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July 29, 2011 at 04:53 AM
In response to complaints from fund companies that FINRA fails to consistently communicate new interpretations of existing advertising rules for mutual funds, the regulator says it now intends to send a “Notice” to firms detailing any “significant” new interpretations of fund advertising rules affecting “a broad section of the industry” to help protect investors from misleading ads.
FINRA’s pledge comes after the Government Accountability Office (GAO) performed a review of mutual fund advertising focused on the advertising of funds’ past performance. GAO’s report, which was mandated under Section 918 of the Dodd-Frank Act, examined three areas:
- What is known about the impact of fund advertisements on investors
- The extent to which performance information is included in advertisements
- The regulatory requirements for fund advertisements and how they are administered and enforced.
To address these objectives, GAO reviewed existing and proposed SEC and FINRA rules, conducted a literature review of studies related to mutual fund advertising’s impact on investors and reviewed a random sample of 300 fund advertisements. GAO also met with regulators, fund companies, academics, and industry and investor protection groups.
During its review, the GAO found that because FINRA communicates “some new interpretative positions initially by making comments on advertisements submitted for its review, only those firms that submit new advertisements learn of new interpretations of existing rules.” As a result, GAO said in its report, “they may be competitively disadvantaged if other firms attract additional investments by continuing to use previously approved advertisements that do not comply with the new position.”
