June 29, 2000

Mr. Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
450 5^th Street NW
Washington, DC 20549-0609

Re: Proposed Rule for Disclosure of Mutual Fund After-Tax Returns
(File Reference No. S7-09-00)

Dear Mr. Katz:

The After-Tax Reporting Subcommittee of the AIMR Performance Presentation Standards^tm Implementation Committee of the Association for Investment Management and Research (AIMR)¹ is pleased to comment on the U.S. Security and Exchange Commission's Proposed Rule for the Disclosure of Mutual Fund After-Tax Returns.

The AIMR Implementation Committee, the standing committee responsible for the review and interpretation of the AIMR-PPS^tm standards, established the After-Tax Reporting Subcommittee (Subcommittee) several years ago to address issues of after-tax performance reporting. The Subcommittee is comprised of investment professionals from a variety of areas in the investment industry including performance measurement, asset management, consulting, accounting, mutual fund management, software development, and academics.

Six years ago, the Subcommittee published practical guidelines that were incorporated into the AIMR-PPS standards for investment managers seeking to show after-tax performance results. The Subcommittee is currently reviewing and revising those guidelines and hopes this work and its comments on the Commission's Proposed Rule will help lead to the establishment of a consistent methodology and a single industry-wide standard for the reporting of after-tax returns.

General Comments

The After-Tax Subcommittee fully supports the Commission's proposal to require the disclosure of after-tax performance results for mutual funds. The Subcommittee agrees with the Commission that providing after-tax return history will improve the quality of disclosure and help investors understand the impact of taxes on their investments. The Proposed Rule is consistent with AIMR's longstanding belief, manifested by its adoption of the AIMR-PPS standards, that money managers have an ethical and professional responsibility to provide full and fair disclosure of their investment performance.

The Commission's proposal represents a significant and credible effort in addressing a complex subject that is of growing interest to the investing public. The Subcommittee believes the Proposed Rule outlines a sound methodology for calculating after-tax performance results and introduces a straightforward format for presenting those results to investors. Many aspects of the Commission's proposal are consistent with AIMR's guidelines for after-tax performance reporting.

While the Subcommittee applauds the work of the Commission and supports the concepts outlined in the Proposed Rule, the group recommends that the Commission further refine its proposal to better achieve its goal of providing investors with the necessary information and tools to understand the magnitude of tax consequences on the performance results of different funds.

Summary of Subcommittee Recommendations

The following is a summary of the primary recommendations of the Subcommittee. A detailed discussion of each recommendation follows within the Subcommittee's specific comments on the proposal.

The Subcommittee recommends:

1. Disclose unrealized capital gains as a percentage of portfolio holdings.

2. Use of the maximum federal tax rate to compute after-tax returns.

3. Disclosure of after-tax returns reflecting alternative minimum tax (AMT) in the proposed table in certain cases.

4. No required after-tax return for an index or peer group of funds for comparative purposes.

5. Publication of historical tax rates in an accessible resource.

6. Disclosure of the effect of foreign tax credits.

7. Support of the proposal for funds to track actual holding periods of investments and distributions.

8. Extension of compliance date.

Specific Comments

Requirement to Disclose After-Tax Return

The Subcommittee supports the Commission's proposed requirement of all funds available to taxable investors to show after-tax returns. This requirement is preferable to the more limited steps of developing a standardized computation of after-tax returns for funds that choose to disclose after-tax returns or only requiring those funds that hold themselves out as "tax-managed" or otherwise managed with a view toward shareholder tax consequences to show after-tax returns. Without a requirement applicable to all funds, some funds might choose not to provide after-tax performance and thereby deprive investors of important information, making it difficult for the investor to compare funds on an after-tax basis. Only those funds that serve the needs of tax-exempt investors exclusively, such as retirement plans or funds aimed at offshore investors should be exempt from reporting after-tax returns.

