The Depository Trust & Clearing Corporation (DTCC) issues white paper called Complying with New Cost-Basis Legislation: What Brokers, Banks, Transfer Agents, Mutual Funds and Issuers Need to Know. The paper investigates the challenges aroused from cost basis legislation and addresses brokers, transfer agents, mutual funds and issuers.
DTCC discusses the compliance issues and problems that each of these groups face as they prepare to meet the complexities of cost basis reporting.
The new cost basis legislation was signed into law in October as part of The Emergency Economic Stabilization Act of 2008, commonly referred to as “the bailout bill.” It poses new challenges for brokers and others as they must begin to report accurate, adjusted cost basis information to investors and the Internal Revenue Service (IRS).
Brokers and banks, for example, may have to obtain or calculate missing cost-basis information; transfer agents will need to capture and track new cost basis data; and mutual funds will need to calculate cost basis information for a variety of investment plans including dividend reinvestment plans (DRiP).
The legislation will be implemented in three phases. Cost basis reporting must begin for:
– All equity stock acquired on or after 1 January 2011.- All mutual funds and dividend reinvestment plans shares acquired on or after 1 January 2012.- Other specified securities types, such as debt issues, options, private placements acquired on or after 1 January 2013.
According to the paper brokers, transfer agents mutual funds and issuers also must decide if they will “be guided by the legislation as written only reporting cost basis on securities acquired after the implementation dates then (they) must keep track of those share lots where cost basis is to be reported and those lots where cost basis is not to be reported the mechanics involved in developing and maintaining a dual system can be just as difficult as one that will report on all share lots in an investor’s portfolio.”
The paper highlights cost basis challenges facing intermediaries:
– For brokers and banks, “one of the major problems they face in reporting cost basis rests in the fact that the shares they hold may have been delivered to them from another broker, bank, custodian or transfer agent without cost basis information or with inaccurate cost basis information. The receiving broker may have the task of updating and recalculating missing or inaccurate cost basis information.”- For transfer agents: “…shareholder recordkeeping systems will need to be upgraded to capture and track share lots those shares accumulated at different times under different circumstances: gifts, reinvestment shares, ESOP shares, voluntary cash purchases, transfers into and out of the registered name”- For mutual fund companies: “their cost basis calculations are complicated by the fact that they include dividend reinvestment plans, multiple purchases and sales and frequent distributions in a given investor’s account.”- For issuers: “While their shareholders have often complained about the lack of accurate and accessible cost basis information, many issuers have hesitated to provide it. Issuers do provide component information on cost basis, but they won’t do the calculation for the investor, fearing that the information could be inaccurately or incorrectly reported and lead to legal implications.”
All financial intermediaries will need to examine their shareholder accounting systems and decide how they will upgrade and “determine if they will buy, build or partner to handle the complexities of implementing an adjusted cost basis accounting system.”
Also paper touches the question of application for the electronic service that could perform complete and historical cost basis accounting and meet the new legislative requirements. Accubasis, DTCC’s automated cost basis application, answers these criteria. Because it provides adjusted cost basis information quickly, accurately and efficiently for a broad variety of financial firms in the securities industry.
We’re encouraging the industry to start preparing for cost basis reporting as soon as possible,” says Lori-Ann Trezza, vice president, Product Development, DTCC. “While the deadlines appear to give financial intermediaries sufficient time to prepare for cost basis reporting, the reality in the case of stock, for example is that the ramp-up time is short considering the decisions that need to be made and system changes that may have to be implemented and testing to be done.”
The paper outlines the obstacles and roadblocks we see ahead for our customers, continues Trezza. We want them to see the steps they will need to take in complying with the new requirements. At the same time, they may want to consider AccuBasis in their cost basis planning.”
L.D.