What Is a Regulated Investment Company?

Posted May 10, 2022

what is a regulated investment company?-1182811599

A regulated investment company (RIC) can be any one of several types of companies, including mutual funds, exchange-traded funds (ETFs), unit investment trusts, or real estate investment trusts (REITs). What matters for the definition is whether the company is qualified to pass-through income per Internal Revenue Regulation M (Title 26, sections 851 through 855 and others).

The Investment Company Act of 1940 Created the Regulations

Franklin Roosevelt and Congress passed the Investment Company Act of 1940 to improve protection for investors after the stock market crash and Great Depression, which severely affected investors’ faith in the market. The Securities and Exchange Commission enforces the Act, which outlines the responsibilities of investment companies and the requirements for publicly traded investment products. The Act targeted mutual funds and unit investment trusts (since REITs and ETFs did not yet exist). In addition, the Act includes rules governing financial disclosures, service charges, fiduciary responsibility, and informational filings.

The Investment Company Act also requires an investment company to register with the SEC before offering securities to the public, including mutual funds, which are increasingly a significant portion of retirement plan assets. This requirement helps to protect the safety of Americans’ retirement savings, as intended. It defines an investment company as "an issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire 'investment securities' having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis."¹

Pass-through Income is Fundamental

For regulated investment companies, the salient characteristic is the ability to pass through income to the investor without paying taxes first at the corporate level. The shareholders instead pay the income tax at their individual rate. Each of the four primary types of RICs shares the structure of pooled fund investments but differs in form and the products offered.

REITs are real estate investment trusts that own, operate, or finance real estate properties with the goal of earning income for their investors. They pool capital from investors (one requirement for REIT eligibility is that the company must have at least 100 shareholders by maturity) to buy commercial real estate or financial instruments related to real estate, or sometimes both.

An ETF (Exchange-Traded Fund) is a collection of securities that trade on a financial exchange. An ETF may focus on any one of many investment sectors such as industry, capitalization, geographic region, and include stocks, bonds, and commodities. ETFs track index performance and are traded throughout a trading day (while mutual funds are settled at the end of each trading day). ETFs began to develop popular appeal in the 1990s.

Mutual Funds have been offered to U.S. investors since 1924 and provide an active, professionally managed strategy that individual investors may prefer to their own knowledge and expertise. However, investors may find that the fees charged for mutual fund participation are higher than for holding shares in a passively invested ETF because of the active management. Further, since mutual fund shares are priced based on net asset value at the end of a trading day, price volatility during the day can’t successfully evoke an immediate reaction.

Unit Investment Trusts (UITs) are similar to mutual funds in the sense that they pool contributions from investors in a fund that a portfolio manager manages, and the funds are invested in stocks and bonds. UITs are active for a fixed time with a stated end date, at which time the portfolio is disposed of, and the investors get their share of the proceeds. Also, UIT positions are typically held rather than traded. UITs often favor bond holdings more than stocks and hold the bonds until they mature.

The individual shareholder may be attracted by the pass-through structure and potential income with any RIC investment. To maintain status as a RIC, the company must distribute at least ninety percent of its net investment income to the shareholders.


1. U.S. Securities and Exchange Commission. “Investment Company Regulation and Security Package.”

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. There is no guarantee you will receive any income. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus. UITs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. Please consider the investment objectives, risks, charges, and expenses carefully before investing in Mutual Funds or ETFs. The prospectus, which contains this and other information about the investment company, can be obtained directly from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.

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