Funds must reveal after-tax performance

SEC approves rules to help investors make fully informed decisions

January 20, 2001|By BLOOMBERG NEWS

WASHINGTON - The Securities and Exchange Commission approved rules yesterday that require mutual funds, for the first time, to disclose their after-tax performance to investors.

"Taxes can be the most significant cost of investing in a mutual fund," said Paul Roye, director of the SEC's division of investment management. Yet, there is a "gap" in investors' knowledge about these taxes, he said.

Currently, the performance figures made available to fund investors consider managers' fees and expenses, but not the taxes that investors ultimately pay on fund dividends and capital gains.

"Investors should have this information but do not now," said U.S. Rep. Paul E. Gillmor, an Ohio Republican who introduced legislation in March 1999 calling for the new rule. Over the past 15 years, taxes have consumed more than 30 percent of the average stock fund's return, in some cases because of high portfolio turnover, Gillmor said.

The House of Representatives passed the bill, also sponsored by Rep. Edward J. Markey, a Massachusetts Democrat, on a 358-2 vote. The Senate didn't act on the measure.

The SEC has done on its own what Gillmor, Markey and other lawmakers wanted.

"The rules will help investors make fully informed investment decisions," Markey said. "Capital gains have a material impact on the overall performance of a mutual fund. Information regarding the impact of such taxes is clearly material information that investors need to have in the fund prospectus."

In 1999, mutual funds distributed about $238 billion in capital gains and $159 billion in taxable dividends, the SEC said. More than 2 1/2 percentage points of the average stock fund's total return is lost annually to taxes.

The new rule, proposed by the SEC in March, requires fund companies to display one-, five- and 10-year after-tax returns in their prospectuses. The agency dropped a proposed requirement that funds also report the data in annual reports.

Fidelity Investments, the nation's largest mutual fund complex with $804.6 billion in fund assets, opposed including after-tax returns in annual reports. Vanguard Group, the second-largest fund manager with $550.6 billion in assets, supported disclosure in annual reports.

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