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FIF Cost Basis Working GroupCost Basis Survey IIIFinal ReportFor questions regarding this document or to join the FIF Cost Basis Working Group, please contact the FIF ProgramOffice at [email protected]: May 25, 2011

Table of Contents1Introduction . 32Methodology and Participation . 33Identifying Existing Cost Basis Support . 545673.1Security Types . 53.2Methodologies . 63.3Default to Average Cost Method . 73.4Standing Instructions . 83.5DRP Functionality . 93.6Single Account Election . 103.7Differentiating ETFs from RICs . 11Cost Basis Reporting Functionality and Education. 124.1Cost Basis Modifications and Ability to Export Data . 134.2Basis Reporting for Non-Reportable Accounts . 144.3Reporting Changes – Online and Statements . 154.4Client and Internal Cost Basis Education – Communication Media and Training Topics . 16CBRS/Non- ACATS Participation . 185.1CBRS Adoption and Timelines . 185.2Firm Transition during CBRS Release . 185.3Transfer Statement Transmittal and Follow-Ups . 19Implementing Cost Basis Changes – Resource Cost . 206.12011 Preparation Costs . 206.22012 and 2013 Preparation Costs . 216.3Staffing Needs . 226.4Estimated Industry Costs – 2011-2013 . 22Getting Ready for 2012 and 2013 . 247.1Anticipated Changes for Mutual Funds & DRPs. 247.2IRS Guidance for 2013 Preparation. 257.3Additional Implementation Thoughts . 258Conclusion . 269Appendix 1: FIF Cost Basis Survey . 28FIF Cost Basis Working Group Member Material; Not for Redistribution2

1 IntroductionThe Financial Information Forum (FIF) addresses the issues that impact the financial services industry,from real-time decision support through securities processing. FIF provides a collaborative environmentfor subscribers to benefit from technology, regulatory, and market innovations. Through its Cost BasisWorking Group, FIF has assisted its members in addressing implementation issues associated with thenew cost basis requirements, as laid out in the Emergency Economic Stabilization Act passed in October2008, through surveys and meetings aimed at information sharing and issue resolution. The newrequirements put reporting obligations on financial institutions to report adjusted cost basis of coveredsecurities bought on or after January 1, 2011 to the IRS on form 1099-B: For 2011, covered securities include stocks, many ETFs, ADRs and REITs Mutual Funds and Dividend Reinvestment plans will be covered in 2012 Additional securities for 2013 include Options, Fixed Income and Other Securities.As part of its implementation tracking efforts, FIF conducted its third cost basis survey in January 2011.This survey focused on progress to date with cost basis requirements as we look to 2011 developmentand testing efforts and estimated the total industry project cost (2011-2013). The survey report coversthe following: Identifying existing Cost Basis Support and Reporting Functionality CBRS/Non-ACATS Participation ETFs and RICs Implementing Cost Basis Changes and Education Challenges Getting Ready for 2012 and 20132 Methodology and ParticipationSurvey respondents included both FIF and Non-FIF members. The analysis divides the questions underdifferent topics with the question number included in parentheses for ease of identification. The topicsare listed below: Identifying Existing Cost Basis Supporto Security Types (Q4)o Methodologies (Q5)FIF Cost Basis Working Group Member Material; Not for Redistribution3

