COST BASIS

1. COST BASIS

2. Recent Events • Proposed Regs filed 12/16 published 12/17 • Comments were due Feb. 8th Public hearing Feb. 17th • Participation: DTCC Steering Committee – to define, and provide to DTCC, high level business requirements to support cost basis reporting legislation SIFMA/ICI/NFS/SSA/STA • STA Cost Basis Committee meeting weekly – Understand Reg/Comment & discuss Best Practices for each scenario • Participating Cross Industry Committee meeting – review regs/discuss each industry’s comments/CBRS reqs. • Joint Cost Basis Committee – due to other meetings really haven’t met recently!!!

3. The Scary Stuff • The proposed regs are 141 pages long • Final regs anticipated in May or June?? • Approx. 6 months to program, test and deliver • There appears to be no contemplation of a delay in the effective date • The CBRS product - available by 1/1/2011?? • TA systems ready for 1/1/2011??

4. Risks • Continued delays in the release of the final regulation • Provides little time to design, build and test accurate record-keeping systems – how are you managing your risks? OCC? PAPER STMTS if programs not ready??? • An uneven playing field. Brokers already have some Cost Basis Recording capabilities and the IRS has an additional year to develop their systems

5. The SSA’s Recommendation Delay all Cost Basis Transfer Agent reporting requirements until 2012. Put all reporting in line with the 1099B reporting requirement for Dividend Reinvestment Plans

6. SIFMA/FIF/STA • SIFMA requests that the effective date of the transfer statement requirement under Code section 6045A be delayed until January 1, 2012. • FIF – Transfers – Defer to 2012 • STA - Urgently requests that brokers and agents be only required to capture and report basis for transactions that occurred on their own books for covered securities in 2011, and then add the transfer reporting piece for January 1, 2012.

7. Transfer Statements • Privacy concerns regarding some of the information required on the transfer statement – if your system isn’t ready, are you prepared for paper statements? – state law privacy regulations. • Availability of CBRS – final record layouts to be issued late this week or early next week. • Staffing implications due to paper based transfer statements

8. SSA and STA take a united approach • Basis Adjustments for Corporate Actions • Proposed reg implies that TA’s who do not issue 1099B’s are not required to update shareowners cost basis with the quantitative effect of Corporate Actions • Recipients of transferred shares will have to research each transfer received to determine if the shares received have the most current adjusted cost basis

9. Wash Sales • Every reinvestment of dividend funds has the potential of creating a Wash Sale • Causing the need for numerous adjusted transfer statements, 1099B’s, and cost basis adjustment • Recommended that purchase resulting from reinvestment of dividends be exempt from consideration for Wash Sale monitoring by Agents or Brokers

10. Definition of DRP • The reg indicates that a plan qualifies as a DRP (making the shareholder eligible for cost averaging) if the plan documents indicate at least 10% of the dividend paid is to be reinvested • STA Committee members and brokers were unable to identify any plan documents written this way -Recommended that language be removed from the reg

11. Gifted Securities • The reg indicates transfer requests received without an explanation as to why shares are being transferred should be assumed to be gifted. • Gift transfers require that the Agent record the donors acquisition date, acquisition price, the date of the gift and the FMV on the date of the gift

12. Gifted Securities cont’d • Agents will be required to calculate Tax Cost at the time of the sale considering both the donors cost basis and the basis at the time of the gift and report which ever is favorable to the IRS • Trusts/Estates –move cost basis from certificate A to Certificate B see page 64. • Agents are rarely advised of the date of a gift and would be unable to accurately determine the cost basis at the time of the gift. Recommended that cost basis would be carried from the donor to the new owner

13. S Corps • Request to make adjustments to W-9 so that liability is on shareholder • Re-solicit all corporate accounts? Additional Mail costs for your budget? • If not returned, do you default? • SSA requested that all Corporations be grandfathered in prior to Cost Basis Reporting and all new account should be coded according to NEW W-9 form received.

14. Corrected Reporting • At any time an agent is provided with corrected or missing cost basis information they must adjust their systems and send correct transfer statements. • This would cause the agent to retain records indefinitely. Recommended that there be a time limit for providing these corrections that coincides with the retention requirements for 1099B reporting

15. 1099B Reporting for CIL • Currently agents are not required to produce CIL for amounts less then $20.00 • This amount was established in 1983. SSA recommended that minimum be raised to $100.00 or reporting for CIL be eliminated completely.

16. Employee Stock Purchase Plans • Tax cost will be determined at the time of sale and varies based on the qualifying or disqualification status of the shares. This information would be lost if the shares are transferred from the plan administrator’s books prior to the sale (discounted 423b plans) • Field is being added to the CBRS record layout.

17. Incentive Stock Options • Have unique tax reporting rules – holding periods and tax consequences

18. Recommendation for ESPP (discounted) and ISO • The transfer statement provided by the delivering agent report no basis with a flag to indicate the shares were purchased as part of an ESPP plan or ISO shares • Upon sale of these shares the 1099B filer would provide the gross proceeds indicating the sale of ESPP or ISO shares

19. Review Comments!

20. If I had more time • I could bore you all day with this stuff