Alert August 02, 2011

GAO Issues Report on Mutual Fund Advertising

As required by Section 918 of the Dodd-Frank Act, the Government Accountability Office (the “GAO”) delivered to designated Congressional committees a report (the “Report”) on advertising by registered open-end investment companies (“mutual funds”).   The Report focuses on (1) the impact of fund advertisements, particularly those with fund performance, on investors; (2) the extent to which performance information is included in advertisements; and (3) the regulatory requirements for fund advertisements and their enforcement.  The Report notes concerns expressed by mutual fund industry representatives that FINRA’s practice of communicating new interpretations of its requirements governing mutual fund advertising, through comments provided on new advertisements submitted for review, does not effectively communicate these new interpretations on an industry-wide basis.  To address these concerns, the Report recommends that the SEC take steps to ensure that FINRA develops mechanisms to ensure industry-wide notification of new interpretive positions for its mutual fund advertising rules. 

In a comment letter included in the Report, SEC Chairman Schapiro stated that she plans to (a) request that FINRA review its methods of disseminating new interpretations of fund advertising rules and (b) ask SEC staff to (i) work with FINRA, as needed, to develop mechanisms to enhance the transparency of those interpretations and (ii) incorporate the GAO’s findings into its oversight of FINRA.  In a comment letter included in the Report, Thomas M. Selman, FINRA’s Executive Vice President of Regulatory Policy, stated that in response to issues raised in the Report, FINRA intended to publish any “significant new interpretation of the advertising rules that affects a broad section of the industry” and that pending publication, FINRA will apply any such new interpretations in its regular filings program.  Mr. Selman’s letter also provided that FINRA will develop “one or more mechanisms to provide a regular summary of advertising issues and its interpretation of the application of the advertising rules to these issues.  For example, these mechanisms would include a regular letter to advertising compliance contacts in the industry and regularly scheduled webinars for these contacts.”