The AGRO Mutual Fund invests in aggressive growth stocks of midcap corporations. The fund is running an advertisement on the radio that informs the listeners that AGRO earned a 22% return last year while the S&P 500 Index returned only 10%.The ad also contains information regarding how an interested investor can contain a fund prospectus. Has AGRO violated any securities laws with this advertisement?
Explanation
Answer: C - Yes. When AGRO runs an advertisement that informs the listeners that it earned a 22% return last year while the S&P 500 Index returned only 10%, it has violated securities laws because although the fund provided the return on the S&P 500 as well as its own return, it failed to mention that the S&P 500 Index is comprised of large company stocks of average risk, which is not an appropriate benchmark for AGRO to use. The appropriate index is one comprised of similar stocks, such as the Russell Mid-Cap Growth Index. Furthermore, any advertisement referencing past returns must contain a statement that past performance is not indicative of future performance.
