The NASPP Blog

The Case of the Missing Cost Basis

Legislation included in the Economic Stabilization Act of 2008 requires brokers, banks, and other financial services firms to report cost-basis information for different types of securities to shareholders and to the IRS. As a result, these firms will soon need to provide cost-basis data to their clients.

This is going to involve the implementation of various new interfaces and tracking systems, and the review and clean-up of massive amounts of historical information, all of which could involve quite a lot of investigative work for anyone involved in the project, particularly around the task of locating missing cost-basis information for historical transactions. Imagine having to locate accurate cost-basis information for a countless number of corporate events that have occurred (and this assumes all prior corporate events have occurred with the same firm)…let the detective work begin!

The facts, please!

Now that I’ve got your attention, the historical clean-up I mention above might not impact every firm and may not be quite as dire as I describe. The legislation only requires cost-basis reporting for securities acquired after a certain date. The requirement is phased in over three years, with different effective dates for different types of securities. Equity stock (such as common or preferred stock purchased on the open market or acquired through an employee stock plan) is up first, in 2011.

Each financial services firm will need to decide how they are going to approach the reporting–it boils down to what level of service a firm wants to provide to its clients (which include participants in employee stock plans)–report cost-basis data only for sales on a go-forward basis or, now that Form 1099-B (a draft of the new form is located here) can include this data, make tax reporting easier for clients by reporting it for all sales, even securities acquired before the effective dates.

Making the decision not to track cost-basis information for securities acquired before the effective dates could result in an equal amount of work, however. A firm’s records will still have to reflect whether securities are eligible for cost-basis reporting and identify the different securities that fall under the legislation on the various effective dates.

Observations

Cost-basis reporting will undoubtedly improve the overall customer service experience for many shareholders, but not without a significant price tag to financial services firms beyond the costs involved in implementing new systems to support the regulations. The additional resources/staff to support the increased volume of questions from clients once the regulations become effective is going to result in quite a bit of extra money spent in training and education to both staff and clients.

Beyond financial services firms, there may be costs to companies that offer stock compensation, since they will likely have to provide cost-basis data for stock plan transactions to the brokers that service their plans.

Firms have very little time to prepare for these new regulations–just 12 months! Now is the time to make this a priority. Read our recently issued practice alert for additional key information about these proposed regulations and don’t miss our upcoming webcast, “Current Developments Impacting Brokers & Transfer Agents (And What They Mean to You).” Be sure to renew your membership now so you don’t miss this important webcast! If you’re not already an NASPP member, join today.

-Robyn