Mutual Fund Performance Advertising: Inherently and Materially Misleading?

Mutual fund companies routinely advertise the pastreturns of their strong-performing, actively-managedequity funds. These performance advertisements implythat the advertised high past returns are likely tocontinue. Indeed, investors flock to these funds despitehigh past returns being a poor predictor of high futurereturns. Thus, fund performance advertising is inherentlyand materially misleading and violates federal securitiesantifraud standards.

In addition, the SEC-mandatedwarning in these advertisements that "past performancedoes not guarantee future results"fails to temper investors'focus on past returns.The SEC should do more to prevent investors from beingmisled by fund performance advertisements. It should atleast require a stronger warning that makes clear thathigh returns by actively-managed mutual funds generallydo not persist. The SEC should also seriously considerreinstating its prior prohibition of performanceadvertisements. Such a ban would help investors focus onmore important fund characteristics,such a fund's costs,risk, and the extent to which the fund's investmentobjective matches that of the investor.