Software companies that have developed products to help fund firms calculate after-tax returns might logically have been chagrined when Paul Roye, director of the SEC's division of investment management, announced last month that legislation on Capital Hill may render moot a Securities and Exchange Commission regulation requiring fund companies to report after-tax returns that takes effect in October.
But they were not.
Scores of fund companies have turned to mutual fund software providers such as Eagle Investment Systems of Boston, and Confluence of Pittsburgh, to more-easily meet the SEC's October enforcement deadline.
Following Roye's announcement and the ICI's endorsement last week of the pending legislation, the need to report after-tax returns may be eliminated altogether. But the software packages that companies spent months developing are here to stay, according software executives and analysts.
That is because there are plenty of reasons to determine a fund's after-tax returns beyond an SEC requirement to do so, and demand for software that does so will probably increase, say those analysts and executives.
"I'm not concerned," said Kirk Botula, Confluence's vice president of strategic marketing. "It is relevant information and it will just depend upon the audience."
The legislation in question, introduced in January and sponsored by Rep. Jim Saxton (R-N.J.), would allow mutual fund shareholders to defer paying taxes on distributions of capital gains, up to certain limits, provided those shareholders reinvest the distributions in additional fund shares.
Saxton is currently searching for a larger tax bill to which the legislation might be attached, said Chris Frenze, executive director of the Congressional Joint Economic Committee. The prospects for the bill are particularly unclear considering the shift in Congressional power in favor of the Democratic party, he said.
A spokesperson for Eagle Investment Systems declined to speculate on the legislation's prospects and on the effect Saxton's bill might have on its software sales.
In fact, few software company executives, including Botula, seem to be tracking the legislation, which suggests they are unconcerned about the outcome.
That may be because executives identified a demand for after-tax reporting software long before the SEC announced its plans to require the reporting of such data. Confluence has provided such software since January of 2000, Botula said. The company, which also offers a software product known as FundStation that provides performance information and automates workflow for fund companies, has sold its after-tax reporting software to 40 to 50 large fund companies, he said. And he says demand continues to steadily increase as the SEC's October enforcement deadline nears.
The Vanguard Group of Malvern, Pa. and Morningstar have both reported after-tax returns for years, said Scott Cooley, a Morningstar senior analyst.
Saxton's bill will not eliminate mutual fund tax liability altogether so "you'd probably want to give people some idea of what the tax consequences would be, even if they didn't have to pay taxes in the short term," Cooley said.
In addition, reporting software that calculates tax liabilities on individual trades would help investors and portfolio managers focus on cutting tax costs, he said.
And demand may increase for expanded software packages that calculate after-tax returns on local and state taxes, capabilities that do not exist in existing software, Cooley said.
