Alert February 26, 2013

SEC Staff Provides Guidance on Incorporation of 3.8% Tax on Net Investment Income Into Standardized Mutual Fund After-Tax Return Calculation

The staff of the SEC’s Division of Investment Management (the “Staff”) provided guidance regarding the manner in which the 3.8% tax on net investment income applicable to certain taxpayers as a result of the Health Care and Education Reconciliation Act of 2010 (the “3.8% Tax”) should be incorporated into the standardized after-tax return calculation that is required under Form N-1A, the SEC registration form for open-registered management investment companies (“mutual funds”), and Rule 482 under the Securities Act of 1933, as amended, and Rule 34b-1 under the Investment Company Act of 1940, as amended, for mutual fund marketing materials presenting after-tax returns.  Specifically, the Staff stated that a mutual fund should “include the 3.8% tax in after-tax return calculations (e.g., use 43.4% as the highest individual marginal federal income tax rate on ordinary income)” and “. . . should include the 3.8% tax in calculating the tax on qualified dividend income and long-term capital gains or any tax benefit resulting from capital losses required by Instruction 7 to Item 26(b)(3) [of Form N-1A] (i.e., use 23.8% as the highest individual federal long-term capital gains tax rate . . .).”