The Subcommittee supports the Commission's proposal to require funds to disclose both "pre-liquidation" and "post-liquidation" returns. Requiring only one of the measures would not give investors sufficient information to properly consider the impact of tax payments on investment returns. Showing both returns effectively brackets for an investor what their largest and smallest tax exposure would have been if the investor had held shares of the funds in the past. The Subcommittee agrees with the Commission that showing both pre- and post-liquidation returns will achieve the goal of providing the investor information on the tax-efficiency of past portfolio management decisions as well as the full impact that taxes have on a mutual fund investment when sold.

The Subcommittee supports the methodology outlined by the Commission, which provides, in part, that before-tax returns not include the deduction of additional fees and charges payable upon a sale of fund shares. The Subcommittee concurs with the Commission's proposal that funds would not deduct fees or charges in calculating the pre-liquidation before and after-tax returns. In the post-liquidation before and after-tax returns, however, funds would deduct any fees and charges payable upon a sale of fund shares, such as sales charges or redemption fees. This consistent treatment of the deduction of any fees and charges payable upon a sale of fund shares allows for meaningful comparison of before and after-tax returns.

Currently, the AIMR-PPS standards only recommend that firms show after-tax returns for their composites; after-tax returns are not a requirement. This is not because the Subcommittee believes that after-tax returns are unimportant. On the contrary, the Subcommittee's support of the Commission's proposal as well as the comments in this letter should make clear our strong opinion on the usefulness of after-tax information. Unfortunately, at this time, calculating after-tax returns for composites of a number of individual accounts would be burdensome and extremely costly for money managers as portfolio systems with tax-lot accounting are not widely used, especially by small custodian banks. However, calculating and presenting after-tax return for mutual funds would be less burdensome as the information necessary to calculate the after-tax return is readily captured. Therefore, the Subcommittee believes the benefit to investors outweighs the added cost to produce this information. Its anticipated that in near future, the technological burdens currently faced by investment managers of individual accounts in calculating after-tax composite returns will be resolved and the way will be clear for the AIMR-PPS standards to require that firms disclose after-tax returns for their composites.

Index or Peer Group of Funds

The Subcommittee believes that the Commission should not require disclosure of after-tax benchmark returns such as returns for an index or a peer group of funds. Such a requirement would be premature since there is no consensus in the investment community on the best method to track and measure the after-tax returns on benchmark portfolios to which individual funds might be compared. This is a subject on which there is substantial ongoing research, and the "best practice" in the providing after-tax benchmark information is evolving rapidly.

There are a number of unresolved operational difficulties in developing after-tax benchmarks, including the potential need for data on many individual securities that comprise benchmark indices and the difficulty of pricing illiquid securities. AIMR is currently undertaking a review of alternative conceptual approaches to defining after-tax benchmarks. This work will proceed in tandem with an empirical project that is designed to implement at least one approach to developing estimates of after-tax returns on broadly monitored stock and bond index portfolios.

While requiring the disclosure of after-tax benchmarks returns is not currently appropriate, it would be very helpful if the SEC would support industry efforts like those by AIMR to develop a standardized methodology for computing after-tax benchmark returns. Such a standardized methodology might make it feasible to require, at some future date, comparison of returns on individual funds and after-tax benchmarks.

Finally, the Subcommittee believes that the Commission's Proposed Rule should not prevent a fund from presenting after-tax returns of an appropriate benchmark, assuming the returns can be calculated and displayed consistent with the Commission's format of showing both pre- and post-liquidation after-tax returns.

