The Financial Industry Regulatory Authority (FINRA) has told 50 leading bond mutual fund companies to remove credit ratings on their holdings from advertisements, marketing materials and Web sites.
As Herb Perone, FINRA associate vice president, media relations, put it: “Bonds get ratings. Bond funds do not.”
The inconsistencies in how fund companies were presenting ratings on their holdings from the nation’s three credit rating agencies came to light in a routine review of advertisements by FINRA’s regulation department.
"In the wake of the economic downturn and the failure of mortgage-backed securities and subprime, concern about the validity of credit ratings has become heightened among all regulators,” Perone said.
Some fund companies were averaging the ratings, which themselves are based on different scales, he said. Others were cherry picking the most favorable ratings. In all cases, the fund companies were generating their own ratings methodology.
“It could be misleading to investors,” Perone said, adding that FINRA has not asked the companies to destroy the marketing materials but to remove the line item from future printings and from their current Web sites.