7773 / Can a regulated investment company (RIC) invest in a master limited partnership (MLP)?

In the past many mutual funds have been reluctant to invest in MLPs because of the RIC investment restrictions of IRC Section 851. To maintain its RIC election, a RIC must derive at least 90 percent of its gross income from certain sources specified within the IRC, including dividends and interest.¹ Because as a partnership, an MLP does not distribute “dividends,” a RIC was unable to derive more than 10 percent of its income from MLPs.

However, in 2004 Congress amended IRC Section 851 to provide that a RIC may include “net income derived from an interest in a qualified publicly traded partnership” in calculating its 90 percent income requirement.² Essentially, this amendment provided mutual funds the ability to diversify their portfolios because any income derived from the MLP will not affect its status as a RIC.

A RIC still faces limitations in its ability to invest in MLPs. A mutual fund is not permitted to invest more than 25 percent of its assets in a MLP.³ Nor are mutual funds permitted to own more than 10 percent of the interests issued by a MLP.⁴

See Q 7922 to Q 7935 for a detailed discussion of the rules governing RICs.