You’ve probably come across the term regulated investment company (RIC) before. It is a broad term that can include everything from mutual funds and exchange-traded funds (ETFs) to real estate investment trusts (REITs). Virtually any investment company that deals in securities fits the definition of RIC.
This blog looks at how RICs came into existence and what sets them apart from other financial service providers.
What do you need to qualify as a RIC?
The first step to obtaining RIC status is registering with the Securities and Exchange Commission (SEC). This is required under the provisions of the Investment Company Act of 1940. The Act lays down guidelines for qualifying investment companies to follow when recommending investment products to customers. These include full disclosure of their financial condition, service fees, fiduciary responsibility, etc.
This information is to be filed annually to enable customers to make an informed decision regarding who to invest with. The Act was originally written to protect retired investors from fraud or misrepresentation. However, the rules are binding on all investment companies trading in securities worth more than 40% of total asset value.
Pass-through Income is Fundamental
Regulated investment companies do not need to pay corporate taxes on their income prior to distribution to investors. In other words, the income is taxable in the hands of investors according to the tax bracket they fall into.
Let’s take a look at how the four primary types of regulated investment companies collect capital and distribute their income among investors:
REITs are syndicates that acquire and operate investment properties by mobilizing funds from investors. They are required to have a minimum of 100 shareholders by the time the offering matures. There are different types of REITs that invest in different asset classes such as commercial, institutional, or both.
ETF (Exchange-Traded Fund) is a bundle of securities that can be traded on a financial exchange at any time during the day. In contrast, mutual funds can only be bought at the close of trading hours. ETFs track a specific index and specialize in a certain asset class such as stocks, bonds, or commodities. ETFs.
Mutual Funds invest in a variety of securities like stocks, bonds, and short-term debt. They allow investors to leverage the experience of professional fund managers to grow their capital. In return, investors pay management fees that are deducted from the income generated by the fund. Depending on their type, mutual fund prices are updated based on their net asset value at the end of a trading day. This means that short-term fluctuations do not affect their prices.
A key qualifier for RICs is that they must distribute 90% of their net investment income to shareholders to avoid double taxation. This would be the case if the company and its investors paid taxes on their respective earnings.
Last Words
It is important to thoroughly analyze the offering memorandum to determine if an offering fits in with your investment objectives in the long run.
True North helps individuals and businesses invest strategically to grow their capital and minimize taxes. For more information, contact our team today!
