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REGULATION & COMPLIANCE; After-Tax Performance Proposal Criticized

PALM DESERT, Calif. - The SEC's proposal to require funds to report their after-tax investment performance may prove popular with investors, but it is far from a hit with mutual fund industry lawyers.

The SEC's proposal fails to provide investors meaningful guidance on tax issues, has the potential to mislead and should be withdrawn or totally overhauled, said Robert Zack, associate general counsel for OppenheimerFunds of New York. The proposal, which the SEC made last month, is well intentioned but poorly executed, said Zack, speaking at the 2000 Mutual Funds and Investment Management Conference here last week.

"The proposal is so fundamentally flawed that it should either be withdrawn by the commission or drastically revised," Zack said.

Zack criticized the proposed rule after Paul Roye, director of the SEC's division of investment management, described it. The absence of personalized tax information would create confusion rather than promote understanding among investors, said Zack. The proposal, if adopted, could subject funds to allegations that they failed to disclose important assumptions underlying the manner in which they calculate after-tax returns, he said.

The proposal is "fundamentally misleading for most investors," Zack said.

Zack's remarks received enthusiastic applause from the more than 1,000 lawyers and fund executives in attendance.

"I think a lot of the points that you're making are red herrings because you just don't like the numbers," Roye said to Zack.

But, Roye also said the proposal was not perfect and that the SEC was prepared to modify it. Investors, however, want more information about the effect of taxes on their returns, he said. And several fund groups already are providing at least some of the information that the SEC is calling for in its proposal, he said.

The SEC should revise the proposal so that detailed disclosure about tax effectiveness applies only to funds that identify themselves as tax efficient, Zack said. All other funds should be required to provide some discussion about the effect of taxes on performance, he said.

It is unclear when the SEC will adopt a final version of the tax rule, Roye said. The deadline for comments on the proposal is June 30.