ACTION REQUESTED
[14887]
July 17, 2002
TO: ADVERTISING COMPLIANCE ADVISORY COMMITTEE No. 13-02
INTERNATIONAL COMMITTEE No. 55-02
RE: IOSCO REQUESTS COMMENT ON PERFORMANCE PRESENTATION STANDARDS
FOR FUNDS
The International Organization of Securities Commissions (IOSCO) has requested
comment on the attached report on Performance Presentation Standards for Collective
Investment Schemes prepared by the Standing Committee on Investment Management (SC5).
The Report reviews the standards currently used by member jurisdictions with respect to
performance presentations in CIS, including fund advertisements and marketing materials and
articulates some general regulatory principles based on this review.
The first part of the Report summarizes the findings of two IOSCO surveys covering:
whether performance presentation standards (PPS) exist in each responding jurisdiction, who
sets them, whether they are mandatory, what time periods are prescribed, and whether fees and
expenses are disclosed or reflected in the performance presentations. According to the Report,
PPS exist in most jurisdictions, are established by the regulator, an SRO, or both, and mandate a
standardized period for presentations. While almost all jurisdictions require performance
presentations to disclose fees and include mandatory disclaimers, most jurisdictions do not
require the presentation of volatility information or comparisons to benchmarks. The Report
notes that six jurisdictions (Australia, Canada, Italy, Portugal, Sweden and the US) prescribe
standardized methods to calculate performance but noted that the formulas used do not all
make the same assumptions about the treatment of front-end sales loads, deferred sales loads
and redemption fees, ongoing fees and expenses, and reinvestment of dividends and
distributions.
The second part of the Report formulates general principles for the regulation of
performance presentations. Noting that some funds use past performance as a primary
marketing tool and that some investors appear to consider this information as very important,
the Report states the regulation of fund performance presentations is important to ensure
presentations do not mislead investors and allow investors to make meaningful comparisons of
fund performance information.
The Report details how specific regulatory requirements can help achieve these goals.
The Report states that the use of standardized formulas can promote investors’ ability to
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compare funds and prevent misleading performance claims by funds and notes that these
formulas can prescribe the method of performance calculation most appropriate for specified
types of funds. The requirement to reflect fees and expenses in performance information, even
if the jurisdiction does not require standardized formulas, can serve to promote comparability
and prevent a fund from inflating its performance. The use of standardized time periods can
prevent misleading claims, promote comparability, and help demonstrate to investors the
volatility of a fund over time. Requirements to compare performance to a relevant benchmark
enable investors more readily to compare fund performance to the overall market and
determine whether performance is more attributable to manager investment acumen or the rise
or fall of the market. The Report also notes that mandatory disclaimers, particularly if they are
prominent, can prevent investors from being misled.
The Report also discusses the enforcement of PPS and observes that mandatory PPS
generally are more effective, but that voluntary standards can be effective if competition or
other pressures in the market effectively force funds to comply with the voluntary standards.
The Report states that regulators use different means to promote compliance with PPS,
including reviewing the contents of specific advertisements, inspecting funds to determine if
they have calculated performance correctly, relying on investor complaints, or reviewing
advertisements in the media for compliance.
The last section of the Report articulates a set of general principles for the regulation of
performance presentations in collective investment schemes (CIS.) These principles, on which
comment is requested, are as follows:
CIS performance presentations raise investor protection concerns when
performance is calculated inaccurately or presented in a misleading manner.
Regulators can take different approaches to ensuring that investors are not
misled, such as enforcing a general prohibition on false and misleading
statements about CIS performance or adopting or endorsing PPS for the
calculation and presentation of CIS performance information.
The use by regulators of PPS can protect investors from being misled by
performance information and facilitate the ability of investors to compare CIS
performance.
PPS can be established by the regulator, an SRO, a professional organization or
other group. PPS can be mandatory or voluntary; mandatory, enforceable PPS
may be more effective, although voluntary PPS can be effective if competitive or
other pressures effectively force a CIS to comply with them.
PPS may vary depending on the type of CIS.
The need for comprehensive PPS may vary from jurisdiction to jurisdiction,
depending on the maturity of the CIS industry, current CIS advertising practices
and the history of abuses, if any.
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The Report suggests that regulators in jurisdictions that do not require compliance with
PPS may wish to evaluate the effectiveness of voluntary PPS and that all jurisdictions may
wish to consider whether existing PPS, either mandatory or voluntary, are sufficiently
comprehensive to address the investor protection concerns presented by current CIS
performance presentation practices. The Report also states that the SC5 intends to engage in
further work on developing best practice standards for the presentation of CIS performance
information in advertisements.
The Institute is considering whether to comment on the issues presented in the Report.
If you have any views on whether the Institute should submit comments, or on particular
matters that the Institute should consider addressing in its comments, please provide them to
me at 202 326-5826 or podesta@ici.org or Dorothy Donohue at 202 218 3563 or
ddonohue@ici.org by August 20, 2002. In 1997, when Japan was implementing a trade
agreement commitment to improve investment trust performance data disclosure, the Institute
submitted a memorandum to the US Treasury Department, a copy of which is attached, on
principles for developing an effective mutual fund performance reporting system. We would be
interested in your views on whether the points made in the memorandum remain pertinent and
should be mentioned in any comment letter the Institute may submit to IOSCO. Comments are
due by September 30, 2002.
Mary S. Podesta
Senior Counsel
Attachment no. 1 (in .pdf format)