Mandatory cost-basis reporting for mutual funds and dividend reinvestment plans "really touches everything in the organization, according to Ellen Bocina, vice president of product development at Fidelity Investments.

Ellen Bocina, Vice President, Product DevelopmentFidelity Investments The new rules, which take effect on January 1, impact "virtually every system" in a mutual fund or other securities firm, Bocina said at a cost-basis reporting session at the National Investment Company Service Association's 29th Annual Conference & Expo.

Getting the original cost basis of every 100-share lot of a holding that eventually gets taxed will affect at least these systems, she said:

  • Tax lot accounting
  • Tax
  • Trading systems
  • Trade files
  • Monthly statements
  • Confirmation
  • New account forms
  • Inheritors services
  • Prime services
  • Security master records
  • Corporate actions
  • Settlement
  • Securities processing
  • Restricted stock
  • Client applications

The new reporting rules, in the works since 2005, have begun rolling into effect.

Starting January 1, 2011, brokers must report information on any common or preferred stock, exchange-traded funds (ETFs), American Depositary Receipts (ADRs) and Real Estate Investment Trusts (REITs).  

On January 1, 2012, information about mutual funds and dividend reinvestment plans will also be recorded and reported.  

On January 1, 2013, options, fixed income, and any other security otherwise not included in the previous tax years must be recorded by the brokerage and reported to the IRS.

The Depository Trust & Clearing Corporation is operating a Cost-Basis Reporting Service that is intended to automate and simplify the process of exchanging cost-basis information. The automated system gives financial firms the ability to transfer customer cost basis information, in electronic form, without chasing documentation down, manually.

But mergers and other changes in conditions still force such tracking. A defunct firm's records might be in city, but its imaging service in another and each instance has to be chased down, Bocina said. And there are other complications, such as figuring out what share belong to what party in an omnibus account.

All of which means fund firms still have a long way to go in making sure their systems are ready for the January 1 switchover.

That's because it's easy to underestimate the detail required, in getting all systems in place and operating reliably. "When you complete 90% of your journey, you are only halfway there,'' said Deanna J. Flores, principal in the National Tax Office of accounting firm KPMG.

The new rules pose three key challenges for mutual funds, according to Joan Dowd, chief compliance officer at Boston Financial.

These include:

* Using the right accounting method if a shareowner does not make a choice of accounting method, before shares are redeemed. 

* If shareowner wants to make a "single account election" -- and use average cost accounting -- the account must have accurate cost-basis in it to begin with.

* How to handle gifted or inherited shares.

 

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