SEC to Examine Funds’ Past Performance

WASHINGTON — The Securities and Exchange Commission will routinely examine some mutual funds’ calculations of past performance after having found instances in which these results were inflated, the SEC’s top mutual fund regulator said Friday.

SEC investment-management director Barry Barbash said the exams will cover funds that intend to print performance results in their prospectuses that go beyond what they are required to include. Many newly formed funds try to publish their portfolio managers’ records with previous funds to give investors a sense of long-term performance.

“The industry is interpreting our guidance more broadly than we intended” and “overselling past performance,” Barbash told the Investment Company Institute’s annual meeting in Washington. The SEC exams “may lead to some performance presentations disappearing from the scene,” he said.

A portfolio manager’s performance with a different fund may be misleading if he was a co-manager or had more support staff, Barbash said.

The SEC also may provide new guidance to the fund industry that would restrict its use of performance results, he said.

“We could indeed end up limiting the direction of some representations,” Barbash said.

The SEC will consult with the fund industry and the National Assn. of Securities Dealers before issuing new guidance, Barbash said.

The SEC has written several “no-action” responses to fund queries that have been misconstrued by the industry during the last 18 months, Barbash said. These letters, to Bramwell Growth Fund, Nicholas-Applegate Mutual Funds and others, said the commission wouldn’t take disciplinary action if the new funds used certain historical data from investment advisors and portfolio managers.

The mutual fund industry voiced support Friday for the SEC’s efforts.

“We absolutely agree the SEC should put out guidance because some people are interpreting its letters too broadly,” said ICI head Matthew P. Fink.