Location of Required Disclosure

The Subcommittee agrees with the Commission that after-tax returns should be displayed in the performance section of the fund's prospectus and the management discussion section of the funds' performance typically included in the annual report. The subcommittee believes that these sections are the most logical places for current and prospective shareholders to look for this type of information. Disclosure of after-tax return in these sections, accompanied by narrative disclosure proposed by the Commission, will enable investors to easily evaluate after-tax performance and facilitate comparison with the fund's before-tax returns. The Subcommittee recommends, however that the Commission require certain other information pertaining to after-tax returns in the section of the prospectus describing the tax consequences to shareholders of buying, holding, exchanging, and selling fund shares. (See, Narrative Disclosure, p. 11)

Format of Disclosure

Generally, the Subcommittee supports the Commission's proposed table with required captions as the best format for disclosing pre- and post- liquidation after-tax returns in a clear and understandable manner. The Subcommittee recommends that funds be allowed to show a column of performance since inception of the fund. This will allow a fund to show its full performance record.

In addition, the Subcommittee recommends that funds should be required to report, as part of the table, the unrealized capital gains on their portfolio holdings as a percentage of the portfolio's value, in addition to the pre- and post-liquidation returns. This information should be reported prominently in a note following the table of pre- and post- after-tax returns. (See, Exhibit A, attached.)

A fund's share of unrealized capital gains as a percentage of portfolio value constitutes important data that potential investors can use to evaluate the tax consequences of purchasing fund shares. Funds can generate substantial capital gains distributions when the manager sells appreciated assets and gains are realized. Investors purchasing shares in funds with large unrealized capital gains relative to asset value might expect to face larger capital gains tax liabilities as a result of trading activity than would investors purchasing shares in a fund with less unrealized gains. Therefore, it is valuable for an investor to know the significance of potential unrealized gains on the fund's current assets.

The Subcommittee understands that unrealized gains as a share of fund assets is not a perfect predictor of the realized capital gains that investors will receive. The actual tax effect will depend on the fund's realization of capital gains from trading activity as well as the strategy that the fund manager uses in determining which assets to sell. Nevertheless, the amount of unrealized capital gains as a percentage of the fund's value will assist the investor in understanding the tax risks posed by unrealized capital gains.

Information on the ratio of unrealized gains to asset value is currently reported by Morningstar and is widely used by industry practitioners. There is substantial variability across funds in this ratio. For example, among the ten largest equity mutual funds at the end of 1998, this ratio ranged from 19% to 44%.² Without information on unrealized gains as a percentage of asset value, prospective investors may find it more difficult to use historical information on the relationship between a fund's pre-tax and after-tax returns to forecast the future relationship between these returns. In essence, the Subcommittee believes this statistic is the "linkage" between the pre- and post-liquidation methodologies that allows investors to fully grasp the impact of after-tax returns.

Finally, the Subcommittee recommends that when the income from bonds subject to the federal alternative minimum tax (AMT) exceeds 10% of total fund income, municipal and tax-exempt bond funds should be required to report additional lines of after-tax return information that includes the impact of the AMT. (See, Alternative Minimum Tax and Phaseout Adjustments, p. 8)

Exemptions from the Disclosure Requirement

The Subcommittee concurs with the Commission's proposed exemptions to the after-tax return disclosure requirements as well as the Commission's decision not to exclude tax-exempt funds from the requirement to disclose after-tax returns. However, the Subcommittee recommends that the Commission require tax-exempt money market funds to include in their prospectuses additional language suggesting investors compare the after-tax yields/returns of taxable and tax-exempt funds. This disclosure would be beneficial since, fully taxable money market funds often offer higher after-tax yields/returns than taxable or tax exempt funds. This is especially true of high tax states, such as California, where there is an overabundance of demand for short-term tax-exempt issues.

The following example provides a simple illustration of the potential results when comparing after-tax yields/returns for taxable vs. tax-exempt money market funds in California:

California tax-exempt money market fund with a yield of 2.5%
Taxable money market fund with a yield of 5.0%
Individual investor subject to a federal tax rate of 39.6% and state tax rate of 11.0%

ATR = BTR(1-[(FTR+STR)-(FTR*STR)])

Where...
BTR = before-tax return
FTR = federal tax rate
STR = state tax rate
ATR = after-tax return

Thus, ATR = 5.0(1.0-[(0.396+0.110)-(0.396*0.110)]) = 2.6878% or approximately 2.7%

In this case, the investor would be better off on an after-tax basis by approximately +0.2% when investing in the fully taxable money market fund and paying federal and state taxes.

