In this article, Ignites journalist Jackie Noblett reviews the major challenges associated with new cost basis reporting rules that the brokerage industry has implemented this tax season. The 2011 tax year is the first year these rules came into effect and they have added focus on firms’ systems and operations. The same challenges are awaiting fund firms next year when phase two, affecting mutual funds, takes effect. Cameron Routh, Senior VP and Managing Director of Strategic Products at Scivantage, together with other industry experts, highlights takeaways and lessons learned to make next year’s tax season smooth when mutual fund cost basis tax reporting requirements begin. To read the full article click here.
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With all the new regulation impacting this year’s tax reporting season, we recently partnered with SunGard Wall Street Concepts for a Webinar to look at the future of fixed income and options reporting requirements. Artie Wolk, Senior Vice President, Product Strategy at SunGard Wall Street Concepts, and Cameron Routh, Senior Vice President, Managing Director Strategic Products at Scivantage, discussed lessons learned from the 2011 tax reporting season and how to tackle the next critical phase as it gets increasingly complicated with financial instruments such as Original Issue Discount (OID) securities. Based on the questions and feedback from the audience, it was evident that the first phase of cost basis generated issues and challenges related to data management.
Firms will need to make sure they can rely on their current technology systems to ensure compliance with the new rules. As we have already seen this year, it is imperative to prepare as early as possible in order to mitigate errors and service clients best.
As noted in our most recent announcement, 100% of Scivantage Maxit clients using our custom tax extract module were able to mail their 1099s by the IRS deadline of February 15, 2012. This was a result of proper preparation and looking at these new rules as a long-term project. In order to duplicate these results for the fixed income and options reporting requirements, it is imperative for brokerages to start preparing early to avoid any confusion and errors in the future.
Listen to a recording of the Cost Basis Reporting: Looking Ahead. A Critical Look at the Proposed Fixed Income & Options Reporting Requirements Webinar and let us know what you think!
In case you missed it, in a recent FTF News article, reporter Eugene Grygo examines the impact of new cost basis reporting rules on trading firms and their operations. Grygo spoke to Cameron Routh, SVP, Managing Director of Strategic Products at Scivantage and Martin Bentsen, Director of the Cost Basis practice at Jordan & Jordan, to discuss the challenges back offices of larger trading firms are facing this tax season. Read the full article on the impact of cost basis reporting.
Although few tend to look forward to tax season, this year’s cost basis reporting (CBR) rules definitely won’t make this time of year any more appealing. Cameron Routh, Senior Vice President, Managing Director of Strategic Products at Scivantage, talks about what brokerages should expect, how they can deal with the influx of investor requests and how the Cost Basis Reporting Assessment (CBRA) Program can help alleviate many of the concerns.
Q: Now that we’re in the middle of tax season, what should brokerages be focusing on?
A: In terms of cost basis, there is so much going on that is difficult to suggest focusing on one thing. Firms are still cleaning up CBR Phase 1 (equities), mutual funds just went into effect, we’re right in the middle of the first tax reporting season of the CBR era, and planning has started for fixed income and options (Phase 3). While brokerages need to work on all of those projects simultaneously, one area that shouldn’t be over-looked is the internal communications about 1099 corrections. For the remaining few months of this tax season and for the next several years, in fact, there will be a significant volume of 1099 corrections compared to what we’ve seen in the past. January trading activity that triggers wash sales in the previous tax year is one reason. Income reallocation is another. In fact, any change that impacts the cost basis being reported on 1099s will result in corrections. Cost basis reporting regulations require that firms do corrections for three years. So if a client transfers a security from another firm and the security was purchased after Jan. 1, 2011, the other firm is responsible for providing cost basis to our client. A few years from now, that other firm may realize it made an error and issue a correction to the client.
Q: 1099s are in the process of being sent out at this very moment. Is it too late to do anything else to ease this tax season?
