Misleading Fund Performance Claims? 'The SEC Made Me Do It'

The Securities and Exchange Commission is on the warpath against fraudulent fund ads. In his annual address to the mutual fund industry in May, Paul Roye, director of the SEC's investment management division, warned, "The commission will not tolerate the misuse of performance information to mislead investors." SEC Chairman Arthur Levitt has ordered the commission's examinations staff to conduct a "special review" of fund marketing.

Perhaps the commission should start by looking closer to home. Although one of SEC's biggest beefs with the fund industry has been the presentation of outsize short-term returns in fund ads, SEC rules require fund ads to display this data.

Under SEC rules, if a fund advertises its performance results, it is required to provide one-year returns (in addition to five- and 10-year or since-inception returns). Even if the one-year returns are potentially misleading -- as they often are -- they cannot be omitted. ...