Advertisements and Other Sales Literature

Disclosure of after-tax returns in advertising material should be mandatory only for those funds that position themselves by using such words as "tax-aware, tax-efficient, or tax-advantaged." For other funds, including after-tax returns in advertising material should be optional. While the Subcommittee believes that it would be theoretically beneficial to the investor to see after-tax returns in advertisements, the proper forum for a full, complete, and comprehensive discussions of after-tax returns is in the fund's prospectus and annual report. Sufficient disclosure on after-tax would be too lengthy to be effective in advertisements and would cause investors to be confused rather than enlightened about investment in mutual funds overall. The Subcommittee agrees that if funds do include any after-tax returns in these materials, the advertised returns must be computed according to the Commission's proposed standardized formula.

One approach the Commission may wish to consider is requiring funds to include a general disclosure in advertisements that states something to the effect of "advertised historical rates of return may be impacted by the tax circumstances of the investor and that a full discussion of the impact of taxes on the fund's return is included in the prospectus". A disclosure of this nature would at least raise the issue of taxes for investors and point them to a resource for further information about the tax implications of investing in the mutual fund.

Formulas for Computing After-Tax Return

The Subcommittee supports the Commission's proposed formulas for after-tax returns. The use of pre- and post-liquidation return methodologies eliminates the confusion that can occur with the potential variations of treating the capital gains tax for on-going shareholders. Displaying after-tax return information for 1-, 5- and 10-year time periods, as proposed, will allow investors to make meaningful comparisons of managers' results. Therefore, the Subcommittee believes the Commission's proposed method is appropriate.

Maximum Federal Tax Rate

Generally, the Subcommittee concurs with the Commission in the use of the maximum federal tax rate for individuals and with the exclusion of the impact of state and local taxes. The Subcommittee recognizes that applying different tax rates can have a meaningful impact on performance rankings depending on strategies implemented to adjust the taxable yield orientation, to extend the holding period for individual securities, and to adhere to tax-efficient trading practices. In addition, the maximum federal tax rate may not reflect the most prevalent tax position of mutual fund investors.

However, showing multiple after-tax returns for different rates will unnecessarily complicate and likely confuse investors. Any added benefit of multiple rates is not sufficient to justify the added burden by mutual fund groups to prepare and disclose this information. The Subcommittee also does not support the use of intermediate tax rates since possible changes in the tax code could cause challenges in determining the appropriate intermediate tax rate and eliminate the consistency in using one rate.

Therefore, while applying the maximum tax rate is not a perfect answer, it does create consistency of calculation methodology and enforces the most conservative approach to after-tax performance reporting. However, nothing in the Proposed Rule should prevent fund groups from providing additional after-tax returns based on other rates in addition to the required information.

The Subcommittee also agrees with the Commission in not trying to consider the effect of state and local taxes in the after-tax returns. For the most part, assessing the impact of state and local taxes on mutual fund performance would require too many calculations and be too onerous for funds to produce. The Subcommittee believes the impact of state and local taxes can be best handled as a part of the narrative disclosure that the Commission is proposing to accompany the after-tax table.

The one exception to excluding the impact of state and local taxes from after-tax returns involves single state tax-exempt municipal bond funds where some of the income and/or gains is subject to tax. The Subcommittee recommends that both maximum federal and state taxes be accounted for in the reporting of after-tax returns for single state tax-exempt municipal bond funds since the tax rate of only one state is at issue.

For single state tax-exempt and municipal bond funds, the standard convention for calculating the "effective tax rate" should be used when determining after-tax returns for these funds. The Subcommittee suggests a disclosure to reflect the inclusion of the affect of state tax in the funds after-tax return.

