SEC Rule Would Make Funds Show Tax Effects

The Securities and Exchange Commission proposed a rule Wednesday that would require mutual funds to disclose after-tax performance to investors.

The recommendation came on the same day a national survey showed most investors don’t understand the effects of taxes on their investment returns. That study, commissioned by Boston-based money manager Eaton Vance, found that 57% of investors think the government should require funds to disclose after-tax returns.

The proposal, which gives the public until June 30 to submit comments, would require funds to disclose this information in their prospectuses and annual reports--but not in advertisements. Funds would have to display one-, five- and 10-year after-tax returns in a standardized table designed to let investors compare the returns of different funds.

“Two funds with identical before-tax returns can have significantly different after-tax returns,” SEC Chairman Arthur Levitt said. “Investors are entitled to be told that difference.”

Most fund returns aren’t adjusted now to take into account investor income and capital gains taxes, which can be the single biggest cost associated with mutual funds for investors. Investors in stock funds lost an average of about 16%, or 2.6 percentage points, from their annual returns to taxes between 1988 and 1997, an Ernst and Young study found.

Some of the largest fund companies are already moving to disclose after-tax returns. Vanguard Group began reporting after-tax returns last year for its stock and so-called balanced funds.

The proposal would exempt money-market funds and funds used exclusively for 401(k) plans, variable annuities and other tax-deferred programs.