Halt! Who goes there?

A value fund was arrested yesterday and charged with impersonating a growth fund.

Witnesses say they saw the fund manager buying stocks with price-earnings ratios above 100.

Such statements may never find their way onto the police blotter, but don’t be surprised if something like that happens someday soon.

The Securities and Exchange Commission within the next few months will launch a new rule cracking down on funds with misleading names, commission officials say.

The measure will require a fund to invest at least 80% of its assets in the type of investment suggested by the name instead of the 65% currently required.

The good news for fund companies is that the SEC will allow them to change the name of a fund in violation of the rule without getting approval from shareholders, says Cynthia Fornelli, senior adviser to Paul Roye, director of the SEC’s division of investment management.

It’s unclear what criteria will be used to determine if a fund is in compliance with the rule. But a quick look at the mutual fund universe suggests at least a few might run into difficulty.

The most visible of those funds is the $11.8 billion Legg Mason Value Trust, offered by Legg Mason Inc. in Baltimore. Manager Bill Miller continues to make headlines as someone willing to bend the definition of value to include expensive, high-flying tech companies.

tactical moves

Three of the top five holdings in the fund as of Oct. 31 include technology companies, according to Morningstar Inc in Chicago. They are America Online Inc., Gateway Inc. and Amazon.com.

“That is a fund that should not be allowed to use value in the name,” says Mercer Bullard, founder and chief executive of Fund Democracy LLC in Chevy Chase, Md.

Mr. Miller’s strategy has allowed him to beat the Standard & Poor’s 500 stock index for the last nine years, but his streak may be coming to an end now that technology stocks are performing poorly.

Year-to-date as of Nov. 15, the fund was down 1.70%, according to Morningstar. Mr. Miller still led the S&P 500 by 2.81%, but his fund ranked in the 78th percentile of its category.

In a memo sent to the SEC on June 28 in support of the mutual fund “names rule,” Mr. Bullard said Legg Mason Value Trust’s p/e in 1999 was 43% higher than the value category average, and its price-to-book ratio was 186% higher than the value category average.

Officials at Legg Mason would not comment on what the new rule could mean for the fund.

Mr. Bullard, however, suggests that if the company doesn’t want to give up the term “value,” it should rename the fund something like “Bill Miller’s Somewhat Unusual Definition of Value Fund.”

Other funds that might find themselves in trouble with the new rule include the $4 billion Firsthand Tech Value Fund, offered by Firsthand Funds in San Jose, Calif.

Though it uses the word “value” in its name, Morningstar puts the fund in its specialty-technology category.

It’s also hard to imagine a value fund holding something like chip maker PMC-Sierra Inc., the second-largest holding in the fund as of Oct. 31, according to Morningstar. Its p/e is hovering around 270, far above the number most fund managers give a value stock.

The $368 million Montgomery Growth Fund, offered by Montgomery Asset Management in San Francisco, is another example of a fund that may trip over the new rule.

Even though its name suggests it’s a growth fund, Morningstar places it in its mid-cap value category.

Heidi Khashabi, Montgomery’s director of mutual funds, however, takes issue with Morningstar’s assessment.

Ms. Khashabi says the company would never let the fund drift too far away from the objectives its name suggests, although she admitted changes were being made.

“Going forward, we have repositioned the portfolio even more towards growth-oriented stocks and less so towards value,” Ms. Khashabi says. “We don’t expect to be on the value category for long.”

Funds that include terms such as “value” or “growth” in their names, however, aren’t the only ones that will be affected by the new rule, says Burton Greenwald, a mutual fund consultant in Philadelphia.

Mr. Greenwald says that they may actually be the least affected compared with sector funds.

Souped-up funds

“When you look at value, it is in the eye of the beholder,” he says.

“When you talk about a gold fund or a country fund that is so style specific, it doesn’t lend itself to much interpretation.”

That could be a real problem for sector funds, especially utility funds, many of which souped up their performance with telecommunications stocks before those stocks went south with the Nasdaq.

Although it has reduced its exposure to telecommunications, the $11 million Gabelli Utilities AAA Fund, offered by Gabelli Funds Inc. in Rye, N.Y., is an example of such a fund.

“At the beginning of the year, I had about 40% of my assets in telecom,” says Timothy O’Brien, the fund’s manager. “By the end of the second quarter, I cut that to 8%.”

Mr. O’Brien says he takes issue with those who say telecommunication companies are not utilities, because both power companies and telephone companies provide customers with a service that is delivered to their homes.

Other mutual fund observers, however, say funds such as Mr. O’Brien’s should fall under the telecom-utilities category if he doesn’t want to drop the term “utility” altogether.

Whether a slew of name changes will result after the SEC puts its rule in place is yet to be seen and is largely dependent on how strict its guidelines are with regard to categories and styles.

That’s something the SEC won’t make public until it unveils its new rule, but funds claiming to be style or category specific might want to consider this as an option: the small-mid-large-value-growth fund. At least it’s a name that might appeal to both investors and regulators.