The following example shows how to calculate the "effective tax rate" for taxable income or short-term capital gains:

Federal tax rate = 39.6%
State tax rate = 7.0%

ETR = (FTR+STR)-(FTR*STR)

Where...
BTR = before-tax return
ETR = effective tax rate
FTR = federal tax rate
STR = state tax rate
ATR = after-tax return

Thus, ETR =(0.396+0.070)-(0.396*0.070) = 0.43828

Therefore, the "effective tax rate" is approximately 43.8%.

In addition,

ATR = BTR*(1-ETR)

So in this case,

ATR = .562*BTR.

Use of Historical Tax Rates

For the reasons set forth by the Commission, the Subcommittee agrees that funds should apply historical tax rates when calculating historical after-tax investment return. This method is most likely to reflect the fund's actual after-tax returns and best reflects the tax environment in which the managers made active investment decisions.

The Subcommittee also believes that the tax table contained in the Rule Proposal accurately reflects the highest tax rates for the periods and categories specified. However, the Subcommittee recommends that the Commission publish historical tax rates as necessary supplemental information for the investing public. Simply posting the rates on the Commission's website will allow fund groups and individual investors to have timely access to accurate and consistent information on the maximum federal tax rate. Providing the "official" maximum rates will ensure consistency and comparability and will help to avoid the confusion that occurred in the investment community during 1997 when rates where changed and phased in.

Calendar v. Fiscal Year Measurement Period

The Subcommittee believes that it is necessary to establish a uniform reporting period to present return history to allow investors to make "apples to apples" comparisons of after-tax returns. Therefore, the Subcommittee concurs with the Commission's proposal for funds to show after-tax returns both on a fiscal year basis in the Management Discussion of Fund Performance (MDFP) section, usually contained in the annual report, and on a calendar year basis in the prospectus.

The Commission raised concerns in its proposal over the use of fiscal year or calendar year performance returns as leading to abuse by managers attempting to artificially enhance the after-tax returns presented. The Subcommittee believes there is no method that will completely eliminate the potential abuse of funds to "time" distributions or portfolio transactions in any way. However, requiring funds to include the percent of unrealized capital gains compared to overall assets will provide individuals with useful information, and will hopefully dampen the practice of timing.

Federal Alternative Minimum Tax and Phaseout Adjustments

The Subcommittee agrees with the Commission that after-tax returns should not take into consideration the effect of certain tax credits, exemptions, and deductions that are phased out for taxpayers whose adjusted gross income is above a certain level. The Subcommittee believes attempting to address phaseouts would add another layer of complexity without providing sufficient value-added information to investors.

However, the Subcommittee does believe that after-tax returns should account for AMT under certain situations. The Subcommittee recommends that when the AMT exceeds 10% of total fund income, municipal and tax-exempt bond funds should be required to report additional lines of after-tax return information that includes the impact of the AMT. (The Subcommittee would prefer to see 10%, but realizes there may already be a precedent set by the 20% threshold. Funds with more than 20% taxable bonds cannot be called "tax-free" or "tax-exempt" funds and therefore would be called "municipal" funds). If a fund violates the AMT threshold for any one calendar or fiscal year, the fund would be required to report additional pre- and post-liquidation returns for the affected periods that account for the impact of AMT.

An increasing number of taxpayers are being pushed into the AMT for two reasons. First, the Taxpayer Relief Act of 1997 eliminated (or effectively, added back) several more deductions and credits. Second, unlike the regular income tax structure, the features of the AMT mechanism are not indexed to inflation. To illustrate this trend, only 605,000 were subject to the AMT in 1997, but Congress's Joint Tax Committee projects this number to increase to 8.4 million in 2007³.

