CHICAGO - The U.S. Securities and Exchange Commission is not likely to back down on its pending controversial after-tax performance requirement. This was the impression that Susan Nash, the SEC's associate director of the division of investment management, gave at the Investment Company Institute's tax and accounting conference here last week.

Nash expressed no sympathy when other panelists questioned whether funds should be required to display a fund's returns less the impact of the highest personal income tax bracket of 39.6 percent. The highest tax bracket is unfair and unrealistic for the overwhelming majority of the 80 million mutual fund shareholders, panelists said.

About 1,150 tax and accounting executives attended the conference.

However, an executive from Eaton Vance praised the SEC's efforts. And an ICI representative called on the SEC to require funds that call themselves tax efficient to prominently display the impact of taxes in their advertisements.

The SEC's pending after-tax requirement, would require funds to display the pre-liquidation and post-liquidation impact of taxes on one-, five- and ten-year returns, both in a fund's prospectus and in every annual report thereafter. Although the commission considered requiring funds to display the impact of taxes in all ads, the commission decided that might be too burdensome, Nash said.

The industry in the past has questioned both the wisdom and the motives of the SEC for singling out the fund industry to disclose after-tax returns rather than applying the requirement to all types of investments. Executives did so again at the ICI tax and accounting conference last week. Nash fielded a number of questions on the point.

"This number is not as meaningful for other investments which are taxed differently," Nash said. "The competitive disadvantage is built into the tax structure, rather than the requirement."

When "an investor poll indicated that 85 percent of investors felt that taxes were important but only 33 percent believed that they were knowledgeable about taxes, we felt that we needed to expand beyond investor education," Nash said. "It became a disclosure issue."

The SEC under chairman Arthur Levitt's leadership was also reluctant to back down when data showed that the "tax bite can average 1/2 percentage points but varies enormously from fund to fund," said Nash. "Investor awareness could not get at that."

The overwhelming majority of the 250 comment letters that the SEC received through the close of the comment period on June 30 on the pending disclosure rules, favored tax disclosure, Nash said.

"Two hundred of the 250 comments were from individuals, some of whom want all tax brackets to be shown," Nash said. "That is something the SEC cannot tackle in a standardized format."

The SEC may acquiesce, however, on the capital gains tax rate argument, Nash said. That is, the SEC might relent on its stance that the after-tax reporting should be based on income tax rates, not capital gains rates.

"It's something to be considered that in a year and a day, the tax rate changes from a personal rate to the short-term capital gains rate of 20 percent," Nash said.

Two other issues debated were whether after-tax performance should be listed in both a prospectus and an annual report and whether, in the prospectus, after-tax effects should be included in the tax summary or the risk/return report. Deanna Flores, assistant counsel at the ICI, said the industry favors having the information only in the prospectus, in the tax summary. Investors are made sufficiently aware of any tax consequences of their non-qualified holdings through 1099 tax forms each year, Flores said. They do not need to be reminded of taxes in annual reports as well, she said.

Thomas Faust, executive vice president and chief equity investment officer with Eaton Vance Corp. of Boston, said the firm supported the SEC's proposal.

He also said that showing the effects of the highest tax bracket as a benchmark for all Americans was just. Those with the greatest amount of money invested in mutual funds deserve to see this figure, he said.

"Most mutual fund assets are owned by people with $1 million or more," he said.

On other matters, such as revealing sales loads, the industry has willingly opted for the highest numbers, Faust said.

"We strongly disagree with the highest tax bracket figure," Flores said. "The median gross household income for mutual fund owners is $55,000, and married, filing jointly. Even this is a conservative rate."

"We don't exactly agree with the proposal. . . . But the train seems to be moving," said Robert Flaherty, vice president with MFS Investment Management of Boston.

Nash did not say when the SEC will introduce and enforce its new after-tax rules, except to say it was "a priority for the fall," following fund governance.

She said she would take the industry's concerns about after-tax performance into consideration.

"It is not our purpose to torture anybody to do anything," she said.

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