RCA - November 1996 - Blended Fund Family Performance Concerns NASD Regulation

At its March 1996 meeting, the NASD Regulation Investment Companies Committee confirmed an NASD Regulation staff position that blended fund family performance must not be used with members of the general public. The NASD Regulation staff has observed a recent increase in requests by members to distribute communications with the public that include the blended performance of some or all of the funds in a fund family. Some communications show the blended performance as a percentage figure, and some include rankings of various mutual fund families based on the blended performance.

The use of blended performance is prohibited except in limited situations, such as in asset allocation illustrations that include the performance of each fund used in calculating the blended performance, or with institutional clients that invest in a portfolio of funds. Such illustrations must be preceded or accompanied by prospectuses for each fund in the investor's portfolio. NASD Regulation bases this prohibition of blended performance with the general public on the following concerns:

  • Sales material containing blended performance is intended for use early in the sales process, before the registered representative has determined which fund is most suitable for the investor. There is great potential for misuse in the sales process whereby an investor could easily be directed into a poorer performing fund, after being introduced to the fund family through sales material which promotes higher, blended performance.

  • Unlike individual fund performance which must comply with SEC requirements, there is no standardized method of calculation for measuring blended performance.

  • The material also raises concerns with regard to selectivity. Many of these communications include blended performance, and rankings based on such performance, that have been excerpted from financial publications. The data on which the publications' rankings are based are obtained from the various mutual fund information services (such as Lipper and Morningstar). In the course of defining the universe of fund families, the publications typically eliminate fund families for reasons such as fund size, variety of funds, or other criteria that may appear arbitrary. The reader may not be aware that the rankings are not based on the entire universe of fund families, or that fund families with higher performance may have been excluded from the reprint. This exclusion does not provide the reader with a sound basis for evaluating the offered product or products, as required by NASD Rule 2210(d)(1)(A) (formerly Article iIII, Section 35 of the Rules of Fair Practice).
  • Presentations of blended performance rankings are imbalanced, as they omit material disclosure as to relevant differences between the ranked fund families.
If you have questions about sales literature containing blended fund family performance, please contact the Advertising Regulation Department at (202) 728-8330.