Moreover, because of a lack of adequate disclosure by mutual funds and a lack of awareness on the part of most individuals, many taxpayers are "tripped" into the AMT without realizing it, which results in higher taxes plus interest and penalties. It was recently pointed out in the Wall Street Journal that the "...[AMT], which is expected to hit millions of new taxpayers in coming years, many of whom, experts agree, will have never heard of the tax until they get a notice from the IRS telling them they owe more money than was shown on their regular tax return."⁴

Some may argue that adequate disclosure of AMT already exists in the discussion of tax consequences and in the financial statements. While, the knowledgeable investor may be able to find this information and use it, the Subcommittee believes that the average investor would not be able to easily determine this information from those disclosures since there is no required disclosure in the return table or the MDFP and there is no requirement to translate the potential effect into a yield calculation.

The potential impact of the AMT is illustrated below:

	% AMT Income in Fund		0%	10%			20%		30%		40%		50%
	Taxpayer After-Tax Yield:
		Not subject to AMT*	5.51%	5.51%			5.51%		5.51%		5.51%		5.51%
		Subject to 28% AMT*	5.51%	5.36%		5.20%			5.05%		4.89%		4.74%
		Potential AMT Impact	0.00%	0.15%		0.31%			0.46%		0.62%		0.77%
		*Based upon 5/19/2000 Bloomberg 10 year Triple-A Rated Tax-Exempt Insured
		Revenue Bond Average Yield of 5.51%

Over the last five years AMT bonds have represented between 8.62% and 11.59%⁵ of total municipal bond new issuance annually. While the added calculations may be burdensome, it would affect relatively few - less than 10% of - tax-free funds and the value of the added information for the shareholder outweighs the additional cost to provide this information.

Shareholders could readily see what their returns would have been depending upon whether they were subject to the AMT (at the maximum rate) or not. The Subcommittee recommends using the following maximum rates for the AMT:

1990 - 21%
1991 to 1992 - 24%
1993 to 2000 - 28%

While the use of the maximum AMT rate in this case is consistent with the Commission's use of the maximum federal income tax rate for after-tax returns, an even stronger argument to use the maximum is that all AMT taxpayers must pay a (marginal) tax rate within 2 percentage points of the maximum since there are only two rates - 26% and 28%. So, this "two rate" approach closely approximates the actual real world binary impact of AMT related income on taxpayers: either there is no impact if AMT does not apply or returns are reduced between 26% and 28% on the margin, if not on average, if the AMT does apply.

Disclosing AMT effected returns would help level the playing field and provide the most useful information for all shareholders to compare funds on an equal basis and select those funds that would best meet their after-tax objectives. For those investors who are subject to the AMT, it would help them minimize taxes by being more tax efficient and selecting appropriate municipal funds. For those investors who are not subject to the AMT, it may help them select more appropriate funds to increase after-tax income by considering some that include AMT bonds. The Subcommittee recommends that the Commission mandate that funds include a statement encouraging investors to seek professional tax advice as part of its disclosures.

The performance table in Exhibit B shows the Subcommittee's proposed recommendation on how AMT affected returns should be shown when income exceeds the recommended percentage for municipal and tax-exempt bond funds.

Withholding Taxes on International Securities

The Subcommittee recommends that the Commission consider allowing funds to take credit for withholding taxes on international securities. The Subcommittee believes funds should have the option to include the effect of foreign tax credits in the calculation of after-tax returns, as foreign tax credits can have a material effect on a shareholder's investment. In the return calculation, the subcommittee recommends following current industry practice of reducing the dividend by the applicable tax rate and then increasing the dividend by the amount of the tax credit.

Timing and Method of Tax Payment

The Subcommittee agrees with the Commission that, to simplify calculations, the timing of the tax liability associated with distributions should coincide with the date of the reinvestment of the distribution.

Tax Treatment of Distributions

The Subcommittee supports the formula stated in the Proposed Rule for calculating after-tax returns, including the level of detail presented for the tax consequences of fund distribution as appropriate.

