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SEC Considers Changing Rules on Mutual Fund Disclosure

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The Securities and Exchange Commission (SEC) is proposing to force mutual funds to disclose both pre-tax and after-tax returns.

The rule is being strongly resisted by mutual fund companies who are notorious for running tax-inefficient managed funds.

For some perspective on the issue, see our article on the bet that Vanguard founder Jack Bogle won from Robert Markman of Markman Capital Management. In the five-year period of the bet, the Vanguard 500 beat Markman's Moderate Fund, 226% to 156%. With taxes figured in though, the passive 500 fund triumphed by 214% to 114%.

Similar results hold across the field of large capitalization mutual funds, most of which are actively managed and tax inefficent.

 
Vanguard 500
Average Large Cap. Fund

1 Year
Pretax

27.84%
24.67%
1 Year
Aftertax
27.00%
23.07%
 
 
 
5 Year
Pretax
24.95%
20.37%
5 Year Aftertax
23.90%
17.90%
 
 
 
10 Year
Pretax
16.67%
14.07%
10 Year
Aftertax
15.46%
11.62%
Returns Through Sept. 1999 - Motley Fool

The proposed new rule reads as follows:
Mutual funds would be required to disclose after-tax returns based on standardized formulas comparable to the formula currently used to calculate before-tax average annual total returns. The proposals also would require funds that include after-tax returns in advertisments and other sales materials to include standardized after-tax returns.

The comment period on the proposed rule was scheduled to end June 30, 2000. For those who wish to comment to the SEC, email can be sent to [email protected] with File No. S7-09-00 in the Subject line. Rest assured, the active managers have their end covered.