SEC wants fund companies to disclose tax bite on mutual funds

WASHINGTON -- Have you wondered how big a bite taxes are taking out of your mutual fund returns? Companies would be required to provide that information under legislation moving in Congress and new rules proposed by the Securities and Exchange Commission.

An estimated 2 1/2 percent of an average stock fund's return is now lost to taxes, but many people aren't aware of the bite.

Some people have described it as ''the dirty little secret'' of the mutual fund industry, SEC Commissioner Norman Johnson noted Wednesday at a meeting of the market watchdog agency.

''Taxes are one of the most significant costs of investing in mutual funds,'' said Arthur Levitt, the SEC's chairman. ''Yet, many fund investors may not clearly understand the impact of taxes on their mutual fund investments.''

He noted that the tax bite on investors varies widely among the 7,000 or so mutual funds in this country, because differences in fund investment strategies can produce markedly different tax consequences.

Of the estimated $6 trillion that 83 million Americans now have invested in mutual funds, roughly $3 trillion is in taxable accounts.

The SEC commissioners voted, 4-0, to put out the new proposal for public comment until June 30.

It would require mutual funds to disclose in prospectuses and annual reports the estimated one-, five- and 10-year returns after taxes so that investors can compare different funds. The returns would have to be shown in two ways: estimated taxes for investors who sell their fund shares and for those who stay in the fund.

Fund companies currently are required to disclose only returns before taxes.

On Capitol Hill, meanwhile, the House Commerce Committee voted unanimously for a bill directing the SEC to develop final rules on mutual fund tax disclosure within 18 months. Several sponsors of the bill said they were pleased the SEC had already begun but that they wanted to move the measure through the House to ensure the effort doesn't fall by the wayside.

There is no parallel measure pending in the Senate.

A spokesman for the Investment Company Institute, a group representing the mutual fund industry, said it supported, in principle, the SEC's new proposal.

''We have been supportive of the idea of having a form of disclosure of the tax consequences,'' John Collins said.

He noted that some mutual fund companies -- though far from a majority -- already disclose tax impacts in some form.

On the Net: The Securities and Exchange Commission: http://www.sec.gov

The Commerce Committee: http://www.house.gov/commerce

The bill is H.R. 1089