Seeking to discourage inflated or misleading claims by mutual funds and other investment companies, the Securities and Exchange Commission approved guidelines yesterday on how rankings are used in advertising and sales literature.
The new rules, which were proposed by the National Association of Securities Dealers, will require "prominent disclosure" in advertisements and sales literature of an investment company's ranking, the number of companies in the category, the name of the category and the period on which the ranking is based.
Over the years, mutual funds have resorted to all manner of creative advertising, wooing holders of certificates of deposit to volatile bond funds that play in the derivatives market, and trumpeting "first place" status whether they were No.1 or No.600. Since word got out that the NASD intended to act, however, the volume of such advertising has ebbed.
"The increase in the number of investment companies, investment company categories and ranking entities in recent years dictated the need for explicit rules covering the use of rankings," said R. Clark Hooper, vice president for advertising and investment companies regulation at the NASD.
"The new guidelines will help investors make sound investment decisions by providing more information about the meanings of mutual fund and other investment company rankings," she added. "We want to see these guidelines prevent misleading advertising."
The new rules apply only to investment companies that use rankings in their advertising and promotions. Mutual fund experts could not estimate the number affected, but said it was a small percentage of the total.
John Worth, a spokesman for the Vanguard group of funds, a leading mutual fund family, said the company did not use any rankings in its advertising. "Past performance can't guarantee future results," he said.
Many of the disclosure requirements released yesterday are not new, Ms. Hooper said.
But she said they represented an effort by the NASD to codify what needs to be done for a mutual fund to use rankings from such services as Lipper Analytical Services and Morningstar in its advertising.
"My biggest hope is that we will be providing the investing public with enough information, prominently displayed when need be, that if they don't understand it, they will know they need to ask questions," Ms. Hooper added.
Discussion about the need to draw up a set of guidelines began more than a year ago at the suggestion of the Investment Company Institute, the fund industry's trade association.
"We initiated this effort, strongly support these rules and think they will be helpful," said Erick Kanter, vice president for public information and marketing at the institute.