constitutes "significant" is a judgement call because neither the SEC nor NASD Regulation offers much guidance on when a fund needs to provide more recent data other than the previous quarter's, said Thomas A. Pappas, director of disclosure and investor protection

for NASDR.

If the SEC does issue further guidance on the matter, it will be the first time it has done so since rule 482 was adopted in 1988, he said.

At what point a fund needs to include more recent data other than what is spelled out in rule 482 is an issue the

SEC needs to address in a very straightforward manner, said Dan Ross, president

of Wechsler Ross & Partners, a marketing and design firm for financial companies.

"You can't ask lawyers to make a judgement call," he said. "The SEC needs to provide very specific guidance on when it is and when it is not appropriate to use performance figures."

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.