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ICI Submits Statement on Proposed Cost Basis Legislation
Washington, DC, June 28, 2007 - Mandatory cost-basis reporting for funds and brokers must be administrable and effective for shareholders, funds, brokers and other distributors, and the government, according to an ICI submission to the Senate Finance Committee.
Over the past 15 years, a substantial portion of the mutual fund industry has voluntarily provided basis information to a significant, and growing, portion of its shareholders. ICI has participated actively in cost basis reporting discussions since a legislative initiative on cost-basis reporting was raised in 1990. Since January 2006, ICI has also spent considerable time with industry tax and operations experts examining the remaining operational impediments to mandatory cost basis reporting on all fund share purchases. Industry views have evolved as ICI members have focused intently on some of the thorniest operational issues.
Mutual fund shareholders may calculate cost basis using FIFO, specific identification, or the average cost method. Once a shareholder elects to compute basis under the average cost method, this method must be utilized for all shares in the shareholder’s account.
ICI’s June 28 statement emphasizes three main points:
- Administrable and effective: a mandatory basis-reporting regime will be costly, and the cost ultimately will be borne by fund investors. Therefore, it is imperative that mandatory basis reporting be administrable and effective for shareholders, funds, brokers and other distributors, and the government. The basis adjustments required by the Internal Revenue Code (the “Code”) can be complex and may require information not known to funds. Funds and brokers will need clear guidance, including final Treasury regulations, on how to make these adjustments and on their obligations for sending and amending cost basis information provided to shareholders.
- Sufficient time: sufficient time must be provided to ensure that necessary programming and systems challenges are addressed effectively. Cost basis information provided voluntarily today may not take into account all basis adjustments. The systems required to transfer cost basis information between funds and brokers do not exist today, and existing systems to transfer cost basis information between different brokers are not used by all brokers. Requiring funds to report and transfer information before systems are ready would undermine severely the effectiveness of a reporting regime.
- Flexible reporting methods: the flexibility the current law provides to mutual funds and their shareholders to compute cost basis under any available method (first-in, first-out (“FIFO”), specific identification, and average cost, in the case of fund shareholders) must be maintained. Any limitation on available methods would be a tax increase on savings. Further, it would create shareholder confusion if they were required to begin using a method different from the method they have used previously.
ICI believes that its specific recommendations provide in the submission can be administered by funds as long as sufficient time is provided to develop the necessary reporting infrastructure, resulting in with reliable and useful information for fund shareholders and the Internal Revenue Service.
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