The SEC has finally released its anxiously awaited study of whether a fiduciary standard of care should be applied to broker-dealers; but, like the study on adviser examinations, the report leaves as many questions as it answers. The fiduciary standard study—released on January 21, 2011—recommends that brokers be held to the same standard as register investment advisers (RIAs). Although the study doesn’t provide details on how the switch to the fiduciary standard will be implemented, there are hints as to what brokers can expect.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the fiduciary standard in Advisor’s Journal, see Study Finds that Universal Fiduciary Standard Will Hurt Investors (CC 10-97) and What You Don’t Know Yet Might Hurt You: A Broker’s Duties under the Financial Reform Act (CC 10 40).  Comments are welcome below.

The SEC recently approved FINRA proposed rules—FINRA Rules 2090 and 2011—that amend and consolidate know-your-customer and suitability obligations for broker-dealers and their authorized representatives. The new rules are based on, and replace in-part, similar NYSE and NASD rules. According to FINRA, the amended know-your-customer and suitability rules are intended to protect investors by “promoting fair dealing with customers and ethical sales practices.”

The new rules are effective as of October 7, 2011.  For previous coverage of the suitability standard and the debate over the proposed fiduciary standard in Advisor’s Journal, see What You Don’t Know Yet Might Hurt You: A Broker’s Duties under the Financial Reform Act (CC 10-40) and Study Finds that Universal Fiduciary Standard Will Hurt Investors (CC 10-97).

Under the know-your-customer rule, firms are required to use reasonable diligence respecting the opening and maintenance of every account and to know essential facts about every customer. “Essential facts” are facts required to …. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Brokerages are increasingly looking to claw back signing bonuses from bonus baby brokers who leave for another firm. Signing bonuses at the big broker-dealers saw a big jump in 2008, just as the economy took a dive. Signing bonuses of up to $3 million were being offered to brokers who generated $1 million in commissions and fees in the prior year. And a few bonuses paid at Wall Street firms were reported to have been as high as $10 million. But because many of the bonuses were based on the prior year’s inflated numbers, brokerage firms ended up paying too much for too little performance during an economic slowdown.

Now a bottleneck is developing in arbitration cases dealing with brokers’ signing bonuses, forcing FINRA to reduce the qualifications for persons serving as arbitrators in order to expand its rolls and push the cases through the system. About 1,100 bonus cases have been filed by brokerages as of December 12, compared to just 415 cases in 2008. About 17 percent of 2010 FINRA arbitration cases were bonus-related cases.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of broker and securities arbitration in Advisor’s Journal, see FINRA Proposes Eliminating Industry Insiders from Arbitration Panels (CC 10-80) and Mandatory Securities Arbitration Clauses on the Chopping Block (CC 10-48).

Author: William H. Byrnes & Benjamin S. Terner

Why is this Topic Important to Wealth Managers? Provides wealth managers with information relating to client transactions and reporting to the Internal Revenue Service beginning next year.

The Energy Improvement and Extension Act of 2008 created new laws requiring most regulated securities transactions occurring after December 31, 2010 to be subject to cost basis reporting by securities brokers to the IRS. [1] Currently, brokers are required to report the gross proceeds from the sale of a security on Form 1099. [2] The new law will add reporting of client’s adjusted basis of the security, and whether the gain is a short or long-term.  [3] Mutual fund cost basis reporting is to start a year after regulated securities reporting, and options and debt contracts are to follow a year after mutual funds.  The reports are to be filed on a Form 1099-B, Proceeds from Broker and Barter Exchange. [4]

Why is it important to know that the IRS will be receiving information about the values of securities of clients?

