Transfer Agents Are Facing Multi-Million Dollar Investments To Be Ready For Cost-Basis Reporting… And Perhaps, For More Backup Withholding By Money-Starved State Governments

An Interim Rreport On Virtual Annual Meetings

A reader emailed us after our last issue to ask why we haven’t been covering the Cost-Basis Reporting scene…after lots of earlier coverage, where we correctly predicted that there was absolutely no way it could be enforced on a retroactive basis as most people, including the regulators, seemed to think back then.

“Gosh, we think that transfer agents will never make the January 1, 2011 deadline for reporting cost-basis on a going forward basis” we said, “especially since the Final Rules aren’t out for final comments, and are not even promised before mid-year.”

Stupid us, to focus on the practical matters! “The money that Congress thinks this will raise is in the budget…And we guarantee the Treasury isn’t going to budge an inch” our reader told us. And yes; we realized at once that he is exactly right.

So here’s the poop, as we see it:

For most brokers, this will largely be a slam dunk: The bigger ones, and lots of the smaller ones too, have been tracking and reporting cost-basis on an account-by-account basis for years.

For transfer agents, this is turning into a very complex, risky and costly program for them to implement: Not only do they have to build from scratch, many of them will have to build on very rickety systems platforms…and without all the necessary building-specs in hand. And without a lot of spare cash in hand either. Plus, they have to build a totally new “highway” - that will let them fork over the cost-basis info smoothly, mainly to brokers, when registered holders leave the T-A behind…as so many are doing these days. Ouch! Plus, they have to build new clerical and systems processes that will force them to determine whether transfers are gifts – where the giver’s cost-basis must somehow be determined and passed along – or whether they are to settle an estate, where the cost- basis “steps up” to the price on the decedent’s date of death.

For Employee Plan Agents – some of whom are brokers, some of whom are T-As and some of whom are “others” – there seem to be numerous tracking and reporting pitfalls to think about, and to deal with, with lots of “customization” required – especially where options, various kinds of restricted shares and SARs are concerned.

Do we think there may be some major “washings out” here? Yes, we do. Many of the “in-house” transfer agency operations will be covered, or course…IF they use a major provider of such systems, that is. But many will not have such an umbrella. And many of them that DO are likely to come under intensive scrutiny by corporate risk-managers, who real- ly don’t need more “compliance issues” to check on, or more “doin’s” with the Treasury Dept. and the IRS. We also think that there is a good chance that some of the “professional T-As” – and some of the “professional Plan Agents” – and almost all of the in-house Plan operations will have some major implementation snafus, which’ll cost them big.

Perhaps the biggest issue here involves the MONEY: Many professional agents do have riders in their contracts that call for them to be reimbursed for their efforts in complying with new regs…but many do not. Also worth noting, the actual implementation costs – and the number of “units” – whether of clients, or of account records – against which an agent can lay off such costs – will vary widely from agent to agent. Many folks opined, for example, that this will squeeze the smaller agents. We’re not so sure at all, since many of them have smaller and sometimes newer, and often more nimble systems – and nimbler systems people too than a lot of the big guys do.

Especially important to note, as we did during a recent NASPP-sponsored teleconference – the industry has not done a particularly good job of “setting the table” for clients, with respect to the costs – in part because they don’t have a good handle on them. So there may be some major “sticker shock” when the bills, and the cost-justification arguments for them “hit the fan.” As we noted; it is always hard to recover spent money, and harder yet in these tough economic times. But it’s even harder when the tab takes customers by surprise.