SEC officials last week outlined a rule proposal on how mutual funds should report their after-tax returns.

The proposed rule would require funds to issue a standardized number on one-, five- and 10-year after-tax returns in their prospectuses, in the Management's Discussion of Fund Performance section of a fund's annual report and in advertisements. The rule would also require funds to report both pre- and post-liquidation numbers and after-tax returns would have to be presented alongside before-tax returns in a standardized table that includes a brief explanation of the returns presented.

When calculating after-tax returns, funds would be required to assume that taxes are charged at the maximum income tax rate and taxes on fund distributions are charged at the time that the distributions are made, not when the calculation is performed.

Money market funds, 401k plans, variable annuities and other tax-deferred vehicles would be exempt from the rule.

Fund companies will have until June 30 to comment on the proposal.

"The proposal before us is intended to help investors understand and compare the magnitude of the tax-bite' suffered by investors in different funds," said Arthur Levitt, chairman of the SEC, in a statement. "Two funds with identical before-tax returns can have significantly different after-tax returns. Investors are entitled to be told that difference."

Figures cited by the SEC reveal that only 33 percent of investors feel they are very knowledgeable about the tax implications of investing and only 18 percent were able to identify the maximum tax rate for long-term capital gains.

But, the SEC's good intentions may only further confuse investors, said Geoff Bobroff, president of Bobroff Consulting of East Greenwich, R.I., a mutual fund consulting firm.

"It seems a bit overkill and the reason I say this is because 60 percent of assets invested are in long term plans like IRA's, annuities and 401(k) programs," he said. "You will create a level of confusion for the non-tax paying investor. Furthermore, all investors aren't equal. My tax bracket is different than yours."

The rule proposal, however, will not draw much criticism from the industry, Bobroff said.

"[The industry] will get in lock-step with the SEC and do whatever the agency wants," he said. "It may comment but it will do little to disturb the concept. I think disclosure is useful, I'm just concerned about mandated disclosure."

Mounting pressure from Congress to educate investors on after-tax returns could be driving the SEC's rule proposal, Bobroff said.

At the same time the SEC outlined its proposals last week, the House Commerce Committee unanimously approved the Mutual Fund Tax Awareness Act. The legislation was introduced late last year by Congressman Paul Gillmor of Ohio and is expected to be passed by the House quickly, said Chris Slagle, a spokesperson for Gillmor. That legislation requires mutual fund companies to disclose their funds' after tax returns. The legislation mandates the SEC to issue regulations on the form of those disclosures. The SEC made its proposals in anticipation of the legislation.

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