[Congressional Record Volume 146, Number 39 (Monday, April 3, 2000)]
[House]
[Pages H1648-H1651]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 MUTUAL FUND TAX AWARENESS ACT OF 2000

  Mr. GILLMOR. Mr. Speaker, I move to suspend the rules and pass the 
bill (H.R. 1089) to require the Securities and Exchange Commission to 
require the improved disclosure of after-tax returns regarding mutual 
fund performance, and for other purposes, as amended.

[[Page H1649]]

  The Clerk read as follows:

                               H.R. 1089

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Mutual Fund Tax Awareness 
     Act of 2000''.

     SEC. 2. FINDINGS.

       The Congress finds the following:
       (1) Taxes can be the single biggest cost associated with 
     mutual funds. The average stock fund investor has lost up to 
     3 percentage points of return every year to taxes.
       (2) The average portfolio turnover rate for an actively 
     managed (nonindex) fund has increased from 30 percent 20 
     years ago to almost 90 percent today, and average capital 
     gains distributions of growth funds, per share, have more 
     than doubled in the last 10 years.
       (3) If a fund's performance is based mostly on short-term 
     gains, investors can lose a significant part of their return 
     to taxes.
       (4) Performance figures that mutual funds generally 
     disclose to their shareholders are net of fees and expenses, 
     but not taxes, and therefore do not represent the impact 
     taxes have on an investor's return.
       (5) This disclosure focuses on how much money investors 
     made before taxes, and not on how much money investors 
     actually got to keep.
       (6) Improved disclosure of the effect of taxes on mutual 
     fund performance would allow shareholders to compare after-
     tax returns to raw performance, and would permit the 
     investors to determine whether the fund manager tries to 
     minimize tax consequences for shareholders.
       (7) While the mutual fund prospectus details the average 
     annual portfolio turnover rate, the prospectus may not 
     expressly inform shareholders about the impact the portfolio 
     turnover rate has on total returns.

     SEC. 3. IMPROVEMENTS IN DISCLOSURE REQUIREMENTS.

       Within 18 months after the date of enactment of this Act, 
     the Securities and Exchange Commission shall revise 
     regulations under the Securities Act of 1933 and the 
     Investment Company Act of 1940 to require, consistent with 
     the protection of investors and the public interest, improved 
     disclosure in investment company prospectuses or annual 
     reports of after-tax returns to investors.

  The SPEAKER pro tempore. Pursuant to the rule, the gentleman from 
Ohio (Mr. Gillmor) and the gentleman from Massachusetts (Mr. Markey) 
each will control 20 minutes.
  The Chair recognizes the gentleman from Ohio (Mr. Gillmor).


