New Cost Basis Reporting – Coming to a Transfer Agent near You?

Issuers should take note of a congressional move in the offing that would require stock transfer agents to capture and report substantially more cost basis information for registered shareholder positions and transactions.  And a by-product could be a system “re-tooling” charge passed by transfer agents back to issuers, of a possibly significant amount.

In 2005, the Internal Revenue Service produced a “Tax Gap Report” that allegedly discovered $11 billion in under-reported capital gains taxes for the U.S. Treasury linked to transfer agent, broker and mutual fund record keeping on equity securities.  In 2007, Charles Rangel, head of the House Ways and Means Committee, became the leading political proponent of measures to plug this perceived “leak.”

With respect to stock transfer, how soon could mandated changes to record keeping processes occur?  January 1, 2011 is being discussed.  That is less then 24 months away!

The way operational and systems experts in the stock transfer business see changes manifesting themselves include the following…

  • Additional record keeping “fields” will be required, to now reflect original acquisition date, the date subsequent shares purchased were “transferred-in,” the date there was any adjustment in “basis” of positions such as a stock split, and share sale date.
  • More “lot” accounting will be required, in increasing cases of Direct Registration System holdings via book-entry, and shares held in dividend reinvestment and direct stock purchase plans.
  • Protocols on “lot” treatment need to be established, and properly accounted for cost-basis-wise, where the shareholder does not specify which shares are to be transferred or sold.  (“LIFO?”  “FIFO?”)
  • Corporate action (M&A) accounting will need to be similarly amended and expanded.
  • Year-end tax forms issued by transfer agents will have to reflect the new accounting methodology, including both short- and long-term gain information.
  • Not only will transfer agents’ record keeping software need to be updated, but also components of their Interactive Voice Response systems and web sites offering on-line transactional access to shareholders.

This is a development issuers need to be following more closely!

And companies should be aware that one complementary step has already been taken by the Depository Trust & Clearing Corporation (DTCC) and NetWorth Services, Inc. These organizations have formed a strategic alliance called DTCC Solutions LLC, officially a subsidiary of DTCC, set up to provide comprehensive cost-basis information dating back to 1925 via AccuBasisTM – to transfer agents, broker/dealers, mutual funds and issuers themselves.  All splits and other M&A activity affecting cost basis are already reflected in AccuBasisTM.  It is a web-based product, and automatically connects enquiring shareholders to the DTCC/NetWorth website.  Moreover, if desired, it can be designed to look as if it is part of the website of the transfer agent, fund company or issuer.

And as if AccuBasisTM needed another endorsement, it is already the “go-to” database used by the U.S. Internal Revenue Service.

So stay tuned to these changes, here and in other industry press.  We feel good about the “infrastructure players,” like transfer agents, paying close attention already.  But again we would like to see the issuer community a lot more dialed in.  One way companies can do that is to ensure their transfer agent is told to keep them apprised of any new developments.  For our part, as producers of what we call a Shareholder Services Check-Up® for our clients, we will be keeping a close eye on what issuers are being asked by their transfer agent to pay for system re-tooling relating to modified cost-basis record keeping.  If the assessments are very large, they will need to be well-documented and defended by agents; because, there has to be a balance between what the transfer agent claims is an unfair financial burden to bear by itself, and what cost it must accept and absorb as a leading, ongoing provider of service in this industry.