Report on Mutual Fund Advertising

Section 918 of Dodd-Frank Act required a study on mutual fund advertising. The Government Accountability Office delivered that report before the 18 month deadline to the designated Congressional committees. The Report’s objectives were “to examine (1) what is known about the impact of mutual fund advertisements on investors, (2) the extent to which performance information is included in mutual fund advertisements, and (3) the regulatory requirements that exist for mutual fund advertisements and how they are administered and enforced.” Just for fun, the GAO included ETFs in the study given their popularity and some similar legal structures

The GAO reviewed Securities and Exchange Commission and Financial Industry Regulatory Authority (FINRA) rules and studies related to mutual fund advertising’s impact on investors. They also reviewed a random sample of 300 fund advertisements.

The most interesting finding (at least most interesting to me) is that they did not find a clear harm from advertisements that included performance results. Traditionally, research has shown that past performance generally does not persist and is not predictive of future performance. Therefore performance advertisements would be inherently misleading. Under Rule 482, mutual fund advertisements that includes performance data have to point out that past performance does not guarantee future results.

However, the GAO found some studies illustrate that investors who are influenced by performance advertising may still achieve returns that exceed market indexes or other funds.

The main recommendation that came out of the report was to ensure the “FINRA develops sufficient mechanisms to notify all fund companies about changes in rule interpretations for fund advertising.” Both SEC and FINRA agreed with the recommendation.