Tax Facts

7937 / What are portfolio investment programs?

Portfolio investment programs provide investors with the opportunity to use a sponsoring broker-dealer’s website to “create and manage portfolios of securities (‘baskets’) based on each investor’s individual needs and objectives.” (Portfolio investment programs are frequently referred to as “folios,” the name of the initial sponsor’s product.) However, unlike a mutual fund, “the investor does not hold an undivided interest in a pool of securities; rather the investor is the direct beneficial owner of each of the securities included in the portfolio. Each investor has all of the rights of ownership with respect to such securities.”1 The SEC denied a request from the Investment Company Institute (ICI) to adopt a rule that would deem portfolio investment programs to be regulated as mutual funds.2


Because investors in investment portfolio programs own the stocks directly, they are taxed on distributions and the sale of their shares in the same manner as stockholders. For the treatment of cash dividends, see Q 7502.For the treatment of capital gain on the sale or exchange of stock, see Q 7517. For the treatment of capital gains and losses, see Q 702.





1.  U.S. Securities and Exchange Commission, Letter in Response to Petition for Rulemaking from Investment Company Institute, (August 23, 2001); Speech by Paul F. Roye (Director of Investment Management, U.S. Securities and Exchange Commission) to the American Law Institute - American Bar Association Conference on Investment Management Regulation, (October 11, 2001).

2.  Letter in Response to Petition for Rulemaking from Investment Company Institute, above.


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