SEC Intervenes in Sales of Open-End Shares

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To eliminate or at least cut down the volume of improper sales literature used in the selling of open-end shares in particular, the Securities and Exchange Commission (SEC) with the assistance of the National Association of Security Dealers, which is a self-policing organization, adopted a Statement of Policy in 1950. It set forth the types of advertising and sales literature that were considered to violate the standards of the Securities Act of 1933 (the "Truth in Securities Act") and the Investment Company Act of 1940. The Statement of Policy was amended in November 1957.

Pursuant to the Statement of Policy, it is considered materially misleading for sales literature to:

1. Imply a percentage return on the investment in the shares of investment companies, except when the rate of return is expressed as a ratio of dividends paid from net investment income and adjustment has been made for capital gains distributions. Distributions from net investment income and distributions from other sources must not be combined. Nor is it proper to represent or imply that an investor will receive a stable, continuous, dependable or liberal return, or that he will receive any specified rate of return.

2. Represent that an investor's capital will increase or to discuss such matters as accumulation of an estate, protection against loss of purchasing power (particularly effective when the cost of living is rising), diversification of investments, financial independence or profit possibilities without pointing out the market risks inherently involved in the investment.

3. Refer to the registration or regulation of investment companies without explaining that this does not involve supervision of management.

4. Exaggerate the significance of the services of banking institutions as custodians of securities or as transfer or disbursing agents, fail to state the character of the limited role of the custodian whenever the advantages of these services are discussed.

5. State or discuss the redemption features of investment company shares without explaining that the value of the shares on redemption may be more or less than the cost of the shares to the investor.

6. Represent that shares of an investment company are similar to or as safe as government bonds, insurance annuities, savings accounts, or life insurance, or possess the features of a debt security; or that the management of an investment company is under the same type of investment restrictions or is operated under limitations such as are imposed on savings banks and insurance companies, except as investment policy is restricted by the investment company itself as set forth in the registration statement.

7. Use any comparison of an investment company security with any other security or security index or average without pointing out: that the particular security index or average and period are selective; that the results disclosed should be considered in the light of the company's investment policy and objectives, the characteristics and quality of the company's investments, and the period selected; and any other factor necessary to make the comparison fair, to represent that investment companies are direct sources of new capital to industry or that a particular investment company is such a source unless the extent to which such investments are made is disclosed.

Fortunately for investors, the government saw the need for regulation of the stock system early in the 19th century and stepped in on our behalf. If this had not been the case, it is quite likely that large companies could have taken the money of innocent (or ignorant) investors and simply disappeared with it.

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