                             General Leave

  Mr. GILLMOR. Mr. Speaker, I ask unanimous consent that all Members 
may have 5 legislative days within which to revise and extend their 
remarks and insert extraneous material on the bill, H.R. 1089, as 
amended.
  The SPEAKER pro tempore. Is there objection to the request of the 
gentleman from Ohio?
  There was no objection.
  Mr. GILLMOR. Mr. Speaker, I yield myself such time as I may consume.
  One of the most important changes in America in the last couple of 
decades has been the tremendous expansion of direct ownership by 
individuals of America's businesses.
  More people than ever now have a direct stake in the profitability of 
American companies. In fact, 80 million Americans own stocks. Some of 
those 80 million own stocks in individuals companies, and many others 
own shares in mutual funds. Those 80 million shareholders represent 
half of America's households.
  More and more Americans are utilizing mutual funds because of the 
ease of investing and for the diversification that they provide. 
Investors have done well in recent years in most mutual funds. But 
there is a major category of critical information that investors have 
not had access to in the past and generally do not have access to now.
  I originally introduced this legislation 2 years ago to assure that 
investors could obtain access to that information. I am happy that the 
Committee on Commerce has by unanimous vote recommended this bill for 
passage, and that is why H.R. 1089 is before the body today.
  Also, I want to thank the gentleman from Ohio (Mr. Oxley), the 
subcommittee chairman; the gentleman from Virginia (Mr. Bliley), the 
full committee chairman; as well as the gentleman from Massachusetts 
(Mr. Markey), the ranking member, for their support of this 
legislation.
  The critical information that I am talking about is the actual after-
tax return of various funds. Without that information, it is almost 
impossible for investors to make a meaningful comparison of real 
returns between different funds. This bill provides for the Securities 
and Exchange Commission to require all funds to make this information 
available. All funds report their pre-tax returns; however, very few 
funds report their after-tax returns, which can be dramatically lower.
  Because of the way different funds operate, the tax consequences and 
the real returns for an individual investor can vary tremendously from 
fund to fund. Some funds have very little turnover in the stocks they 
manage and, therefore, impose a relatively small tax burden on their 
investors. Other funds trade frequently. Each trade imposes some type 
of tax consequences on the investor.
  Often, all of that frequent trading, which is sometimes called 
churning, does not even result in a higher pre-tax return. Certainly it 
results in a lower after-tax return. But that fact is seldom disclosed 
to a mutual fund investors.
  This chart shows the hypothetical mutual fund return over a 1-year, 
5-year, 10-year, 15-year and 20-year period using the average mutual 
fund return over the past several years of 16.4 percent per year. 
First, the investor never really sees that 16.4 percent. On average, 
2.8 percent of that return goes to mutual fund fees and expenses, 
bringing the return down to 13.6 percent. Then one has in the average 
fund an additional 3 percent for the investor that goes for taxes. 
Factoring that in, the return drops to 10.6 percent.
  Well, what does that mean in real dollars? It means a lot. Over a 20-
year period, an initial investment of $10,000 at 16.4 percent grows to 
$208,000, which is represented by the yellow. However, when one takes 
out the fees and expenses, that shrinks to $128,000, represented by the 
red. Finally, after taxes, the investor is left with only $75,000, 
represented by the blue. In other words, over 20 years, the investor 
loses $133,000 of the $208,000 to costs and to taxes.
  Now, this bill does not in any way tell the mutual fund what stocks 
to buy. It does not limit in any way the amount of trading a fund can 
do. All it says is that an investor should know the after-tax return as 
well as the pre-tax return when making an investment. This is the type 
of information a fund investor should have, but does not now generally 
receive. It is very difficult to make an intelligent investment 
decision without it.
  The bill provides an important protection for investors by making 
available critical information which was not available before. It will 
also, I suspect, result in increased competition in the mutual fund 
industry.
  Now, over the course of the 2 years since I introduced this 
legislation, I have worked with Securities and Exchange Commission 
Chairman Arthur Levitt and the commission as well as the mutual fund 
industry. I am encouraged by the responsible efforts of the mutual fund 
industry to improve after-tax disclosure.
  I would like to commend both the industry and the SEC for the 
forward-looking approach that they have indicated they will be taking 
toward this problem.
  I urge the Members to join me in approving H.R. 1089.
  Mr. Speaker, I reserve the balance of my time.
  Mr. MARKEY. Mr. Speaker, I yield myself such time as I may consume.
  Mr. Speaker, I would like to begin by complimenting the gentleman 
from Ohio (Mr. Gillmor). He has been a real national leader, looking at 
this whole area of how much information a mutual fund investor should 
receive just as a matter of course with regard to their investment and 
how much of what was managed by a mutual fund company over the 
preceding year had led to tax consequences for investors across the 
country. The gentleman from Ohio (Mr. Gillmor) has been pressing on 
this issue for several years. Without question, today is a historic day 
because we are moving very close now with passage here today to this 
becoming a national law.
  I want to commend the gentleman from Michigan (Mr. Dingell) on the 
Democratic side, along with the gentleman from New York (Mr. Towns), 
ranking Democratic Member of the subcommittee, for their work on this 
issue, along with the gentleman from Virginia (Mr. Bliley) for the 
majority and the gentleman from Ohio (Mr. Oxley), who is the 
subcommittee chair.

