Success Brings Scrutiny: SEC Moves Slowly in Approving Jacob Internet Fund

Portions of the fund's prospectus dealing with Jacob's triple-digit returns at his previous fund appear to be under the microscope.
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Ryan Jacob's new Internet fund is quickly becoming a victim of its manager's success.

The fund, which was expected to be launched as early as Labor Day, has been languishing in the regulatory filing process. The unusually long delay has come as the

Securities and Exchange Commission

has intensified its scrutiny of performance-based advertising of mutual funds.

Since it filed its original prospectus on July 14, the

Jacob Internet

fund has submitted at least three amended versions to the SEC for further review. In the latest filing, the only notable changes were to portions detailing Jacob's record at the once-white-hot

(WWWFX) - Get Report

Internet fund.

That record became a bone of

contention between Jacob and

Kinetics Asset Management

, the Internet fund's adviser. While Jacob says that he started managing the Internet fund in December of 1997 -- a story supported by the fund's regulatory filings from that period -- Kinetics has said Jacob didn't start really managing the fund until several months later, around March 1998. He left the fund -- and Kinetics -- in July 1999.

Whether Kinetics has disputed Jacob's version of events directly with the SEC is unclear. Peter Doyle, Kinetics' chairman, has been cryptic about whether he's actually petitioned the agency about Jacob's performance record. But the slight changes in the wording surrounding that record suggest it has been the center of attention for Jacob and regulators alike.

"It would seem logical that everyone's focusing on that section now," says Rob Rosenblum, a securities lawyer and former regulator at the SEC. "It's not at all unusual in context of a filing to engage in spirited debates with the

SEC staff, to reach a point that makes both sides comfortable."

Both sides are very conscious of the controversy surrounding performance-based advertising in fund prospectuses.

In September, the SEC announced that it had fined

Van Kampen Investment Advisory

and its former chief investment officer, Alan Sachtleben, $125,000. At issue was a lack of

disclosure in the prospectus of the

(VGRBX)

Van Kampen Growth fund, which had racked up a terrific 63% gain as an incubator fund the year before it was available to the general public. The problem was that investments in initial public offerings had provided an outsized -- and unsustainable -- impact on the small fund.

With Jacob's record, the SEC must contend with an eye-popping 517% return over 18 months. Those kinds of numbers tend to make securities regulators nervous.

"If you happened to eke out a 450% return over the

S&P 500

during the same period, my goodness, I would think you would want to focus very carefully on the disclosure concerning how the return was achieved," Rosenblum says.

Jacob would not comment on where his fund is in its filing process, citing regulations that prohibit him from hyping his fund while it's in registration. The SEC, as a policy, does not comment on reviews of specific company filings.

But one thing's for sure: It's taking Jacob longer to get his fund off the ground than it has for other Internet funds filed around the same period. The

Goldman Sachs Internet Tollkeeper

fund filed its prospectus July 16, two days after the Jacob Internet prospectus was filed. The Goldman Sachs fund launched Oct. 1.

But Goldman Sachs was merely adding a new fund to an existing business rather than launching a new company, points out Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I.

"With Goldman, when you add a new fund to an existing family, you have some degree of ability to lock the

SEC staff into a tighter time frame," Bobroff says. "That was an easier thing. Ryan Jacob's fund is a brand-new filing."

But even for a new management company, the registration process for Jacob Internet's new fund is pushing the upper limits.

"If you hired the right lawyers to push it, 90 days is not unreasonable" to complete the process, Bobroff says. "But he's pushing 120 days at this point."

The delay has caused Jacob's fund to miss out on the recent rally in Internet stocks. Since Labor Day, when Jacob had originally said his fund would be out of the gate,

TheStreet.com Internet Sector

index has risen 38.7%. On

Monday, it posted its highest close ever at 840.79.

Can you say opportunity cost? It's a phrase that, no doubt, has a certain ring in Jacob's ears.