December 16, 1993
TO: SEC RULES COMMITTEE NO. 111-93
SUBCOMMITTEE ON ADVERTISING NO. 21-93
RE: INSTITUTE LETTER TO SEC ON MUTUAL FUND VOLATILITY RATING
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As you may know, several nationally-recognized statistical rating
organizations are reportedly developing "volatility ratings" that purport to
measure the sensitivity of a bond fund's net asset value to changes in interest
rates. We understand that the Division of Investment Management is considering
whether to permit the inclusion of the proposed volatility ratings in mutual fund
advertisements. The Institute recently sent the attached letter to the Division,
urging the staff not to approve such a use of the ratings.
In its letter, the Institute expressed its strong support for the objective
of providing meaningful investment risk disclosure to investors, but stated that
the volatility ratings "would be an improper projection of future performance,
could mislead investors about investment risk, and would provide them little, if
any, useful information concerning a fund or funds in which they may consider
investing."
The letter points out that current SEC rules prohibit the use of such
ratings in mutual fund advertisements. Moreover, since the ratings would be
determined by analyzing a fund's current portfolio, they quickly could become out
of date as the portfolio or the adviser's investment methods change. In
addition, there is a significant danger that investors will place too great a
reliance on the rating as the only or the most relevant presentation of the
fund's risk. Finally, the rating could lead investors to view the rating as
promissory in nature.
Thomas M. Selman
Assistant Counsel
Attachment