June 28, 2000

Mutual Fund After-Tax Returns

  • Andrew Morriss

    Dean, Anthony G. Buzbee Dean's Endowed Chairholder, Texas A&M University School of Law
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Rulemaking:

Disclosure of Mutual Fund After-Tax Returns

Stated Purpose:

"Despite the tax dollars at stake, many investors lack a clear understanding of the impact of taxes on their mutual fund investments."

Summary of RSP Comment:

The Securities and Exchange Commission (SEC) is concerned that investors are not receiving the information they need regarding the tax consequences of investing in mutual funds. The simple solution to this problem, in the SEC's view, is to require mutual funds to report standardized after-tax returns along with the standardized pre-tax returns they already report. The SEC's proposal, however, is inferior to the current market response and is unlikely to generate net benefits to investors.

The SEC's only stated criterion in developing the proposal is that the information be deemed "helpful" to investors in making investment decisions. But the SEC has no way of identifying information that meets this standard except by observing what information is brought forth by the private sector. It has not identified any market failure that would warrant regulatory action. On the contrary, the SEC's proposal is an attempt to mimic the successes of the market.

The private sector has already responded to demand by investors for information on after-tax returns, and the SEC's one-size-fits-all standard cannot supplant the response of the market to investor demands. Not only does this approach weaken the incentives to produce different kinds of information that could be of value to certain investors, it may also limit the development of more and better information to meet investors' ever changing needs and desires. As a result, the proposed disclosure requirement will offer no benefits not already provided by market participants, but will impose real costs on investors.

More and more Americans are investing in mutual funds; however, the standardized information proposed in this rule will not make them better off. Market participants are responding to the varied information and investment needs of different investors more efficiently than these requirements would. The SEC should withdraw its proposal.