Capital Gains and Losses Upon a Sale of Fund Shares

The Subcommittee supports the Commission's proposal that funds treat the tax consequences of any capital gain or tax benefit from any loss as a short or long term gain or loss depending on the length of the investment period. The Subcommittee understands that this will necessitate that funds track actual holding periods of initial investments and reinvested distributions to ensure the tax treatment is accurate and consistent with generally accepted accounting principles. While this will require some additional effort on the part of fund groups, the information can be captured by funds and will ultimately eliminate confusion and possible manipulation of data.

The Subcommittee also agrees with the Commission's proposed methodology of permitting capital losses on a sale of fund shares to be deducted in full. This methodology assumes that investors will be able to offset a loss with a gain from another investment, which is a reasonable assumption for mutual fund investors and is consistent with the after-tax guidelines of the AIMR-PPS standards.

Narrative Disclosure

The Subcommittee supports the Commission's requirement that funds include a short explanatory narrative, in plain English, adjacent to the performance table where it appears in the prospectus. The Commission's Proposed Rule covers much of the information that the Subcommittee believes is pertinent to include in the narrative. The Subcommittee believes it is particularly important that the narrative include certain mandatory disclosures to facilitate investors' use of the table. These include:

• the ending periods for the 1, 5, and 10 year returns;

• that the after-tax rates are calculated using historical maximum federal tax rates for investors;

• where historical maximum federal tax rates for individuals can be found;

• that state and local tax rates have not been considered in the after-tax return except in the case of single state tax-free funds;

• that the return figures assume that all fund distributions are taxed appropriately and reinvested;

• that pre-liquidation returns do not reflect redemption charges and taxes associated with redemption, including taxes on unrealized capital gain positions (positive or negative); and

• that post-liquidation returns do reflect redemption charges and taxes associated with redemption, including taxes on the realization of capital gain positions (positive or negative).

For those funds for which the Subcommittee is recommending the disclosure of additional after-tax returns that reflect the impact of AMT, the Subcommittee recommends that:

• the return table include the percentage of total income for the period that is subject to AMT, and

• AMT is defined in the narrative as an income tax paid by high-income taxpayers (corporate and non corporate including estates and trusts) who reap large tax savings by making use of certain tax reductions and exemptions.

In addition to the above information that will accompany the performance table, the Subcommittee recommends that there should be additional explanation of the assumptions and limitations of the after-tax returns included in the section of the prospectus describing the tax consequences to shareholders of buying, holding, exchanging, and selling fund shares. Additional disclosures that the Subcommittee believes will benefit investors include the following information:

• An unrealized capital gain position reported in the table that is anything other than 0% will have an impact on future after-tax returns;

• Before purchasing mutual fund shares, investors should consider the timing of future income and capital gains distributions since these distributions may inadvertently subject investors to a significant tax liability that is attributable to the fund's investment activity prior to the investor's purchase of shares;

• Investors should be aware of different tax consequences that can occur when investing in a young as compared to an older or seasoned fund since it is beneficial to be an early shareholder in a fund in a rising market with favorable sales activity (as realized capital gains will be distributed across a greater number of shareholders) and that the opposite may be true of a more seasoned fund in a declining market experiencing redemptions, as relatively new shareholders may not only be subject to negative before-tax returns but also meaningful capital gains distributions as well.

• Individuals are encouraged to seek qualified tax counsel to determine if they are or will be subject to such items as AMT.

A discussion of tax-strategy elements in this section may also be appropriate and include such items as: extending the holding period of individual securities, orientation toward capital appreciation versus taxable yield, or specific trading strategies to enhance after-tax returns. However, the Subcommittee believes the proposal to require the description of the tax management strategy of the fund should not be a mandatory requirement. It is only natural that funds managing assets according to tax-efficient methods will comment both on policy and strategy.

While the Subcommittee believes that the above categories of information should be required, the Subcommittee supports the Commission's decision not to mandate the specific language of the disclosures. This balanced approach is consistent with the guidelines of the AIMR-PPS standards that allow managers flexibility in making disclosures while still insuring that investors receive relevant information.