[[Page H1650]]

  This has been put together in a bipartisan manner towards the goal of 
ensuring that all Americans, whether they be Democrat or Republican or 
liberal or conservative, have access to their tax obligations as a 
result of their mutual fund investment.
  The bill that we are taking up today is one that the gentleman from 
Ohio (Mr. Gillmor) and I introduced about 1\1/2\ years ago. It is 
something that occurred to us as an area that really did need some 
redressing.
  Now, the good news is that, since the gentleman from Ohio (Mr. 
Gillmor) and I have introduced this legislation, the Securities and 
Exchange Commission has now taken an interest; and they in fact are now 
in the process of promulgating regulations in this area that are 
consistent with the objectives that the gentleman from Ohio (Mr. 
Gillmor) and I had in introducing the legislation. That is the good 
news. The legislation itself has prompted that kind of a discussion at 
the Securities and Exchange Commission.
  The essence of the bill is that it requires the Securities and 
Exchange Commission to issue rules aimed at ensuring that mutual fund 
investors receive disclosure regarding the after-tax performance of 
their fund. This type of information, in combination with the other 
disclosures already required under Federal laws, can be very useful to 
investors in making fully informed investment decisions.
  Capital gains taxes have a material effect upon the overall 
performance of a mutual fund. Information regarding the impact of such 
taxes is clearly material information which every investor in the 
United States should be entitled to receive.
  In 1998, these are big numbers, Mr. Speaker. Mutual funds distributed 
approximately $166 billion in capital gains and $134 billion in taxable 
dividends.
  So as we approach April 15th, as we approach tax day, mutual 
investors all around the country become acutely aware of the importance 
which capital gains taxes have on their personal investments and on 
whether they will owe Uncle Sam any additional taxes based on the gains 
their investments have made in the preceding year.
  Indeed, we know today that the average domestic equity mutual fund 
has lost nearly 2\1/2\ percentage points per year to taxes on 
distribution of dividend and capital gains made to the fund 
shareholders.
  In the last 5 years, it is estimated that investors in diversified 
U.S. stock funds surrendered an average of 15 percent of their annual 
gains to taxes. Fifteen percent of the annual gains for mutual fund 
investors just went to taxes in the way in which the funds were 
managed.

