What is a significant disadvantage of operating common trust funds of type 9.18(a)(1)?

The significant disadvantage of operating common trust funds of type 9.18(a)(1) lies in capital gains taxation to participants. This type of trust fund can lead to distributions that may generate capital gains for the participants, and these gains can be subject to taxation. Unlike certain investment vehicles, common trust funds do not offer the same tax advantages, meaning that participants could end up with tax liabilities that diminish their overall returns.

In comparison, scrutiny from regulatory bodies such as the SEC or the OCC, or operational costs, may also be concerns associated with common trust funds, but they do not directly impact the financial outcome for participants in the same way that capital gains taxation does. The taxation aspect is particularly significant because it directly affects the net income that participants receive from their investments, making it a critical consideration for those involved in such funds.