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Cost Basis Reporting: Best Practices

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With the looming deadline to comply with new cost basis reporting requirements, companies must ensure effective communication between front-, middle- and back-office systems, people and processes. All of these pieces need to work in unison in order to create the necessary data and communicate changes to their clients over the next several years.

From a technology perspective, various data sources will need to communicate key data elements to your cost basis reporting engine. This involves securities masters and transactions. For example, there are special classifications implications around ETFs. Today you may have all ETFs in one category; however, some ETFs are considered covered in 2011 as stocks, while others will fall into 2012 since they are regulated investment companies (RICs).

Transactions must be accurately identified to allow cost basis to be properly established, adjusted or relieved. Since not all of this information may come from one single source, automation is crucial, but validations and flexibility are also important. Is there a process for validating information as it is being received? Are there rules written and reports available that allow an administrator to review data catch items early on?

Resources and Training

From a resource and training perspective, core business areas will need to work closely together to share information:

  • The operations department will need to work closely with tax departments on such key topics as interpretations of corporate actions.
  • Client service teams will need to understand how to respond to client questions and concerns, such as what the new details provided on statements and confirms mean to them, responding to calculation disputes, and determining how Web sites may evolve to offer clients the ability to do specific lot trading.

Although the IRS recently finalized the regulations, there is still uncertainty in the securities industry. One thing, however, is certain: now is the time to increase communications. It is important to begin to establish key policies and procedures around cost basis reporting. Establishing these procedures early on will assist in dealing with difficult questions that will arise. Use this as an opportunity for advisors to deepen their conversations with their clients. Conduct webinars and lunches to educate staff on cost basis and impending changes. Most importantly, educate your clients on what changes can be expected over the next several years.

Is your firm ready for cost basis reporting? If not, what are your main challenges or chief concerns? What best practices have you implemented at your firm?


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