COST BASIS REPORTING: THE QUESTIONS YOU NEED TO ASK NOW

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Author: Rich Hulit, executive vice president, SunGard’s brokerage & clearance business

According to respected industry analysts from TowerGroup, financial services institutions are “vastly underestimating” the impending customer service expenses related to cost basis reporting requirements.  That suggests that firms need to start preparing now, because January 1, 2011 will approach quickly – you simply cannot afford to wait to solidify your cost basis reporting plans.

Let’s put this in context with some background information.

In a December 2009 article titled “The Urgency and High Price of New Cost Basis Reporting Law,” Melanie Rodier of Wall Street & Technology wrote:

The new cost basis law effectively means that starting Jan. 1, 2011, brokerage firms will have to start reporting on clients’ tax statements the gains and losses realized on their investments. They will also have to transfer cost basis information — the purchase price of the security plus any fees and commissions — when a client moves his or her account to a new brokerage firm, according to a report from TowerGroup. Experts say this will initiate a major upheaval in the way brokers report to clients.

Likewise, Chris Kentouris outlines the new policies in the December 2009 Securities Industry News article “IRS Issues New Guidelines for Cost-Basis Reporting” and stresses how quickly these changes will become reality for U.S. financial firms:

The new policies will be effective as of January 1, 2011 for equity shares purchased after that date. By January 1, 2012 financial intermediaries and asset managers will have to do so for mutual funds and dividend reinvestment plans. By January 1, 2013 other financial instruments, such as debt issues, options and private placements must comply.

Clearly, these are not simple issues, and compliance will affect customer service, technology, training, communications and ultimately – costs. To help you figure out the best plan of attack, consider these questions:

  • Are you prepared to track the cost basis of future purchases?
  • Does your strategy include both implementing cost basis reporting software and integrating it with your existing back-office and tax reporting information applications?
  • Have you begun preparing your staff and senior management for the changes?
  • Are you willing to provide your clients with this information only on the lots for which you have a statutory requirement?

These questions are critical, and all point to the need for adequate and effective planning and preparation.  We at SunGard are ready and equipped to help nowAre your plans in place?

Do you have questions to add to the list above?  When it comes to cost basis reporting, what is your most significant concern?  Have you begun preparing for these changes?

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