Publication Date



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.