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Changes to Cost Basis Rules Provide Investors More Flexibility

By Karen Lau Gibian

August 26, 2011

In a positive development for fund shareholders, the Department of the Treasury and the Internal Revenue Service have issued new cost basis reporting rules that enhance a fund’s ability to provide shareholders with average cost basis information. Fund shareholders have become quite familiar with average cost basis information, which many funds have been providing to their shareholders voluntarily for 20 years or more. The regulatory change makes it more likely that funds will continue to use this method as their default method for redeemed shares.

Earlier this year, ICI urged Treasury and the IRS to make such changes to the existing rules, which limited shareholders’ ability to choose cost basis methods for fund shares. In a comment letter filed last week, we applauded regulators for doing so. The new rules, we said, “are workable and resolve a significant issue for our industry.”

Some background on cost basis: the term generally refers to the purchase price of a mutual fund share. This is essential information for fund investors, because the amount of taxable gain or loss on the sale of fund shares is determined by the difference between the cost basis of the shares and the sale price. If there were fees or commissions paid at the time of purchase, they are included in the basis. You can learn more about cost basis and other important tax considerations for fund investors in this set of FAQs.

In 2008, Congress passed a law that requires brokers and mutual funds to report—to shareholders and to the IRS—the shareholders’ cost basis when shares are redeemed. This rule is effective for shares of mutual funds, closed-end funds, and most exchange-traded funds acquired on or after January 1, 2012. It applies to other equities purchased on or after January 1, 2011.

Our recent letter, which addresses implementation of this law, urges several more fixes to the cost basis regulations beyond the recent ones on cost basis method. One is to eliminate the requirement that shareholders must provide written notifications to brokers or funds when they want to elect average cost, revoke that election, or change from average cost to another method. Given that a significant portion of customer communication, including orders for redemptions, occurs over the phone, we noted that requiring such notifications in writing is unnecessarily burdensome and potentially costly for shareholders. In the words of our letter:

Some shareholders may not have immediate access to any means for sending their election or change in writing. If the shareholder is redeeming shares, this processing delay may expose the shareholder to market fluctuations that may produce investment losses. In market conditions like the present, such losses can be significant. Forcing investors to bear market risk to preserve an unnecessary writing requirement makes no sense.

Brokers and funds have procedures and controls in place to handle, securely and efficiently, redemptions and share exchanges that take place over the phone. Similar procedures and controls easily can be applied to shareholder requests to elect or change basis methods. As an alternative to requiring written notification by shareholders, we suggested that the proposed regulations instead permit brokers to provide customers with written confirmations of their average cost elections, revocations, or changes in method. Brokers and funds already provide such confirmations with many routine customer requests such as shares exchanges or address changes. Broker confirmation of a shareholder method election, revocation, or change will provide adequate documentation of the shareholder’s request without overburdening the customer.

  • Read ICI’s letter.
  • Learn more about ICI’s tax policy work.
  • Read “Frequently Asked Questions About Taxation for Mutual Fund Investors.”
  • Browse more recent ICI comment letters.

Karen Lau Gibian is Associate Counsel, Tax Law, at ICI.

TOPICS: Taxes

New York Times Editorial Misrepresents the Behavior of 401(k) Investors

By Brian Reid

August 23, 2011

Read more…

TOPICS: 401(k)Retirement PolicyRetirement Research

ICI Economists Provide Long-Term Mutual Fund Flow Analysis

By Brian Reid and Chris Plantier

August 17, 2011

All eyes were on the markets in early August just after Standard & Poor’s Corp. downgraded the long-term sovereign credit rating on the United States of America to AA+ from AAA and as Europe’s ongoing fiscal challenges dominated the news.

Read more…

TOPICS: Financial Markets

‘One Size Fits All’ Doesn’t Fit Today’s Fund Investors

By Brian Reid

August 16, 2011

David F. Swensen is the chief investment officer of Yale University and a noted author of investment advice for the public. In books and articles over the last decade, he’s focused much of his attention on mutual funds. Yet he consistently ignores or is unaware of basic facts about how mutual funds operate, how investors seek and use funds, and how individuals manage their portfolios—gaps on full display in his latest commentary in the New York Times last weekend.

Read more…

TOPICS: Investment EducationInvestor Research

The Uphill Path to Better Economic Analysis in Rulemaking

By Paul Schott Stevens

August 10, 2011

Last month, the United States Court of Appeals for the District of Columbia Circuit vacated the Securities and Exchange Commission’s rule on proxy access. The unanimous ruling marked the fifth time since 2005 that the DC Circuit has struck down an SEC rule, and the third decision based on the agency’s failure to properly weigh economic consequences and to consider—as the law requires—the effects of its rules on efficiency, competition, and capital formation.

Read more…

TOPICS: Commodity InvestmentsFund Regulation

Standard & Poor’s Downgrades U.S. Government Debt

By Mike McNamee

August 6, 2011

On Friday, August 5, Standard & Poor’s Corp. downgraded the long-term sovereign credit rating on the United States of America to AA+ from AAA. The agency reaffirmed the U.S. government’s A-1+ short-term rating, which is the rating that money market funds rely upon in making their investment decisions. Moody’s Investor Services and Fitch Ratings Ltd. have reaffirmed their Aaa and AAA ratings for long-term U.S. government debt.

Read more…

TOPICS: Financial Markets

The Lingering Threat of Floating NAVs

By Mike McNamee

August 5, 2011

Despite widespread opposition from dozens of business, municipal, and investors groups, regulators continue to ponder the question of whether money market funds should be required to abandon the stable $1.00 net asset value (NAV) in favor of a floating NAV.

Read more…

TOPICS: Fund RegulationMoney Market Funds

The Debt Ceiling Debate and Its Impact on Money Market Funds

By Chris Plantier and Sean Collins

August 4, 2011

Data on money market funds flows continue to draw attention, especially with today’s report that net outflows totaled $66 billion in the week ending August 3.

Read more…

TOPICS: Money Market Funds

401(k) Plans Help Keep Americans on Track

By Paul Schott Stevens

August 1, 2011

ICI sees strong evidence that the features of 401(k) plans help Americans avoid overreaction to financial turmoil, by countering extremes in investor behavior that hard times often produce.

This was one of the key points that I made recently at the Ayco Summer InnerCircle Benefits and Compensation Conference in Saratoga Springs, New York. I invite you to look over my full presentation, which contains a trove of data and charts pertinent to retirement policy.

Read more…

TOPICS: 401(k)Retirement Policy

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