The Urgency and High Price of New Cost Basis Reporting Law
For the first time, broker-dealers will soon be legally required to track and report cost basis. The change will transform what had previously been perceived as a value-added service occasionally offered by only a few firms to premium clients into a hugely costly regulatory burden that will affect the entire industry.
Few financial firms -- and only a handful of consulting firms -- are even aware of the changes that were signed into law by President Bush in October 2008 as part of the Economic Stabilization Act that was pushed through in response to the financial crisis. Yet the impact of the new cost basis reporting law will be far-reaching both for investors, who are increasingly demanding transparency, and for the firms that will be required to implement costly technology to address operational requirements and comply with the regulations.
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.
"Historically firms steered clear of giving anything that could be construed as tax advice," Sean Cunniff, TowerGroup research director, brokerage and wealth management, wrote in the report. "They viewed their role as providing clients investment services and advice associated with getting the best returns, with little consideration of tax implications. Firms made sure not to cross the line to making tax recommendations. If offered, cost basis generally was added as a client service intended to help clients prepare their tax returns, and in many firms it was provided only to clients with assets above a certain level."
Adam Schneider, principal, Deloitte, notes that while proposals to expand cost basis reporting on brokerage tax statements have circulated for years, until last year they had come to no avail. "If I have an account at Merrill, the brokers [currently] issue an end-of-year statement that typically has gross proceeds -- what I sold -- but little in terms of cost information," he says. "Some brokers have expanded this information, but until now it has not been required. ... [Brokers'] systems didn't capture cost."
What's the Rush?
At first glance, complying with the new law and calculating the cost basis of a security might seem relatively straightforward, which could explain firms' apparent lack of urgency around the matter. "The cost basis reporting legislation is important and, I fear, not being the priority it needs to be at many firms," says Robert Ellis, senior vice president, wealth management, in Celent's securities and investments group. "Firms seem to be expecting either their custodian or clearing firm to handle the nuts and bolts, their reporting software to automatically adapt, or their in-house IT to wave a magic wand and make it happen."
On closer examination, however, the complexities of calculating adjusted cost basis information are apparent. The new legislation affects all stock purchased beginning Jan. 1, 2011; all mutual fund shares acquired starting Jan. 1, 2012; and options and debt instruments acquired on or after Jan. 1, 2013. Hence one of the first challenges firms will face is segregating their data and different types of securities.
Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio
Tweet This