48 Pages Posted: 17 Feb 2011 Last revised: 31 Dec 2011
Date Written: December 30, 2011
Mutual fund companies routinely advertise the past returns of their strong-performing, actively-managed equity funds. These performance advertisements imply that the advertised high past returns are likely to continue. Indeed, investors flock to these funds despite high past returns being a poor predictor of high future returns. Thus, fund performance advertising is inherently and materially misleading and violates federal securities antifraud standards. In addition, the SEC-mandated warning in these advertisements that “past performance does not guarantee future results” fails to temper investors’ focus on past returns.
The SEC should do more to prevent investors from being misled by fund performance advertisements. It should at least require a stronger warning that makes clear that high returns by actively-managed mutual funds generally do not persist. The SEC should also seriously consider reinstating its prior prohibition of performance advertisements. Such a ban would help investors focus on more important fund characteristics, such a fund’s costs, risk, and the extent to which the fund’s investment objective matches that of the investor.
Keywords: mutual funds, advertising, deceptive advertising, securities law, securities regulation, financial institutions, investing, investor protection, regulation, securities law, Securities and Exchange Commission, Federal Trade Commission, FTC, SEC
JEL Classification: G20, G23, G28, K20, K22, M30, M37
Suggested Citation: Suggested Citation
Palmiter, Alan R. and Taha, Ahmed E., Mutual Fund Performance Advertising: Inherently and Materially Misleading? (December 30, 2011). Georgia Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1761552 or http://dx.doi.org/10.2139/ssrn.1761552