AMFI Exam series -13

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Regulation and Compliance

This chapter contains the following topics:

Securities Acts
Mutual Fund Industry Associations
Tax Treatment
Year-End Tax Processes

Open end mutual fund companies must comply with a wide variety of securities Acts. Most of these acts were passed in the 1930’s, a period of aggressive reform in the financial services arena. The primary purposes of these Acts were to reduce investment company selling abuses and they have evolved to assure investors of adequate and truthful information.

The Securities and Exchange Commission (SEC) is a federal agency created by the Securities Exchange Act of 1934 to administer that act and the Securities Act of 1933. The statutes administered by the SEC are designed to promote full disclosure and protect the investing public against fraudulent and manipulative practices in the securities market.
The National Association of Securities Dealers (NASD) is an association of broker-dealers in the over-the-counter securities business. NASD is dedicated to “adopt, administer, and enforce rules of fair practice…and in general to promote just and equitable principles of trade for the protection of investors.”

The NASD is a self-regulatory organization with authority over firms that distribute mutual funds as well as other securities. It reviews and approves mutual fund sales literature on behalf of the SEC.
The NASD also sponsors NASDAQ, a pricing communication system used by much of the industry. NASDAQ gathers pricing and dividend data and forwards the information to the wire services.

Most distributions of income by mutual funds, except for certain distributions by tax free bond or money market funds, are taxable to the shareholder.
Dividends are normally considered “ordinary income”, and taxed at the shareholder’s regular income tax rate.
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