December 10, 1991
TO: BOARD OF GOVERNORS NO. 87-91
STATE SECURITIES MEMBERS NO. 53-91
CONTRACTUAL PLANS COMMITTEE NO. 19-91
RE: INSTITUTE RESPONDS TO NASAA INVESTOR ALERT ON MUTUAL FUNDS
__________________________________________________________
In October, the North American Securities Administrators
Association, Inc. ("NASAA") and the Council of Better Business
Bureaus ("CBBB") jointly issued an Investor Alert regarding
investing in mutual funds. The Alert describes briefly the
nature of mutual funds, discusses potential problems for mutual
fund investors and provides ten tips on buying mutual funds.
However, as well as providing useful information, the Alert also
contains numerous misleading statements with respect to mutual
funds.
For example, the Alert constantly refers to "hidden fees"
and "unexpected commissions" that may be assessed by a fund, but
fails to mention that Form N-1A requires all fees to be clearly
disclosed in a fee table which is required to be included in the
front of a fund's prospectus. In addition, the Alert states that
"some mutual funds and sales organizations do little or nothing
to inform potential investors that the SAI exists," but fails to
state that Form N-1A requires that disclosure be included on the
cover page of a fund prospectus regarding the availability of the
SAI. The Alert also cautions investors against making an
investment decision based on advertisements and sales literature
since such information is not reviewed by the SEC before it is
used. However, the Alert fails to state that investors cannot
purchase shares of a mutual fund off an advertisement and that
most sales literature and advertising is reviewed by the NASD.
The Institute contacted the Executive Director of NASAA to
object to the Alert's misleading characterization of the fund
industry and was subsequently informed that the Alert would no
longer be distributed by NASAA.
In addition, the Institute submitted a letter to the
President of NASAA which detailed its objections to the overall
tone and specific allegations contained in the Alert. The
Institute's letter expressed concern over the need to issue an
Investor Alert on mutual funds by noting that in the past,
Investor Alerts had been issued on topics such as boiler room
scams, international investment frauds, penny stock frauds, "dirt
pile" gold swindles and pyramid scheme frauds. The Institute
objected to the implication that, by issuing this Alert, NASAA
has determined that investing in mutual funds is in that same
category of "investment fraud."
The Institute's letter also objected to several of the more
egregious misleading statements contained in the Alert (such as
those listed above). The letter concluded by noting that the
issuance of dire warnings by state regulators is bound to
discourage investors from purchasing mutual fund shares,
encourage redemptions and lead to a general loss of confidence in
the fund industry. Moreover, scaring investors off mutual funds
may lead investors to products that are less suitable, far less
regulated and much more susceptible to abuse -- the very products
that are the legitimate focus of NASAA Alerts.
* *
*
A copy of the Institute's letter, the NASAA Investor Alert
and a press release issued by the Idaho Securities Bureau is
attached. We will keep you informed of developments.
Patricia Louie
Assistant General Counsel
Attachments