Disclosure of Tax Consequences For Mutual Funds
By Mitchell S. Ostwald
Earlier this month, the House of Representatives passed a bill with a 358 - 2 vote requiring the Securities and Exchange Commission (SEC) to implement regulations to include mutual fund tax disclosure within one year after the measure becomes law. This bill now goes to the Senate.
This legislation is a result of concerns by investors and consumer groups over the lack of disclosure about how taxes affect the amount of money mutual funds make, and whether it should be disclosed to investors who are contemplating making an investment. Many believe this is the type of information a fund investor should have because it is very difficult to make an intelligent decision without it.
Taxes can be the biggest cost associated with mutual funds, with the average investor losing up to 3% point of return each year due to taxes according to the House Commerce Committee. About half of the $6 trillion dollars invested by 83 million Americans in mutual funds are in taxable accounts.
The SEC has been diligently trying to affect rule changes on its own. Last month, the SEC provided public comment on rules that would require mutual funds to estimate 1, 5, and 10 year returns after taxes, instead of before tax returns as under current rules. Estimated taxes would have to be shown for investors who sell their fund shares, and for those who remain in the fund.
Both the SEC and the House of Representatives Commerce Committee noted that the mutual fund industry has been fully cooperating with its efforts to draft legislation to provide more information to investors. Obviously, voluntary requests of mutual fund companies to present their returns after taxes have been met with deaf ears. With the regulatory boards and legislation now moving in this direction, it is a case of the mutual fund industry reluctantly agreeing to change its long-time practices. Whether the Senate will also agree to the legislation, and if it will ultimately be signed into law, is yet to be seen. Since taxes remain the reality for most investors, this will hopefully show a truer illustration of what an investor can expect as a return on its investment; not the current loss leaders printed in the mutual fund company advertisements.
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