The Basis for “Cost Basis” Assessments

Our early warning  that 2008 TARP legislation would cause major stock transfer systems re-tooling  in the U.S., to capture additional stock valuation data (generally known as  “cost basis”), has proven true.   And, as  also projected, a number of U.S. transfer agents are assessing clients one-time  fees to cover the related software development.   It is an interesting situation, which bears  watching. 

Unexpectedly, most transfer agents have not assessed their clients…yet anyway.   One of the “Big Four” agents just announced  publicly that it will not charge its clients anything for cost basis.   It apparently considers this, and similar  regulatory change-driven adjustments to its record keeping system, a “cost of  doing business” which should not be passed on to clients.   We consider this laudable, but have also  heard, from multiple sources, that throughout 2010 this same agent increased  its stock transfer fees to many (most?) of its clients by 5%.   Was it coincidentally just time for them to  raise fees?   Or, did the likely several  million dollars from such fee increases just happen to cover its cost basis expense?   We do not know.   However, if this is the way the agent took  care of its cost basis funding challenge, we have to admire the soft and  “digestible” approach it took.

Another  of the “Big Four” uses a third-party’s record keeping software.   We understand the software provider and the  agent are absorbing most of the cost basis expense themselves; so, the agent is  passing only a “small portion” as a flat fee onto its clients.   We will monitor how small this “small portion”  is, over time.

Another  of the four largest agents, with a pronounced international footprint, seems to  be assessing flat dollar amounts as well…the first invoices to arrive in  January 2011.   The charges coming to  light are sizable – higher than those of the previously cited agent – but are not  staggering.   The vast majority seems to  be in the low five figures; and, there is an apparent willingness on the part  of the agent to spread the charges over a year (at least) in many cases.

The  last of the “Big Four” is assessing two and more times what the prior agent  is.   We have heard of many mid-five  figure amounts, including for large but not huge clients that do not have a  DRIP (or DSPP) or even pay a dividend.   Indeed, it appears the assessments are linked  solely to registered shareholder population, and not the complexity of the  account.   Fortunately, we have also heard  this agent is willing to negotiate the time over which the assessment can be  made, and (rarely, but sometimes) even the total amount of the assessment.

Smaller  transfer agents are apparently charging clients nothing for cost basis, or quite  small amounts, for what we think are these reasons:   1) their total shareholder bases are not  large enough to make the total cost basis “fix” that expensive, 2) they  consider cost basis a cost of their doing business, 3) they embrace a client service culture that avoids “bad news”  to clients at almost any cost, and 4) they figure (correctly and astutely?)  that by not charging for cost basis they will pick up accounts from “the big  guys” which are, in fact, charging.    Again, we will keep an eye on “who is charging what” over the next  several quarters.

So,  what are our closing thoughts on cost basis assessments?

Unlike  the Direct Registration System/Profile, or Notice & Access, cost basis is a  truly sudden and unexpected challenge  thrown at transfer agents that could almost be classified as “once-in-a-generation.”   Therefore, transfer agent assessments should  be looked at objectively, and not just skeptically.   At the same time, these questions should be  asked of an assessing agent…

  • What are you projecting as the total cost (rounded to the nearest million dollars) for your system retooling?
  • On what are you basing per-client assessments?
  • Are you taking into consideration client complexity, such as whether it pays a dividend?
  • Do you need to enlist outside resources to accomplish the retooling?   And/or, pay your existing employees overtime?   (If not, where is your true cost coming       from?)
  • Why assess in 1Q11, when much of the extra effort will not manifest itself until tax reporting in 2012?
  • Will you be assessing again in 2012, and beyond?
  • Can we pay the assessment over time?

One  problem for agents charging a lot for cost basis is they might be forcing clients to send a Request for  Proposal (RFP) to all competing transfer agents – i.e., make the decision to do  an RFP a “no brainer” – on the assumption (accurate, we feel) that some other  good agent will take on the account for no more than the company is currently  paying for stock transfer and not  charge anything (or much) for cost basis!    So, transfer agents are walking a fine and difficult line right  now.   They have a legitimate reason to  have clients pay something to defray  their cost basis expense (after all, if it were not for commercial transfer agents,  companies would have to deal with cost basis themselves); yet, if they charge too much – dare we say, make a “revenue  opportunity” out of the situation? – they will drive clients to other, less-expensive  competitors and reduce the very  population from which they need to source their cost basis funding!

It is an interesting predicament in which many  industry participants find themselves today; and, of course, we stand ready to  offer our opinion or assistance in the matter, wherever and whenever needed.