Changes increase the quantity and prominence of disclosures and reemphasis that advertisements are subject to the antifraud provisions of the federal securities laws. Comments due July 31, 2002
On May 17, 2002, the Securities and Exchange Commission proposed extensive changes to the rules governing advertising by registered investment companies. Release Nos. 33-8101, 34-45953, IC-25575 (May 17, 2002). The proposed changes include substantial increases in the quantity and prominence of required disclosures and a reemphasis that fund advertisements are subject to the antifraud provisions of the federal securities laws. Comments on the proposals are due by July 31, 2002.
At present, Rule 482 under the Securities Act of 1933 requires fund advertisements to disclose (i) a source from which an investor may obtain a prospectus containing more complete information about the fund, which should be read carefully before investing; (ii) that the performance data quoted represents past performance; and (iii) in the case of a non-money market fund, that the investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The proposed amendments would also require funds to include the following information in advertisements that contain performance figures:
–A toll-free or collect telephone number and, if available, a website where an investor may obtain performance data current to the most recent month-end;
–A statement that current performance may be lower or higher than the performance data quoted;
–A statement that past performance does not guarantee future results (which most fund advertisements already state); and
–A statement that the prospectus contains more complete information about the investment company, including charges and expenses (required whether or not the advertisement contains performance information).
Fund advertisements currently make some disclosures in 8-point type in a footnote. Under the proposals, all of these disclosures would be required to be presented in a size type at least as large as and of a style different from, but at least as prominent as, that used in the major portion of the advertisement. In a radio or television advertisement, the disclosures would have to be given emphasis equal to that used in the major portion of the advertisement.
The proposed amendments would also eliminate the application of 1933 Act Rule 134 to fund advertisements. Instead, all fund advertisements would be under Rule 482 and, unlike Rule 134 advertisements, would be subject to potential liability as a 1933 Act prospectus. The amendments would also provide that the fact that an advertisement complies with Rule 482 does not relieve the investment company, underwriter, or dealer of the obligation to ensure that the advertisement is not false or misleading.
The proposed amendments would also implement a provision of the National Securities Markets Improvement Act of 1996, which directed the SEC to eliminate the requirement in Rule 482 that fund advertisements under that rule may contain only information the substance of which is included in the statutory prospectus (sometimes called the “substance of which” requirement). Chairman Pitt noted that it is no longer 1996 and asked the staff to compile a list of statutory obligations that the SEC has been assigned and their current status.
Chairman Pitt also stated that, while these are good changes given the existing regime, his question is whether there is a better and more efficient way that the SEC can achieve the same result. Faced with this striking example of disclosure creep, fund companies and fund investors will have the same question. Investors may benefit from having more current performance information available, but otherwise it’s hard to see how they will really be served by lookalike disclosures that will dwarf the so-called “major portion” of many print advertisements and essentially make radio and television advertisements impossible.
The SEC’s proposing release is available online at http://www.sec.gov/rules/proposed/33-8101.htm
The SEC Commissioners voted to propose the rule changes on Tuesday, May 14. The meeting audio has been archived at http://www.sec.gov/news/openmeetings.shtml and the SEC press release announcing the meeting results is available at http://www.sec.gov/news/press/2002-66.htm
Copyright 2001, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to firstname.lastname@example.org
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.