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SEC Steams Ahead on Tax Disclosure


NEW YORK - The after-tax disclosure regulations that were recently adopted by the Securities and Exchange Commission have several major flaws which will potentially hurt, not help, fund shareholders, according to Matthew Fink, president of the Investment Company Institute, who spoke here last week.

In a Jan. 24 letter to the SEC, the ICI requested that the commission voluntarily participate in the regulatory review plan announced by the new administration on Jan. 20 with regard to after-tax return disclosure. The review would put the regulations on hold for 60 days. The SEC, independent of the White House, is not obliged to participate in the review, however, and will not do so, since the new regulations were adopted on Jan. 19, before the regulatory review was announced, according to Fink.

The regulations require funds to disclose before and after-tax returns in prospectuses and advertisements and were instituted to inform shareholders more accurately of historical and potential returns. The ICI has supported the SEC in its goals, however there are three elements of the regulations "where the SEC pressed the pedal too far" and which would be a disservice to fund shareholders, said Fink.

One element the ICI objects to is that, under the rules, the after-tax returns would be calculated using the highest marginal income tax rate. The majority of mutual fund shareholders are not in that bracket so the taxes published would be inflated for most investors, said Fink. The ICI also objects to the rules applying the short-term capital gains rate, the rate used with investments lasting 365 days, to returns. Shareholders would not redeem shares after 365 days, since they would be taxed much less if they redeemed the following day, said Fink. Finally, the ICI objects to the requirement that funds put the after-tax data in the risk/return section of prospectuses. By doing so, the numbers would be in an improper context, said Fink. They should be disclosed in a separate section on tax disclosure, said Fink. Terry Glenn, the ICI's new chairman, said investor awareness and education about retirement plans, will be top priorities for the ICI this year.