A: Between the end of January and April, firms really need to focus on education and proper management of expectations, both internally and externally. This includes educating investors so they know why they’re getting the 1099, what is cost basis, why the IRS is receiving this information, what went into the calculations, what is a wash sale, what are the rules around transfers, what happens in a correction. Don’t wait until a client comes across a correction; managing expectations and educating the client, will reduce confusion and angst for those investors who do receive corrections. And there will be a lot of corrections this year. However, it’s important not to overwhelm the investors. Tell them enough to let them know what to potentially expect, including the negative aspects, which is important. But stop short of using overly technical explanations.
Q: What behavior should firms expect from investors?
A: This year is the first year that investors will receive cost basis in their 1099, which will immediately trigger red flags and a lot of calls to the help desk asking questions like “why is my information being provided to the IRS?”. Investors tend to be very protective about trading information and so even when the data is correct, firms are going to have to field calls from agitated investors. This is one of the reasons we encourage firms to get ahead of the game in terms of education – not just simple FAQ about cost basis, but really getting through the details of why and how it works.
Q: What other issues are you anticipating firms will face?
A: There will be a lot of corrections to the 1099s this year. For starters, this is the first year of the cost basis reporting regime. Change always leads to errors initially. Also, a lot of data was not available when firms generated their initial 1099 extract. For instance, wash sale calculations require 30 days past the disposal of the security. For example, if I sell something for a loss on Dec. 27th and I buy it back on Jan. 25th, that’s after firms have sent their data to the 1099 print shop. My brokerage will have to issue a correction to state the cost basis correctly on my 1099. Similar problems result for income reallocation, which generally also occurs after the initial tax extract.
Q: What can firms do to lower the number of corrections or the cost of the help center? What are you advising your clients to do now?
A: There are several things they can do. As a cost basis vendor, we help clean up the data, we help identify position breaks, corporate actions that weren’t processed correctly or the data was wrong or missing or incomplete. This reconciliation process occurs year-round. But during tax season we apply additional scrutiny on activity which has an impact on the current tax season. We can help clean up that data and reprocess it. Any number of transfers will impact cost basis, so we can help with all those things, too.
But it’s still the client’s data, so they’re going to have to do a lot of work on their side. They’re going to have to look at their books and records, and not just look at the data. They also have to look at back office processes. Back office systems were not designed with cost basis in mind. And the policies and procedures used to support those systems were also developed independently of current cost basis reporting rules. Reviewing these procedures and making cost basis “friendly” changes will go a long way to ensuring that data which is passed to the cost basis system is as clean as possible. One last recommendation is to manage internal expectations. Until this year, corrections were only necessary when information on the securities sold changed. This year, and going forward, corrections will be required not just for changes to closing transactions, but also opening activity for covered securities, income reallocation, wash sales, incorrect lot selection, or virtually anything else related to cost basis.
Q: Does the Cost Basis Reporting Assessment (CBRA) program, in partnership with Jordan & Jordan, offer a template for brokerages looking to educate their investors?
A: The CBRA program provides a few tools in this area. It does include some facts and some basic concepts that we feel are important for investors and brokerage employees to understand. In addition to the basic concepts, the CBRA process itself will stimulate self-evaluation that will generate additional ideas for education. CBRA also provides a number of check points that instill confidence that everything is included, which is important because there’s a fear of the unknown here.
Q: What can be done about employee concerns?
A: When we talk about the need for education we’re principally thinking of investors. But it’s also critical to manage expectations internally. Brokerage professionals who have been doing 1099s for years may think they know 1099s, but this is a whole new ball game this year with the addition of cost basis data on tax documents. Any metrics that were used to gauge tax reporting in the past go out the window here because everything changes. There shouldn’t be expectations that this tax season is going to be flawless. However, once the executives understand that, they’re half way to keeping things calm through April.
Q: What do brokerages need to look out for when reviewing the CBR processes?