                              {time}  1515

  Clearly, taxes are one of the most significant costs of mutual fund 
investment, and investors need to have clear, comprehensive 
understandings of how, in fact, each one of the mutual fund companies 
are managing similar portfolios. Because then the consumer can select 
the fund which is more judiciously managing in order to avoid that tax 
incident for investors.
  In pressing for better disclosure in this area, we recognize that 
disclosure regarding past tax performance, like all historical data 
regarding a fund's past performance, does not have precise predictive 
value. The past does not give us any indication of what is going to 
happen in the future. However, we do believe that such information is, 
nevertheless, important and useful to each investor so that they can 
have an idea of how a fund has been managed, and we believe that each 
prospectus should have that information. Since there are so many mutual 
funds out there with similar investment objectives, investors could 
evaluate key factors like overall performance, fees, and tax efficiency 
in choosing a particular fund.
  So H.R. 1089 directs the SEC to issue rules within 1 year to provide 
mutual fund investors with disclosures regarding the tax-adjusted value 
of their mutual funds. It does not mandate the specific form or the 
content of such disclosures. Instead, the Gillmor-Markey bill gives the 
commission the flexibility to develop rules which are consistent with 
the public interest and the protection of investors following public 
notice and comment.
  The SEC has submitted testimony on the bill in which it has stated 
that the Commission supports the goals of H.R. 1089. In fact, they have 
already issued draft disclosure rules which, again, seem to be 
consistent with the bill's objective. In adopting a final rule, the 
Commission should take into account the views of investors, the mutual 
fund industry, and other commentators regarding the precise form and 
content of the new disclosure requirements, but it should move forward 
quickly so that by next year mutual fund investors have this type of 
disclosure at hand.
  In conclusion, my colleagues, this is a good bill. It is 
noncontroversial. The gentleman from Ohio (Mr. Gillmor) and I, along 
with all the members of the committee, have worked out this Gillmor-
Markey legislation in a way that ensures that there is no controversy. 
And the reason there is no controversy is that it is good for 
investors, and it is good for our financial markets. The more 
information which investors in our country are given access to, the 
more likely that we will have efficient and intelligent markets that 
are moving America's investment dollars towards those funds, towards 
those companies which are going to result in the highest degree of 
productivity for our society.
  So, again, I want to bow in recognition of the great leadership of 
the gentleman from Ohio and to the chairman of the committee in moving 
this bill forward through the legislative process.
  Mr. Speaker, I reserve the balance of my time.
  Mr. GILLMOR. Mr. Speaker, I yield myself such time as I may consume 
to once again express my appreciation to the gentleman from 
Massachusetts (Mr. Markey) for his stalwart support of this 
legislation; as well as the gentleman from Virginia (Mr. Bliley); the 
gentleman from Ohio (Mr. Oxley); and the ranking members, the gentleman 
from Michigan (Mr. Dingell) and the gentleman from New York (Mr. 
Towns).
  Mr. Speaker, I reserve the balance of my time.
  Mr. MARKEY. Mr. Speaker, I yield myself such time as I may consume to 
once again urge support of all Members for the Gillmor-Markey tax 
disclosure legislation.
  Mr. Speaker, I have no further requests for time, and I yield back 
the balance of my time.
  Mr. GILLMOR. Mr. Speaker, I yield myself such time as I may consume 
to once again urge passage of the bill.
  Mr. BLILEY. Mr. Speaker, today the House is considering H.R. 1089, 
the Mutual Fund Tax Awareness Act of 2000. This legislation, introduced 
by my friend and colleague, Mr. Gillmor of Ohio, will benefit mutual 
fund investors by providing them with better information about the 
performance of their funds.
  Presently, mutual fund companies list fund performance rates net of 
expenses and fees, with no consideration given to the taxes that fund 
investors must pay on a yearly basis. I believe it is important that 
investors be given information about the effect of taxes on their 
funds' performance.
  The Gillmor legislation would change present law by requiring the 
S.E.C. to promulgate new regulations to improve disclosure of the 
effect of taxes on listed mutual fund rates of return. By doing so, 
investors will be able to shop around for a fund which best suits their 
needs. Individuals with large yearly capital losses can look for a fund 
with large capital gains distributions, as a means of offset. 
Individuals who do not wish large capital gains or ordinary income 
distributions will be able to opt for a fund specifically managed for 
tax efficiency purposes.
  Some may say, ``Why is this bill necessary now?'' The S.E.C. is 
trying to accomplish the same purpose as this bill. I believe this bill 
is necessary because we must ensure that these regulations go into 
effect on a date certain. This legislation gives the S.E.C. 18 months 
to promulgate revised regulations. Mr. Gillmor has worked with the 
S.E.C. for years, asking them to revise these regulations on their own, 
without Congressional action. It was only after Mr. Gillmor was stymied 
at the administrative level that he pushed for enactment of this bill.
  I know of no opposition to this legislation. Because it is so 
important to American investors that they have a better idea about the 
effect of taxes on listed rates of performance in mutual funds, I urge 
an ``aye'' vote on this bill.
  Mr. OXLEY. Mr. Speaker, today I urge the House to pass H.R. 1089, the 
Mutual Fund Tax Awareness Act of 2000.
  In some form or another, 83 million Americans, or one in every other 
household, are invested in mutual funds. While many are invested in tax 
deferred accounts, through pensions, IRA's, or other retirement 
vehicles, millions are invested in taxable mutual funds.

