The Investment Company Institute has asked the SEC to make changes in its after-tax rule proposal that would reduce the quantity of data funds would be required to disclose and would mean funds have to include the data in prospectuses only, not in annual reports as well.

The SEC's proposed rule would require funds to report one-, five- and 10-year pre- and post-liquidation tax returns in their prospectuses and annual reports. Over the next few months, the SEC will review the ICI's comment letter, and more than 70 others that individual investors sent to the SEC overwhelmingly in support of the rule.

The ICI strongly opposed using the highest tax bracket of 38.6 percent for ordinary income and 20 percent for long-term capital gains to calculate after-tax returns. The association said that less than one percent of the investing public is subject to the highest tax bracket and that many people are eligible for tax exemptions.

It would be much more realistic and useful for most investors to use the 28 percent income tax and the 10 percent long-term capital gains rates, the ICI said.

"In order to compute after-tax numbers [based on the highest tax bracket], funds will have to make a series of assumptions, many of which will not be applicable to any particular shareholder," Craig Tyle, general counsel for the ICI, wrote in the ICI's comment letter.

If fund companies are going to make such gross assumptions, "after-tax numbers will have to be accompanied by narrative disclosure that may be technical and lengthy . . . [which could] overwhelm other important information," Tyle said.

The ICI also said the proposed rule would require the disclosure of numerous figures that would overwhelm investors. A fund with multiple classes would have to disclose the after-tax performance of each of those classes. Instead, the association suggested multiple-class funds be required to show the after-tax returns for only one class.

The ICI also said that displaying two different sets of numbers for one-, five- and 10-year periods - for a total of 16 different figures - would result in "information overload."

The SEC would require four after-tax figures - pre-liquidation before-tax returns with no deduction of exit fees; pre-liquidation after-tax returns with no deduction of exit fees; post-liquidation before-tax returns net of exit fees; and post-liquidation after-tax returns net of exit fees.

The ICI suggested as an alternative that the SEC require one set of numbers, including exit fees, showing: 1) returns after taxes on fund distributions and 2) returns after taxes on fund distributions and sale of fund shares.

The ICI further criticized the proposed requirement that fund companies disclose after-tax returns in both prospectuses and annual reports.

Publishing data in both prospectuses and annual reports would be an unnecessary duplication of information, the ICI said.

The after-tax return data should be included in the tax section of the prospectus rather than in the risk/return summary as the SEC had proposed, because including tax information in the risk/return summary "would overwhelm the other important information included" there, the ICI said.

Also, investors in tax-deferred accounts are not subject to taxes, the ICI said. Therefore, "disclosure that has only limited applicability does not belong in the risk/return summary," which is meant to apply to all investors, the ICI said.

The ICI welcomed the SEC's decision not to require after-tax returns to be included in fund advertisements and marketing literature. However, the ICI suggested that the SEC make its after-tax rule more stringent by requiring that any fund claiming to be tax efficient outline its after-tax returns in its advertisements.

The ICI also welcomed the SEC's proposal to exempt money market funds and tax-deferred investments such as variable annuities, IRAs and 401(k)s from the proposed new requirements. But, it recommended that the SEC also include bond funds among the exempted investments.

More than 70 individual investors sent the SEC letters praising the proposed after-tax disclosure rule.

"I believe you have a responsibility to all investors to make the mutual fund industry tell the truth about after-tax results," wrote Roger Benson, an investor. "The mutual fund investors have been duped long enough."

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