Investors Deserve an Intolerant SEC

Examples of the SEC's failure to recognize and address systemic problems in fund industry abound.

SEC Chairman Levitt frequently complained in the 1990s about misleading fund ads that overemphasized short-term performance. Yet SEC rules that require funds to include one-year returns, a measure of performance that independent data providers such as Morningstar have generally eschewed. Rules proposed by the SEC last year in response to advertising abuses don't address the underlying problem of touting short-term performance. For example, the rules will require that current short-term performance be available via toll-free numbers, the idea apparently being that the problem is not that investors are relying on short-term performance, but that the short-term performance on which investors are relying is not current enough. The SEC's proposal entirely misses the point.

Blatantly misleading fund ads continue to appear without any SEC response. For example, an ad for the Strong Ultra Short-Term Income Fund that has appeared for months in a number of financial magazines asks in large, bold typeface: "Has your money fund slowed to a trickle?" The suggestion that a bond fund should replace a virtually risk-free money market fund is inherently misleading, not to mention that the ad violates the express terms of the rule governing fund ads by prominently displaying the fund's 3.49% 30-day yield while burying its 0.83% one-year return in a footnote. This ad was specifically authorized by the National Association of Securities Dealers and has run repeatedly without public objection from the SEC.

The SEC's response to misleading fund ads sends the message that such conduct is acceptable. Fund executives hear and understand this message, and they will inevitably live down to the SEC's standards.

Even on the occasion when the SEC has taken action, its commitment to high standards has been underwhelming. For example, in 1999 the SEC sued the Van Kampen Growth Fund for advertising its one-year return, 61.99%, without disclosing that the fund's performance resulted from its having been stuffed with hot IPOs.

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