o Default to Average Cost Method (Q7, Q8)o Standing Instructions (Q6)o DRP Functionality (Q9)o Single Account Election (Q10, Q11)o Differentiating ETFs from RICs (Q29, Q30)Cost Basis Reporting Functionality and Educationo Cost Basis Modifications and Ability to Export Data (Q13, Q14)o Basis Reporting for Non-Reportable Accounts (Q31, Q32)o Reporting Changes on Statements and Online (Q12)o Client and Internal Cost Basis Education – Communication Media and TrainingTopics (Q15, Q16)CBRS/Non- ACATS Participationo CBRS Adoption and Timelines (Q22, Q23)o Firm Transition During CBRS Release (Q24, Q25, Q26)o Transfer Statement Transmittal and Follow-Ups (Q27, Q28)Implementing Cost Basis Changes – Resource Costo 2011 Preparation Costs (Q19)o 2012 and 2013 Preparation Costs (Q20)o Staffing Needs (Q21)Getting Ready for 2012 and 2013o Anticipated Changes for Mutual Funds & DRPs (Q17)o IRS Guidance for 2013 Preparation (Q18)o Additional Implementation Thoughts (Q33)Of the 32 firms that responded to the survey, 28 agreed to have their name listed: Banking Institution/Custodian Transfer Agento Bank of Americao BNY Mellono Brown Brothers Harrimano Invesco Investment Serviceso Deutsche Banko Prudential Investmentso Wells Fargo Broker Dealer Service Bureauso Ameriprise Enterprise Investment Serviceso Broadridgeo Charles Schwabo Comprehensive Software Solutionso Credit Suisseo Shadow Financialo Davenport & Companyo SunGard Brokerage & Clearanceo Edward Joneso Thomson Reuters BETA Systemso E*Trade Financial Cost Basis Solution Providero Fidelity Investmentso Scivantageo JP Morgano Wolters Kluwero Pershing Cost Basis Supporto Raymond Jameso Cokalao Scottradeo Interactive Datao TD AmeritradeFIF Cost Basis Working Group Member Material; Not for Redistribution4

The chart below depicts survey respondents by category:Figure 1: Survey Participation - Firm CategoriesCost Basis Support, 2Transfer Agent, 3BankingInstitution/Custodian,5Service Bureau, 6Mutual Fund, 1Broker Dealer, 12Cost Basis SolutionProvider, 33 Identifying Existing Cost Basis SupportParticipants were asked a set of questions regarding support for various security types, methodologiesand standing instructions offered to clients in reporting investment gains and losses.3.1 Security TypesEquities, Options, Fixed Income and Mutual Funds were the four options given to participants todemonstrate cost basis support today.FIF Cost Basis Working Group Member Material; Not for Redistribution5

Figure 2: Cost Basis Systems - Security Types SupportBroker DealerService BureauBanking Institution/CustodianCost Basis Solution ProviderTransfer AgentMutual Fund302520151050EquitiesMutual FundsFixed IncomeOptionsAll Banking Institutions/Custodians, Broker Dealers, Cost Basis Solution Providers and Service Bureausurvey respondents indicated support for Equities (Figure 2). Mutual Funds were the second mostpopular with 83% of respondents providing support. Fixed Income and Options are supported on alimited basis by all Service Bureaus and over 80% of Broker Dealer respondents.3.2 MethodologiesWhen questioned on support for cost basis accounting methodologies, all responding Broker Dealersand Cost Basis Solution Providers indicated support for FIFO and 50% of Broker Dealers and all Cost BasisSolution Providers support Average Cost (Figure 3).From the remaining respondents, 80% of Banking Institution/Custodians provide support for AverageCost and FIFO.All Service Bureaus facilitate FIFO and 83% pointed out support for Average CostFIF Cost Basis Working Group Member Material; Not for Redistribution6

Figure 3: Cost Basis System MethodologiesBanking Institution/CustodianCost Basis Solution ProviderService BureauBroker DealerMutual FundTransfer Agent302520151050FIFOAverage Cost3.3 Default to Average Cost MethodFor average cost eligible securities, participants were asked if they were planning to default to thisdisposal method. 55% of respondents said no, 24% said yes and 16% were undecided (Figure 4).Figure 4: Default Eligible Securities to Average CostBanking Institution/CustodianCost Basis Solution ProviderService BureauBroker DealerMutual FundTransfer Agent181614121086420NoYesFIF Cost Basis Working Group Member Material; Not for RedistributionUndecided7

