Institute Comments on SEC After-Tax Returns Proposal

Washington, DC, July 5, 2000 - The Institute filed a comment letter on the SEC's proposal to require funds to disclose after-tax returns. The Institute's letter supports the objectives of the Commission's proposals, but recommends significant modifications to various aspects of the proposal.

1. Location of the Required Disclosure
The Institute recommends that disclosure of after-tax returns be mandated in a fund's prospectus only. The Institute's letter recommends that within the prospectus, after-tax return disclosure should be included in the tax section, rather than the risk/return summary as proposed.

The Institute's letter supports the Commission's proposal to not require funds to include after-tax returns in fund advertisements and sales literature. If funds chose to do so, they would be required to include after-tax returns computed in accordance with the proposed standardized formula.

2. Required After-Tax Return Numbers
The Institute's letter supports two types of after-tax numbers-"pre-liquidation" and "post-liquidation" returns-in order to provide a balanced and meaningful presentation.

The letter also recommends that in order to avoid inundating investors with numbers, a multiple class fund should be permitted to disclose after-tax returns for only one class, rather than for all classes offered by the prospectus.

3. Standardized Formula for Computing After-Tax Returns
The letter supports many aspects of the Commission's proposed formula but strongly opposes the use of the highest marginal tax rate. The letter recommends instead the use of marginal federal ordinary income and long-term capital gains tax rates that are more representative of the average fund investor's tax situation.

4. Exemptions From the Disclosure Requirement
The Institute's letter supports the Commission's proposal to exempt from the disclosure requirement money market funds and the prospectuses of those funds that offer their shares as investment options for defined contribution plans, tax-deferred arrangements, variable insurance contracts, and similar plans and arrangements. The letter recommends that the Commission also exempt bond funds.

5. Compliance Date
The Institute's letter disagrees with the Commission's proposal to require all new registration statements, post-effective amendments that are annual updates to effective registration statements, reports to shareholders, and profiles filed six months or more after the effective date of the amendments to comply with the proposed amendments. The letter explains that a six-month time frame would be inadequate in most circumstances and recommends instead a twelve-month transition period.

6. Need for the Commission to Re-Evaluate Rules if Tax Law is Changed
The Institute's letter makes clear that the SEC should reconsider the after-tax return disclosure requirement if the current tax regime applicable to mutual fund shareholders changes. The letter notes that there are legislative proposals currently under active consideration, for example, to permit investors to exclude some or all capital gains from taxable income and to permit fund shareholders to defer tax on reinvested capital gain distributions. The letter cautions that if any proposals along these lines are enacted, the proposed after-tax returns disclosure will have little relevance.