Compliance Date

The subcommittee recommends that the Commission's proposed compliance date be extended from six months to one year after the final ruling. The Subcommittee makes this recommendation for the following reasons:

1. The Subcommittee believes it will take software developers at least six months to develop appropriate technology that will allow funds to calculate after-tax returns. The major challenges with software development that require additional time are data extraction and testing. If a six month period is implemented and the software is not available, fund groups will be forced to use electronic spreadsheets, such as Excel, which are subject to human calculation and input error; a major concern of compliance personnel.

2. An extension will allow funds more time to achieve after-tax returns for benchmarks which will assist investors in evaluating after-tax returns.

3. In addition, extending the implementation period to one year will allow investment management firms, especially small firms, to budget for the added expense to comply with this requirement. The subcommittee expects fund groups to incur additional costs in the following areas:

   • developing and implementing necessary software and personnel resources to calculate returns;

   • collecting and capturing necessary historical data;

   • changing their reporting procedures and format for the documents affected by the report.

4. Finally, and perhaps most importantly, a one year implementation period will allow time for investor education on the relevance and impact of after-tax returns.

While the Subcommittee is recommending an extension of the implementation date for the Proposed Rule, nothing in the Commission's proposal should prevent funds from presenting after-tax returns earlier than the mandatory compliance date if they can do so consistent with the Commission's final adopted rule.

Additional Comments

An issue that does require the Commission's attention not mentioned in the disclosure document is advertising standards relating to yields for tax-exempt and municipal bond funds. The Subcommittee strongly encourages the Commission to revise the standard for comparing after-tax yields. Currently, tax-exempt and municipal bond fund yields are allowed to be "grossed-up" when compared to funds managing taxable bonds. This is inconsistent with the AIMR-PPS standards and leads to misleading results when attempting to compound returns for bond funds based on yield information presented in this matter. Therefore, the Commission should require that all yields be shown on a "net" after-tax basis when comparisons are made. Additionally, the yield should be properly adjusted when AMT related income exceeds 10%.

Concluding Remarks

The After-Tax Reporting Subcommittee strongly supports the Commission's proposal to require the disclosure of after-tax returns for mutual funds, subject to the recommendations outlined in this letter. The Subcommittee believes the Proposed Rule is generally consistent with the principles of after-tax reporting guidelines in the AIMR-PPS standards set forth by this Subcommittee in 1994.

The Proposal Rule will provide vital information to investors so that they can understand the magnitude of taxes on their investment, compare the impact of taxes on the performance on funds, and make better-informed investment decisions. The adoption of the Commission's after-tax reporting requirements will provide investors with greater transparency to returns they actually earn. Investment practitioners will benefit from having a sound standardized methodology for calculating and presenting after-tax performance results to investors. The Proposed Rule will create greater competition among investment firms and allow investors to more efficiently allocate their taxable investments.

The Subcommittee appreciates the opportunity to express its views on the proposed rule on Disclosure of Mutual Fund After-Tax Returns (File No. S7-09-00). If the Commission or staff has any questions or if the Subcommittee or AIMR can provide any additional information on our comments, please do not hesitate to contact us.

Respectfully yours,

Douglas S. Rogers, CFA
Chair
After-Tax Subcommittee

AFTER-TAX SUBCOMMITTEE

Douglas S. Rogers, CFA,
Chair, After-Tax Subcommittee

Jennifer P. Cahill, CFA
Thomas S. Drumm, CFA
Paul J. Jungquist, CPA, CFA
Sean S. Keogh, CFA
Daniel W. Koors, CPA
David A. Krause
James M. Poterba, D. Phil.
Neil E. Riddles, CFA
David M. Stein, Ph.D.
Ronald J. Surz
Cecilia S. Wong, Ph.D.

Lee N. Price, CFA, Ph.D., Observer

Exhibit A
Proposed table with recommended modifications (shown in italics):

Appendix B
Proposed table with recommended modifications (shown in italics):