SEC Fights for Fund Disclosure

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Investors looking to learn about the impact of taxes on their funds' performance may soon find their fund companies doing this for them. The Securities and Exchange Commission has proposed that fund companies take this role because investors are entitled to be told the after-tax consequences of funds.

Taxes affect funds differently. Two funds with identical before-tax returns can have two very different tax liabilities. Fund investment strategies can really make a difference at tax time. It's estimated that investors lose more than two and a half percentage points of an average stock funds' total return to taxes.

The SEC has proposed that after-tax returns be made available to investors in a standard format that will allow them to compare investments from company to company. Currently, proposed changes call for mutual funds to disclose 1-, 5-, and 10-year after–tax returns in the risk/return summary of the prospectus as well as in the annual report under the management's discussion of fund performance. Other proposed changes require funds that choose to include after-tax returns in advertisements and other sales materials to include standardized after-tax returns.

The SEC’s proposal is supported by the mutual fund industry and many investment companies already provide similar disclosure statements. Many other companies that have not provided similar statements are heading in that direction.

A few funds that escape the proposed disclosure statements are money market funds and fund shares that are offered exclusively for 401(k) plans, variable annuities and other tax-deferred plans.

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