Only fewer disclosures required now

Mutual fund houses can now breathe easy as far as their advertisement code goes. SEBI, the capital market regulator, in a notification last week, announced a change in the advertising code for mutual funds from being ‘rule-based' to ‘principle-based'. What this in effect means is that mutual funds will now be required to make fewer disclosures.

Disclaimer to replace

One of the biggest challenges that fund houses faced earlier was in the disclosure of the risk factors. Industry officials say that while the advertisement itself was just four lines long, the risk factors alone would run for 15-20 lines.

Under the new regulation, the risk factors would occupy around 40 per cent less of the surface area in case of print ads, and lead to a significant reduction in advertising expenditure. SEBI now mandates that these risk factors will now be replaced by the disclaimer — “Mutual funds are subject to market risk. Please read the scheme-related offer documents carefully.”

In case of advertisements announcing the launch of new fund offerings, the advertisements need only give basic information about the fund. “The idea is to get the investor acquainted with the fund first and if that interests them, they can simply refer to the offer documents,” said an official with a foreign fund house.

On ratings

Prior to this regulation, NFO ads by funds were required to make disclosures about the load structure, asset allocation, and terms of issue (whether the issue will be in physical or demat form) among other things.

SEBI has also asked fund houses not to mention fund ratings due to lack of uniformity in awarding these rankings. Only those funds, like the capital protection funds, which require SEBI-mandated ratings, are allowed to mention their ratings in the advertisements.

With respect to the audio-visual advertisements, the new regulation re-emphasises the need to be audible and understandable to the viewers or listeners.

However, confusion still persists over certain issues. The new regulation forbids the use of ‘slogans' in advertisements. The definition of ‘slogan' remains unclear though.

(This article was published on February 29, 2012)
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