The Depository Trust & Clearing Corporation says it has enhanced its cost basis reporting service to help mutual fund managers and other financial intermediaries transfer cost basis information on investors’ accounts from one firm to another.

DTCC describes the Cost Basis Reporting Service as a secure, automated and centralized communications hub for passing cost basis information from one participant to another on all asset transfers among broker/dealers, transfer agents, issuers, mutual funds and custodian banks.

Among the key changes DTCC has made to CBRS are new rules for mutual fund assets, such as requiring the current cost of the tax lot. DTCC made extensive changes to the system in 2010, so minimal modifications were necessary to enhance the data quality for mutual fund assets.

Beginning January 1, 2012 mutual fund companies for the first time will be required to track and report the cost of a mutual fund transaction to both the Internal Revenue Service and investors. The rule became effective for regular stock acquired on or after January 1, 2011. Investors in both mutual funds and equity accounts can select the method of cost basis reporting they want – first in-first out accounting or specific identification approach which allows them to first sell the lots of securities that means paying the least amount of taxes. Only investors in mutual funds and dividend reinvestment plans are allowed to use the average cost methodology.

The IRS also wants financial firms to transfer cost-basis information to each other when customers transfer their assets. While that doesn’t have to be in electronic form, DTCC’s CBRS will mitigate the potential risk involved with either sending the wrong information.

DTCC officials say that about four hundred mutual fund families have signed up to use the new CBRS service. Of those 40 are in test mode.

“We anticipate a smooth transition next year in meeting our obligations for reporting cost basis data on mutual fund assets,” says Ellen Bocina, vice president of product development for Fidelity Investments in a statement issued by DTCC on Tuesday morning.

In the same statement, SunGard was cited as saying that users of its Asset Arena transfer agency platform can link to CBRS using that system.

Chris Kentouris writes for Securities Technology Monitor.