New regulations laid out in the Emergency Economic Stabilization Act of 2008 that are due to take effect in January 2011 may present independent RIAs and broker/dealers with significant business challenges. Fidelity Investments has rolled out a series of resources, including a white paper titled “Cost Basis Regulations and Your Firm,” to help its clients prepare for the changes. Fidelity is also presenting regional client events, Webinars, fact sheets, abd one-on-one consultations to educate clients about the requirements.

According to a Fidelity statement, the regulations, which will be phased in over three years, require broker/dealers to report adjusted cost basis for “specific securities” on the annual IRS Form 1099-B. They will be required to indicate whether the holding periods of the disposed securities were short term or long term. Other provisions in the regulations that are relevant to RIAs, broker/dealers and their end clients include how to handle cost basis for transfer of assets, short sales, wash sales and corporate actions.

Fidelity drew attention to issues RIAs and B/Ds using a third-party portfolio management system to report cost basis to investors may face. Since multiple platforms would monitor cost basis data, firms must ensure that the data are consistent. This fragmented storage of cost basis information could pose some challenges:

  • When RIAs and broker/dealers generate gain/loss reports for clients from their portfolio management system, they have to be sure to reflect accurate cost basis for both covered and uncovered securities.
  • Advisors and brokers have to ensure that the lot selection process they use to make tax-sensitive investing decisions is properly reflected in their portfolio management systems and Fidelity’s tax lot accounting system.
  • They must accurately manage cost basis data they receive from other third parties, including multiple custodians and separate account managers.

Michael S. Fischer (msf7@columbia.edu) is a New York-based financial writer and editor and a frequent contributor to Wealth Manager.