DEFINITION of 'Regulation M'
An IRS regulation that allows regulated investment companies to pass taxes from capital gains, dividends and interest distributions onto individual investors. Regulation M conforms to the 'conduit theory,' which states that investment firms should pass capitals gains, interest and dividends to shareholders in order to avoid double taxation both to the company and the individuals investors.
BREAKING DOWN 'Regulation M'
A mutual fund company serves as a conduit for investors, passing on dividends, interests and capital gains to investors. For example, suppose an investor owns a few shares of a mutual fund. The capital gains the fund incurs as well as the tax implications are passed onto the investor. Without regulation M, the company responsible for the mutual fund would pay taxes on the capital gain, and the remaining returns passed onto the investor would also be subject to taxes.