Washington, D.C. –U.S. Rep. Allyson Schwartz praised the U.S. House of Representatives today for passing legislation yesterday that would make changes to the tax code to address outdated provisions related to Regulated Investment Companies.

Schwartz was an original co-sponsor of the Regulated Investment Company Modernization Act of 2009, which was introduced in December 2009 by then Ways and Means Committee Chairman Charles Rangel and Select Revenue Measures Subcommittee Chairman Richard Neal.

“The tax code’s tax provisions concerning regulated investment companies are antiquated and must be modernized in order to minimize difficulties for funds and investors,” Schwartz said. “By updating these provisions we will ultimately help consumers invest and save. The RIC Modernization Act will greatly help accomplish these important goals.”

H.R. 4337, The Regulated Investment Company Modernization Act of 2009, would make the following technical changes to update the tax code regarding RIC’s:

·         Modernization:  The tax rules that relate to RICs date back more than a half century.  Although these rules have been updated from time to time, it has been more than 20 years since these rules were last revisited.  In that time many changes have occurred that eliminate the need for certain rules, including rules that prevent mutual funds from earning income from commodities, rules that relate to preferential dividends, and rules that require mutual funds to send separate annual dividend designation notices to shareholders.

·          Excise tax interactions:  In 1986, Congress enacted an excise tax on the undistributed income of RICs.  Over the past 20 years, mutual funds have identified a number of instances in which interactions between this excise tax and other tax rules can create problems for mutual funds and their shareholders.  This bill would make a number of technical changes that would seek to remedy these interactions.

·         Corporate tax interactions:  Mutual funds are subject to special tax rules that only apply to regulated investment companies under the tax code.  However, mutual funds are also subject to the general corporate tax rules that apply to redemptions and dividends.  Sometimes, the interaction between these two sets of rules can create problems for mutual funds and their shareholders.  This bill would make a number of technical changes that would seek to remedy the adverse effects of these interactions.

Generally under the tax code, RIC’s are those registered under the Investment Company Act of 1940.  These companies form mutual funds to invest in other companies.  These companies are allowed to pass through capital gains, dividends, and interest earned on investments directly to shareholders.  Although these rules have been updated from time to time, it has been more than 20 years since these rules were last revisited.

More than 100 years ago, the concept of pooling assets and spreading risk via a mutual fund took hold in the U.S.  Today, according to the Investment Company Fact Book for 2010, the total net assets held in the U.S. mutual fund industry is more than $12 trillion, held in 270 million share accounts.  Using Census data, ICI estimates that more than 50 million households owned mutual funds.   

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