Generally, gain determination for the sale or exchange of a capital asset is the sales price minus what the asset was acquired for, or the cost basis. [5]

Until now, gain determination, which directly effects tax liability, has largely been a task for accountants.  The new law fundamentally changes how gains will be calculated by the Treasury;  going forward, it will have all the information it needs to calculate tax liabilities for taxpayers from transactions occurring on capital markets. [6]

Now, under Form 1099 reporting by brokers—“basis, sales price, and type of gain, the IRS can track” what was paid for the stock, what the stock was sold for, and whether the gain is short term or long term. [7] There is now little room for error for individuals purchasing securities to correctly report gains from transactions on stocks.  If the IRS receives information from the broker that does not match information on the client’s tax return, “the mismatch should trigger an IRS inquiry.” [8]

The effort is part of the Federal initiative of finding “innovative ways to reduce the tax gap and improve compliance.” [9] Internal Revenue Service Commissioner Shulman states the new law “will go a long way to reducing [miscalculated gains] and making things easier for investors.” [10]

Also, the requirements for reporting continue—a broker who transfers custody of a security to another broker must include an accompanying written statement with information to determine basis. [11] Moreover, once an issuer of stock takes an organizational action such as a stock split, merger, or acquisition that affects basis, an issuer must report to the Service and to each stockholder or nominee a description of any such action and the quantitative effect of that action on basis. [12]

The Commissioner relates to the issue personally, “I don’t know about you, but I have spent far too much time digging through old records, trying to find the basis for securities I sold.  I think investors…and I count myself one …will welcome getting this new, easy-to-understand information from their brokers.” [13] Others may disagree with the Commissioner but, time should tell.

Our Blogticles will continue Friday.  From the staff and experts at National Underwriters – we wish you a Happy Thanksgiving!

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Section 403 of the Energy Improvement and Extension Act of 2008, Div. B of

Pub. L. No. 110-343, 122 Stat. 3765, enacted on October 3, 2008, added sections

6045(g), 6045A, and 6045B to the Code. Section 6045(g) 6045(a); Notice 2010-67.  http://www.irs.gov/pub/irs-drop/n-10-67.pdf.  Last Accessed 11/7/2010.

[2] 26 U.S.C. § 6045.

[3] Id.

[4] See  26 U.S.C. § 6045; 26 CFR § 1.6045-1.

[5] See generally, 26 U.S.C. §§ 1001, 1011, 1012.

[6] Arden Dale.  The Wall Street Journal.

Cost Basis to Come on 1099B’s.  http://online.wsj.com/article/SB10001424052748704763904575550461405074090.html.  October 14, 2010.  Last Accessed 11/22/2010.

[7] Robert W. Wood.  “Forms 1099 For Cost Basis: What, Me Worry?”.  Forbes-The Tax Lawyer.  Oct. 20 2010.  http://blogs.forbes.com/robertwood/2010/10/20/forms-1099-for-cost-basis-what-me-worry/.  Last Accessed 11/22/2010.

[8] Robert W. Wood. Forbes-The Tax Lawyer.

[9] Internal Revenue Service Commissioner Douglas Shulman.   Prepared Address to The American Payroll Association’s and American Accounts Payable Association’s 28th Annual Congress. IR-2010-68.  May 27, 2010, Washington, D.C.

[10] Douglas Shulman.  IR-2010-68.

[11] 26 U.S.C. § 6045(g).

[12] 26 U.S.C. §  6045B.

[13] Douglas Shulman.  IR-2010-68.

Brokers and mutual fund companies will soon be required to report to their customers and the IRS on the basis of securities sold from customers’ accounts and whether any gain on the sale is a short or long-term capital gain. IRS Commissioner Doug Shulman praised the new rules, saying that “[i]nvestors will now receive the information they need to more easily and accurately report their gains and losses.” Easy access to basis information will save many investors time and money when filling out their tax returns and ensure that the IRS is given accurate information by investors who make securities sales.

The new basis reporting requirements will be burdensome for brokers; the IRS has estimated that the average broker will spend eight hours annually to comply with the requirements. And this year, brokers have the challenge of implementing the systems necessary to comply with the basis reporting requirements by January 1, 2011. We will keep you posted if the IRS releases any additional guidance.

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

We invite your questions and comments by posting them below or by calling the Panel of Experts.