The Cost Basis Reporting Market: An Update

by Alexander Camargo,  Isabella Fonseca, September 22, 2011
Product Trends/ Reviews
North America

Abstract

Although the first regulatory effective dates for reporting adjusted cost basis have passed, the cost basis reporting market continues to evolve in terms of technology requirements, regulations, and firm adoption.

During the past six months, Celent conducted close to 50 interviews with broker-dealers, mutual funds, transfer agents, custodians, prime brokers, and technology providers to determine their status as it relates to cost basis reporting. Celent presents the results in a new report, The Cost Basis Reporting Market: An Update. The study discusses major trends and developments in the cost basis reporting market after the first effective date has passed, and examines where firms are headed in terms of technology adoption to address cost basis reporting requirements.

Although most firms have been conducting training programs and hiring additional staff to prepare internally, many have not adequately communicated the changes to investors. Celent believes that a more proactive approach to communication will stem the expected inflow of inquiries.

”Firms should expect a substantial amount of call volume and inquiries related to these 1099-Bs and other cost basis questions,” says Isabella Fonseca, Research Director at Celent and coauthor of the report. “Cost basis reporting may initially be viewed as nothing more than a compliance requirement, but the new regulations provide an opportunity for financial services firms to enhance client relationships and promote greater trust and transparency.”

“In 2010, most investment firms were taken by surprise with the complexities of the cost basis reporting regulations and the breadth of enhancements that needed to be made. Calculations surrounding the 2012 and 2013 effective dates are very complex and present an even greater challenge,” says Alexander Camargo, Celent Analyst and coauthor of the report. “It is important for firms to start early to get a handle on the fixed income regulations for 2013.”

The report defines cost basis reporting and looks at how the regulations have changed compliance requirements. It analyzes areas in which cost basis reporting can provide value-added services to end users, and looks at trends for both financial services firms and technology players. The report also provides an analysis of the major challenges and technology decisions by market segment and size of firm. A detailed look at technology needs and CBR capability requirements for each market segment follows. The report then provides an analysis of existing challenges and lessons learned after the first round of implementation for the January 1, 2011 effective dates. It concludes with Celent’s projections regarding where cost basis reporting is headed.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

5

 

Project Methodology

6

Changes to Cost Basis Reporting Requirements

7

 

New Penalties

8

 

IRS Notice 2011-56

8

Beyond Compliance

10

Cost Basis Reporting Trends and Developments

11

 

Market Characteristics

11

 

Technology Trends

13

Use of CBR Solutions by Market Segments

15

 

Broker-Dealers

15

 

Mutual Fund Firms

16

 

Transfer Agents and Custodians

17

 

Prime Brokers

18

 

Implementation

18

Client Decision-Making Process

20

 

Market Segment Decisions and Priorities

20

 

Importance of Cost

21

 

Broker-Dealers

22

 

Mutual Fund Firms

24

 

Transfer Agents

24

 

Custodians

25

 

Prime Brokers

25

CBR Capabilities Required by Firms

17

Challenges and Lessons Learned

29

 

Perceived Gaps and Challenges

20

 

Lessons Learned

30

Going Forward

32

Leveraging Celent’s Expertise

35

 

Support for Financial Institutions

35

 

Support for Vendors

35

Related Celent Research

36

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