A: In addition to the education, the key element here is that the focus for most firms has likely been primarily on technology. But firms haven’t looked as closely at operations processes, which can lead to bad cost basis calculations. They have vetted the technology, but they haven’t vetted the entire process, including how the data integrates with other systems, and that’s where the CBR assessment really comes in handy, it looks at the process end-to-end and identifies opportunities for improvement.
There is a technology component to the assessment, of course. But the CBRA program we have developed in partnership with Jordan & Jordan is more focused on operations issues and data questions. It’s about evaluating the processes, front-to-back, in a holistic way. Firms have the ability to improve their processes, which will help reduce cost, eliminate redundant activities and improve efficiency not just in the CBR procedure, but companywide, as well.
It’s not always black or white; sometimes there are different grades of response that CBRA provides to help firms identify what areas they can improve. It’s not that they’re failing; there are just some areas where they can do better. The CBRA can also help justify additional resources internally. If it’s clear that additional work has to be done, it helps the manager justify the request for more people or technology.
Q: What is the benefit of outsourcing your CBR processes assessment versus doing it in-house?
A: Everybody is resource constrained and I don’t know a firm yet that doesn’t look at cost basis reporting as anything but a cost center issue. Firms don’t have a lot of extra staff that they can assign to assess the cost basis reporting processes, especially when everyone is busy during tax season. Most firms are woefully low on staff as it is. Also, it’s helpful to have people come with a broader perspective on cost basis, as well as bringing experience with the assessment itself. This results in a clear understanding of the questions and what types of responses the assessment is looking for.
In case you missed it, Cameron Routh, our Senior Vice President and Managing Director of Strategic Products, spoke to Matt Krantz of USA Today for an article on the tax implications of recent cost basis reporting regulations that investors are facing this year. Following the passage of the Emergency Economic Stabilization Act of 2008, 1099-B forms that investors receive from their brokers will be different from what they used to be. Cost basis rules will apply to the way gains and losses on investments are reported to the IRS. Read the full article on the impact of cost basis reporting.
Awards Season Heats Up: Scivantage Nominated in Two Categories for FTF News Technology Innovation AwardsWednesday, February 15th, 2012
Being recognized for our work on cost basis reporting in the Most Notable Regulation & Compliance Initiative category is a testament to the development of Maxit through collaboration with clients and partners leading up to the IRS rule implementation, and ongoing phased rollout over the last several years.
We are also proud to announce that our Senior Vice President, Managing Director of Strategic Products,
Voting for the FTF News Technology Innovation Awards will take place online from February 8 to February 29, 2012, end of business day EST. Voting is open to all qualified registered subscribers to FTF News (subscription is free). Results will be announced by FTF News on Friday, March 16th.
The winners are ultimately up to you, so please be sure to vote today!
Upcoming Webinar: Scivantage and SunGard Wall Street Concepts to Host a Webinar on the Proposed Fixed Income & Options Reporting RequirementsTuesday, February 7th, 2012
As the industry moves through this 1099 tax reporting season, it is essential that we look ahead at the Fixed Income and Options reporting requirements on the horizon. These complex security types will undoubtedly create additional compliance challenges and require substantial technology modifications to existing systems.
Join us for a live Webinar, titled: “Cost Basis Reporting: Looking Ahead. A Critical Look at the Proposed Fixed Income & Options Reporting Requirements”, to hear Artie Wolk, Senior Vice President, Product Strategy at SunGard Wall Street Concepts and Cameron Routh, Senior Vice President, Strategic Products at Scivantage share their thoughts on this tax reporting season and offer critical insight into the proposed regulations for Fixed Income & Options.
This interactive, one-hour webinar will take you through the major provisions of the proposed requirements and offer observations on key areas that will have an immediate impact on your customers, and your business. Key topics covered during this webinar will include:
- Lesson learned from this tax reporting season―from resource readiness and technology integration to data processing and the impact on client service
- Critical insight into the proposed regulations for Fixed Income and Options
- Deep dive from industry leader Wall Street Concepts on Original Issue Discount (OID) securities and their complex calculations
- Question & Answer session where we encourage your participation and questions!
