What Is a Regulated Investment Company (RIC)?

What Is a Regulated Investment Company (RIC)?

4 Min.

A regulated investment company refers to any type of investment entity, including mutual funds, ETFs, and REITs. To qualify as a RIC, the company must derive a minimum of 90% of its income from capital gains, interest, or dividends earned on investments. Additionally, at least 50% of the company's total assets must be in the form of cash, cash equivalents, or securities. On December 22, 2010, President Obama signed the Regulated Investment Company Modernization Act of 2010 into law.


Diverse in structure, a Regulated Investment Company (RIC) encompasses various investment entities. This includes forms such as mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), or unit investment trusts (UITs). The Internal Revenue Service (IRS) designates the eligibility of the RIC structure to pass through taxes on capital gains, dividends, or interest earned to individual investors. Qualifying for income pass-through under IRS Regulation M, a regulated investment company adheres to specific regulations outlined in the U.S. Code, Title 26, Sections 851 through 855, 860, and 4982.

Regulated Investment Company (RIC) Explained

To avert double taxation, regulated investment companies opt for pass-through or flow-through income, avoiding the scenario of both the company and its investors paying taxes on generated income and profits. Commonly known as the conduit theory, this approach positions the investment company as a conduit for channeling capital gains, dividends, and interest to individual shareholders.

Crucially, regulated investment companies are exempt from paying taxes on their earnings. Without this allowance, both the investment company and its investors would be subject to taxes on the company's capital gains or earnings. The pass-through income structure exempts the company from corporate income taxes on profits conveyed to shareholders, with only individual shareholders facing income tax obligations.

RIC Qualification Criteria

To meet the stringent requirements for regulated investment company status, a business must fulfill specific criteria. It should exist as an entity subject to corporate taxes, be registered as an investment company with the Securities and Exchange Commission (SEC), and elect RIC status under the Investment Company Act of 1940, provided its income source and asset diversification align with specified standards. Moreover, an RIC must generate a minimum of 90% of its income from capital gains, interest, or dividends earned on investments. An RIC must distribute at least 90% of its net investment income through interest, dividends, or capital gains to its shareholders. Failure to do so may result in IRS-imposed excise taxes.

For RIC qualification, a minimum of 50% of a company's total assets must be in the form of cash, cash equivalents, or securities. Additionally, no more than 25% of the company's total assets may be invested in securities of a single issuer unless the investments are government securities or securities of other RICs.

Modernization of Regulated Investment Company Rules: A Case Study

On December 22, 2010, President Obama enacted the Regulated Investment Company Modernization Act, significantly altering the tax treatment regulations for regulated investment companies, such as open-end mutual funds, closed-end funds, and the majority of exchange-traded funds. This legislative move marked the first update to RIC rules since the Tax Reform Act of 1986.

The imperative behind the 2010 RIC Modernization Act stemmed from substantial transformations within the mutual fund industry over the 25-year period from 1986 to 2010. During this time frame, many tax rules applicable to RICs became outdated, imposed administrative complexities, or led to uncertainties.


A regulated investment company encompasses various forms requiring strict criteria for qualification. With a focus on tax efficiency, the pass-through income structure exempts RICs from corporate taxes, shifting the burden to individual shareholders. President Obama's 2010 enactment of the RIC Modernization Act marked a crucial update, addressing the evolving landscape of the investment industry by adapting rules last revised in 1986.

Regulated Investment Company (RIC)
Mutual Fund
Exchange-Traded Fund (ETF)
Real Estate Investment Trust (REIT)