Cost Basis Challenges Find Firms Tackling Reporting Earlier

Cost basis reporting (CBR), introduced in the post-crisis Emergency Economic Stabilization Act in 2008, requires firms to measure the taxable value of an investment, currently stocks and mutual funds, adjust for dividends, splits, and return of capital.

Using input from nearly 50 interviews with industry participants, the CBR Landscape 2012 report by Celent's Isabella Fonseca and Alexander Camargo, prepared for financial services provider Scivantage, notes that a variety of implementations for the new regulation still require manual adjustments, and face integration problems as well as legal issues surrounding the definition of a wash sale.

Among those mentioned is the DTCC's Cost Basis Reporting Service (CBRS), which was designed to automatically transfer reportable data between clients.

As a result firms filing the relevant form, 1099-B, are frequently forced to correct information. Looking forward, those errors only stand to worsen, the authors predict, as fixed income instruments are brought into the fold and complications like the Original Issue Discount, or OID, that should attach to a given investment become relevant. Those instruments' inclusion has been delayed a year, from the beginning of next year to January 2014.

The study reflects positively, though, on the progress being made by third-party providers for cost basis, and the greater priority firms are placing on starting their annual reporting earlier.

For example, those interviewed for the study reported being more satisfied with bought─rather than built─implementations; however different market participants have divergent priorities. Brokers, on one hand, remain concerned with proper 1099-B reporting. On the other hand, custodians, transfer agents, and custodians are most troubled by inefficient processing.