If firms answered yes, they were additionally asked for which asset types (open end mutual funds,closed end mutual funds, ETFs and DRPs) would average cost be utilized (Figure 5)? All respondentsselected open end mutual funds and less than 50% selected the remaining asset types including DRPs,closed end mutual funds and ETFs.Figure 5: Use of Average Cost for Different Asset TypesBanking Institution/CustodianCost Basis Solution ProviderService BureauBroker DealerMutual FundTransfer Agent876543210Open end mutualfundsDRPsClosed end mutualfundsETFs3.4 Standing InstructionsAlthough there are no requirements in the Cost Basis regulations for brokers to offer standinginstructions for client accounts, it is allowable and more than half of survey respondents support LIFO,Highest Cost and Lowest Cost as alternative cost basis disposal methods for client accounts (Table 1).Max Tax is least supported and Max Gain was an additional standing instruction supported by a BrokerDealer. Another respondent commented on developing new standing instructions based on clientrequests.FIF Cost Basis Working Group Member Material; Not for Redistribution8

Table 1: Cost Basis System - Standing ian331121111BrokerDealer987544432Cost erviceBureau554333332TransferAgent1111-----Grand Total21211713121111108Percent ofTotal66%66%53%41%38%34%34%31%25%3.5 DRP FunctionalityOver 72% of firms offer a DRP today including 67% of Broker Dealers (Figure 6).FIF Cost Basis Working Group Member Material; Not for Redistribution9

Figure 6: DRP FunctionalityBanking Institution/CustodianCost Basis Solution ProviderService BureauBroker DealerMutual FundTransfer Agent2520151050YesNo3.6 Single Account ElectionSubject to customer average price election, the question asked participants if they intended to utilizethe Single Account election for eligible average cost assets. 39% of respondents said yes, 43% said noand 14% chose none eligible (Figure 7).Figure 7: Single Account Average Cost Subject to Customer Authorization and VerificationBanking Institution/CustodianCost Basis Solution ProviderService BureauBroker DealerMutual FundTransfer AgentNone EligibleYesNo0246810FIF Cost Basis Working Group Member Material; Not for Redistribution121410

Those that chose yes support open end mutual funds, 82% support DRPs and less than 63% supportclosed end mutual fund and ETFs (Figure 8).Figure 8: Single Account average cost election for eligible asset typesBanking Institution/CustodianBroker DealerCost Basis Solution ProviderMutual FundService BureauTransfer Agent121086420Open end MutualFundsDRPsClosed end MutualFundsETFs3.7 Differentiating ETFs from RICsSurvey participants were asked if their systems can distinguish ETFs from RICs since those ETFs that areRICs will be subject to reporting in 2012 while other ETFs may be subject to reporting in 2011 or 2013depending on the final regulations and legal status of the security. Over 58% of respondents indicatedthey would differentiate ETFs from RICs, which included all Cost Basis Solution Providers, 70% of BrokerDealers and half of Service Bureau respondents (Figure 9).FIF Cost Basis Working Group Member Material; Not for Redistribution11

Figure 9: Cost Basis Systems Differentiating ETFs from RICsBanking Institution/CustodianCost Basis Solution ProviderService BureauBroker DealerMutual FundTransfer AgentNoYes0246810121416For those firms that are treating all ETFs the same, majority of them are taking a conservative positionand will consider ETFs to be covered in 2011 (Figure 10).Figure 10: ETFs Covered in 2011 or 2012Banking Institution/CustodianBroker DealerService Bureau6543210201120124 Cost Basis Reporting Functionality and EducationThe new cost basis reporting requirements demand not only extensive systems changes but alsoimmense data processing and reporting functionalities. The exhaustive list of changes also requirescomprehensive client communications and documented procedures to ensure a successfulimplementation.FIF Cost Basis Working Group Member Material; Not for Redistribution12

