Regulation M Definition

Regulation M Definition

Regulation M allows regulated investment companies to avoid double taxation by passing taxes from capital gains, dividends, and interest distributions onto individual investors. It is an Internal Revenue Service Regulation applied to all investment companies operating in the United States that are registered under the Investment Company Act 1940. According to this law, investments companies include exchange-traded funds, mutual funds, real estate investment trusts (REITs) and unit investment trusts (UITs).

A Little More on What is Regulation M

Regulation M is described in the Internal Revenue Code (IRC) Title 26, beginning at Section 851. Regulated investment companies can save on taxes by utilizing this regulation.
According to the “conduit theory”, investment companies should pass capital gains, interest and dividends to shareholders for avoiding double taxation. Regulation M, also known as Subchapter M, conforms to this theory.

Investment companies work as a conduit for such distributions. The distribution amounts are decided by these eligible investment companies working as the conduit. In the process, the capital gain, dividend, and interests are passed on to the shareholders and the conduit does not have to pay portfolio taxes on these payouts. The unique structuring of the management of such companies allows them to retain a cumulative benefit from these payouts to the shareholders.

Mutual fund companies work as conduits and distribute the capital gain, dividends, and interests to the shareholders. While the capital gain distributions are generally disbursed once a year, other distributions are paid regularly during different times of a year.

The shareholders of mutual funds receive the quarterly dividends and capital gain distribution at the end of the year. The shareholders are liable to pay taxes on these receivables, whether or not they reinvest the money.

Regulation M makes sure only the investors need to pay the taxes on these distributions and not the companies.

References for Regulation M

Academic Research on Regulation M

  • ·       Road Testing the New Regulation M, Huber, E. A., & Hudson, T. B. (1998). The Business Lawyer, 1011-1025. This paper explains mainly the process of Road Testing of the New Regulation M as regards its usefulness in the economy.
  • ·       State Law Response to the New Regulation M, Rojc, K. J., & Juffernbruch, T. K. (1998). The Business Lawyer, 1027-1040. According to this research analyses the response of the state law to the process of the New Regulation M was properly explained.
  • ·       “AT-THE-MARKET” OFFERINGS–IMPLICATIONS UNDER REGULATION M, Endres, B. J., & Hanson, K. (2010).  M. Secs. & Comms. Reg.43, 1. This research analyses explains the “AT-THE-MARKET concept and the “OFFERING-IMPLICATIONS” as regards the REGULATION M.
  • ·       At Long Last, the Final Rule on Regulation M, Hudson, T. B., & Ryan, A. C. (1997). The Business Lawyer, 1077-1085. This paper explains what become of the Regulation in the long run. That is, what happens to the Final Rule on Regulation M at the Long Last period.
  • ·       Impact of the New Regulation M on State Motor Vehicle Leasing Disclosure Laws, Rojc, K. J., & Jufernbruch, T. K. (1996). Bus. Law.52, 1101. According to this thesis, the impact of the New Regulation M on State Motor Vehicle Leasing Disclosure Laws was vividly explained and various solutions and appropriate models to prove this claim were also explained.
  • ·      Entry and Regulation m the case of Health Care Professions, Schaumans, C., & Verboven, F.  In this research thesis, an empirical entry model for physicians as nd pharmacist was developed. Recall that lot of pharmacies in most countries receive high markups that are prevented from competition via restrictions of the geographic entry. The entry restrictions and complementariness were taken into considerations and according to this paper, the entry restrictions have drastically reduced the number of pharmacies by more than 50% and also indirectly reduced the no of physicians by about 7%. Not that there are no empirical result for the current regime of the public interest motivation.
  • ·       SEC adopts Amendments to Rule 105 of Regulation M, including important exceptions for bona fide purchases and for separate accounts, Gittleman, C. S., & Sacks, R. D. (2008). Journal of Investment Compliance9(1), 30-34. The main aim of this research thesis is to provide a well explained description of the Amendments to Rule 105 of Regulation M adopted by the US Securities and Exchange Commission (the “SEC”) on June 20. This paper also explains the rule that forbids the sales and purchase of securities during a specified period of time. It also defines the Amendments, which include an expansion of the prohibition act under the Rule of prohibition regarding “covering” to a prohibition on purchase in general.
  • ·       Regulation M: improved protections for consumer leasing, Lewis, C. (1998). Communities and Banking, (Sum), 19-22. This paper is a review made on the new Regulation M and it isolated disclosures which help to protest the customers against the problems as regards leasing. This paper explains the improved protections for consumer leasing.
  • ·       The replacement demand for motor vehicles: evidence from the Survey of Consumer Finances, Aizcorbe, A., Starr, M., & Hickman, J. (2003).  According to this data, household-level data gotten from nthe Federal Reserve’s Survey of Customer Finances to document changes in households’ financing and acquisition of motor vehicle from 1989-2001, the data explains the types of vehicle possessed by the household, the type of financing arrangement used and how the vehicle holdings vary with household characteristics. An important feature of the data is the provision of an insight into the determinants of replacement and use of leasing as an alternative financing arrangement.
  • ·       Consumer Leasing and Personal Property Financing Developments: Early Termination Provisions in Automobile Leasing Contracts, Hudson, T. B. (1992). Bus. Law.48, 1151. According to the Regulation M Consumer Leasing, the implementation of the Consumer Leasing Act (15 USC 1667 et seq.) which was endorsed in 1976. His paper explains the major purpose of this act which is to ensure that customers get accurate and meaningful disclosure of the terms of lease before going into contract to leasing of personal properties. This paper also explains that the Consumer Leasing Act sets limits in balloon payment which sometimes are due at the end of a lease and helps to regulate advertising. As at now, very few of banks are into the business of consumer leasing.
  • ·       Leasing Consumer Goods: The Spotlight Shifts to the Uniform Consumer Leases Act, Rohner, R. J. (2002). Conn. L. Rev.35, 647. According to this research thesis, the process in which The Spotlight Shifts to the Uniform Consumer Lease Act was well explained and the correlation between this act and the Leasing of Consumer Goods was also explained.
  • ·       Consumer Leasing Developments, Cooluris, J. G., & Winn, E. L. (1984). The Business Lawyer, 1163-1174. This paper explains the development in the leasing sector of the economy and how these development has helped to improve Consumer Leasing processes.

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