You can register here for full access to listen on Thursday, February 23, at 4:00 PM EST.
Self-assessment. It’s one of the most difficult tasks operation and IT executives have to make when preparing for regulatory change. Or for figuring out anything that has gone wrong in processing or pricing a securities transaction.
Scivantage’s Cameron Routh talks with Securities Technology Monitor about the new Cost Basis Reporting Assessment Program, a comprehensive, on-site review of a financial institution’s cost basis ecosystem addresses the complex challenges of accurate cost basis reporting (CBR) to ensure preparedness for regulatory requirements, developed in partnership with Jordan & Jordan.
Read the full article on the Cost Basis Reporting Assessment Program.
As the industry continues to tie up the loose ends of Phase I of the IRS Cost Basis Reporting (CBR) rule changes and gets closer to the implementation of Phase II, we have heard a lot of concerns from our clients, and the marketplace as a whole, about the need to uncover any gaps in current practices and reporting.
In an effort to help with these mounting issues, we have partnered with Jordan & Jordan to develop the Cost Basis Reporting Assessment Program, designed to provide practical recommendations for corrective actions and proceeding forward with the ongoing implementation.
There are seven assessment areas that we identify in the program:
1. Cost basis engine and systems integration
2. Policies and procedures
3. Workflows and other processes
5. Website and other communication mediums
6. Understanding activity metrics
7. State of readiness for the continued implementations of Phases II and III
Although having the right tools and technology is a critical competent for cost basis reporting preparedness, client education is a key element that should be taken just as seriously. Brokers need to dissipate any confusion investors might have due to the multitude of new requirements and forms in advance.
An experienced team of analysts from Scivantage and Jordan & Jordan uses a customized approach through the Cost Basis Reporting Assessment Program to help brokers define the objectives they want to reach and determine which approach is the right one for each individual firm.
To learn more about the program, listen to a recording of a Webinar we’ve recently conducted, where our own Cameron Routh and Jordan & Jordan’s Martin Bentsen, Senior Advisor of the Cost Basis Practice, delved into the latest regulatory CBR updates and reviewed the benefits of the Cost Basis Reporting Assessment Program.
One Year Down, Two to Go! Celent Joins Scivantage for Industry Webinar to Explore Ongoing Analysis of Cost Basis Reporting RegulationFriday, August 26th, 2011
In response to our June “Cost Basis Reporting: Where Are We Now?” roundtable event in
I was joined by Alex Camargo, Analyst, Securities & Investment at Celent, during this pivotal point in the three year regulatory rollout, to further explore how the industry is planning to move forward with the phase 2 of the implementation of the cost basis reporting requirements.
Similar to our recent roundtable, we opened up a dialogue with key industry participants from leading broker-dealers, mutual funds, transfer agents, custodians and prime brokers to highlight the findings of the recent Celent research report, focused on understanding the current readiness of the industry, the remaining challenges, industry-wide best practices and lessons learned.
Basic observations that were discussed include highlighting some of the unanswered regulatory questions, in particular, around year three (2013) requirements, gaps in options and fixed income, as well as grey areas remaining for mutual funds and drips.
During the Webinar, Alex delved into the research findings divided by market segment and size, touching on some key trends and developments, including:
· Tracking and reporting wash sales and corporate actions
· Tax lot and sub lot identification and reconciliation
· Changes in lot selection
· Transfer reporting of cost basis when a client switches brokerages
A key part of this discussion was the post-2010 lessons learned, including:
· Firms shouldn’t anticipate the IRS pushing back the effective date with regard to mutual funds or bonds, so be ready.
· Communication is key and education or training of staff will be vital to ensuring clients stay well informed.
No doubt, there are still many unanswered questions and Scivantage and Celent continue to work diligently on behalf of the industry to bring to light additional pain points and opportunities that arise throughout this process. In fact, Scivantage hosts monthly cost basis working group discussions to hear Maxit clients’ concerns and address their needs.