4.1 Cost Basis Modifications and Ability to Export DataA useful functionality for end users is the ability to make cost basis changes and export cost basis data.50% of survey respondents indicated changes would be allowed for non-covered assets (Table 2).Table 2: Clients Ability to Modify Cost Basis DataChanges will be allowed fornon-covered assetsNo changeswill be allowedOtherBanking Institution/Custodian111Broker Dealer8-2Cost Basis Solution Provider1-2Mutual Fund--1Service Bureau2-4Transfer Agent1-2Grand Total13112Percent of Total50%4%46%Those that chose “Other” (respondents not selecting “Changes will be allowed for non-covered assets”or “No changes will be allowed”) provided the following comments:As a service bureau, we provide interfaces that could be made available to anyone by the broker dealerswho are our clients. We are not aware of any of our clients allowing their clients to update cost basisdirectly. As far as we know, brokers are limiting access to direct updates to back office and, in somecases, front office staff.Updates are entitlement based where back office users can update cost basis at a deeper level than anadvisor of end clientThe changes will be allowed through the Admin Module of the Cost Basis Engine.Changes for non-covered assets will be handled thru home office department, based off requestsreceived from clients.Corrections will be reviewed and underlying basis will be changed by the firm if appropriate. No on-linechanges from customers will be accepted.FIF Cost Basis Working Group Member Material; Not for Redistribution13

Changes to basis may be maintained by a representative of the transfer agent.82% of firms will allow clients to export cost basis data including majority of Broker Dealers, BankingInstitutions/Custodians, Service Bureaus and Cost Basis Solution Providers (Figure 11)Figure 11: Ability to Export Cost Basis DataBanking Institution/CustodianBroker DealerCost Basis Solution ProviderMutual FundService BureauTransfer AgentYesNo05101520254.2 Basis Reporting for Non-Reportable AccountsOver 70% of firms provide basis reporting for non-reportable accounts (Figure 12).Figure 12: Basis Reporting for Non-Reportable AccountsBanking Institution/CustodianCost Basis Solution ProviderService BureauBroker DealerMutual FundTransfer Agent20181614121086420NoFIF Cost Basis Working Group Member Material; Not for RedistributionYes14

Those respondents, who don’t provide basis reporting for non-reportable accounts, provided thefollowing list as accounts they will be excluding: Qualified and Corporation AccountsOmni / Pooled AccountsNetwork level 3 accounts maintained by the Financial Intermediary and Retirement AccountsAny account type can be flagged to have cost basis processing turned on (or off)4.3 Reporting Changes – Online and StatementsParticipants were given four scenarios to determine which would cause reporting changes online and tostatements (Figure 13).Figure 13: Reporting Changes – Online and Statements25Banking Institution/CustodianBroker DealerCost Basis Solution ProviderMutual FundService BureauTransfer Agent20151050Marking lots covered /non-coveredNoting when cost basis Displaying bifurcatedhas changed due to aaverage costcorporate action / washsale / option assignmentetcDisplaying defaultmethod at position level85% of respondents indicated Marking lots covered/non-covered as the most popular scenario. Morethan 50% selected “Noting when cost basis has changed due to a corporate action/wash sale/optionassignment etc” and “Displaying bifurcated average cost.”FIF Cost Basis Working Group Member Material; Not for Redistribution15

4.4 Client and Internal Cost Basis Education – Communication Media andTraining TopicsAn enhanced communication plan to raise client and staff awareness can help avoid confusion andreduce help desk traffic. The survey determined 61% of respondents use website and paper mailings forcustomer education and Broker Dealers utilized paper mailings more than websites (Figure 14). Forinternal staff training, more than 70% of respondents indicated using website and seminars as the mostpopular mediums.Figure 14: Customer Education - Medium Used20Banking Institution/CustodianCost Basis Solution ProviderService BureauBroker DealerMutual FundTransfer Agent181614121086420WebsitePaper MailingsWebinarsSeminarsSurvey participants were asked to identify topics challenging from a training perspective. Over 50% ofrespondents listed Gifts and Inheritance as challenging training topics (Table 3). Effective Date andCovered Securities were considered the least challenging training topics. Additional topics not listedbelow but identified as being more challenging include Wash Sales, Corporate Action Adjustments andEmployee Plans.FIF Cost Basis Working Group Member Material; Not for Redistribution16

Table 3: Cost Basis Education - Training ChallengesGiftsAll topicstreatedInheritance equallyLotS-CorpTransfers Selection ReportingBasisCalculationCovered EffectiveSecurities ler652354242Cost ervice