[[Page H1651]]

That is, on a yearly basis, these shareholders must pay ordinary income 
and capital gains taxes on distributions they receive from their mutual 
funds.
  Yet when present or prospective shareholders review annual fund 
performance results in annual reports or prospectuses, the rates of 
return listed do not account for the impact of taxes. This should not 
be the case. Given that the average fund loses almost three percentage 
points from their listed rates of return due to taxes, investors should 
be presented with information about how much money they got to keep, 
not how much money they received before paying the tax man. Only then 
will investors better be able to invest in mutual funds which best suit 
their needs.
  To respond to this problem our colleague, Mr. Gillmor, drafted this 
legislation before the House today. Among other things, this bill would 
require the SEC to revise their regulations to require that mutual fund 
companies list performance figures on an after-tax basis. While it is 
impossible to predict precisely the tax impact for every shareholder--
because taxpayers are subject to differing federal and state tax rates 
due to their incomes--the information to be presented is highly 
informative nonetheless. Such information will allow shareholders to 
determine which funds are more tax efficient, enabling investors with 
tax concerns to opt for funds which best suit their tax needs.
  Federal securities law has always focused on disclosure, and that is 
the objective of this bill. By providing investors with better 
information about their funds, investors will be empowered. I know that 
Mr. Gillmor has worked with the SEC in developing this legislation, and 
that the SEC has responded on their own by issuing a proposed 
regulations which aims to do what the Gillmor bill does. It is 
important to pass the legislation before the House today to ensure that 
the final SEC rule is promulgated by a date certain.
  I know of no opposition to this bill, and I urge the support of the 
House.
  Ms. JACKSON-LEE of Texas. Mr. Speaker, I rise today in support of the 
Mutual Fund Awareness Act of 2000. This Act will ensure that the mutual 
fund industry clearly discloses the performance and costs to investors 
on all funds. Improved methods of disclosing the after-tax effects of 
portfolio turnover on investment company returns to investors is a 
significant step in providing those who invest in our capital markets 
with all the information needed to make prudent investment decisions.
  The Mutual Fund Tax Awareness Act would require the Securities and 
Exchange Commission to revise its regulations to improve methods of 
disclosing to investors in mutual fund prospectuses and annual reports 
the after-tax effects of portfolio turnover on mutual fund returns. 
While investment company disclosure regarding a fund's performance is 
conveyed net of fees and expenses, often the tax effects of a 
portfolio's activity are usually not included in released performance 
information. However, the tax consequences of mutual fund portfolio 
turnover may significantly effect the overall performance of an 
investor's fund selection.
  During this age of often-volatile stock market trading days, the 
portfolio turnover rate for actively managed funds have increased 
during the 1990's, this activity has lead to an increase in the average 
capital gains distribution per share. This measure will enhance 
shareholder understanding of the impact taxes may have on fund 
performance.
  Allowing the Securities and Exchange Commission to revise regulations 
pertaining to the mutual fund industry will also inform investors about 
the relative tax efficiencies of different funds and how much of a 
fund's reported pre-tax return will be paid by an investor in taxes. 
The Commerce Committee reported that taxes cut mutual fund returns by 
an average of more than 2.5 percentage points. This measure will permit 
investors to determine whether mutual fund managers try to minimize tax 
consequences for shareholders.
  The transparency of American capital markets is crucial to our 
continued prosperity. I support efforts to enhance transparency and 
consumer protection. This is why I support the Mutual Fund Awareness 
Act of 2000.
  Mr. GILLMOR. Mr. Speaker, I have no further requests for time, and 
yield back the balance of my time.
  The SPEAKER pro tempore (Mr. Pease). The question is on the motion 
offered by the gentleman from Ohio (Mr. Gillmor) that the House suspend 
the rules and pass the bill, H.R. 1089, as amended.
  The question was taken.
  Mr. GILLMOR. Mr. Speaker, on that I demand the yeas and nays.
  The yeas and nays were ordered.
  The SPEAKER pro tempore. Pursuant to clause 8 of rule XX and the 
Chair's prior announcement, further proceedings on this motion will be 
postponed.

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