Scott Silver, managing partner of Silver Law Group and a leading investor advocate, recently submitted a comment letter to the SEC addressing the importance of mutual funds fairly characterizing the fund in its title or name.
The SEC says that it sought comments from the public “on the framework for addressing names of registered investment companies that are likely to mislead investors about a fund’s investments and risks pursuant to section 35(d) of the Investment company Act of 1940, rule 35d- thereunder, and the antifraud provisions of the federal securities laws.”
The letter can be seen here. The substance of the letter states:
“Dear Sir or Madam:
I am submitting this letter on behalf of myself and Silver Law Group. For over twenty years, I have dedicated myself to representing investors in FINRA arbitration claims. I am an active member of PIABA and the Co-Chair of the Securities and Investment Fraud Group of the American Association of Justice. My full bio is available on www.silverlaw.com. Over the course of my career, I have seen countless examples of investors being defrauded or being sold investments which are characterized as safe and conservative when, in reality, the fund’s design is risky and speculative. For example, my office represents families in securities arbitration claims against brokerage firms for the sale of illiquid or leveraged investments which have been sold as suitable investments to meet conservative objectives. These funds frequently have buzzwords in their title to give the illusion of safety or preservation of capital as objectives. However, it is unreasonable and unfair to allow funds to improperly characterize the funds risk tolerance or objectives in their title with knowledge that investors will be misled by false advertising. Main street investors retirement funds should not be dictated by fancy Madison Avenue marketing. Fair and reasonable risk disclosures should start with the name of the fund.
The purpose of market regulation is to protect investors, including unsophisticated main street investors who lack the knowledge and resources to investigate and understand the intricacies and pitfalls that lay behind a fund name. Despite current regulatory efforts, retail investors are still frequently misled by fund names that are either not addressed by the Names Rule in its current state or that capitalize on existing “gray zones” within the Rule. To the extent the Names Rule needs to be revamped, the SEC should increase its scrutiny on fund names with a focus toward protecting retail investors.
At its core, the name of an investment company should disclose, rather than mask, its purpose, and the SEC’s regulatory efforts should ensure this. If accomplished, this will further promote market integrity by instilling investor trust in these funds and the markets as a whole.
While the current “asset-based” approach—whereby a fund must invest at least 80% of its assets in the manner suggested by its name—provides some utility, it is still insufficient to protect retail investors. For example, a fund can add the words “growth,” “income,” “long-term,” or even “preservation” with little to no regulatory scrutiny. As a result, funds can incorporate “buzz-words” that appeal to retail investors with little to no consequence. As the market becomes more and more saturated with investment funds, the lack of regulatory scrutiny will undoubtedly lead to increased efforts to grab investor attention with misleading names. An investment strategy component must be incorporated into the Names Rule to address these issues.
Scott L. Silver”
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