1
*/ The BDAC members of the liaison group also served as
representatives of the Technical Tax Committee of the Securities
Industry Association (SIA).
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November 26, 1990
TO: OPERATIONS MEMBERS NO. 33-90
ACCOUNTING/TREASURERS MEMBERS NO. 24-90
TAX MEMBERS NO. 50-90
SEC RULES MEMBERS NO. 80-90
CLOSED-END FUND MEMBERS NO. 47-90
TRANSFER AGENT ADVISORY COMMITTEE NO. 47-90
BROKER/DEALER ADVISORY COMMITTEE NO. 43-90
RE: YEAR-END TAX INFORMATION REPORTING FOR 1990 RETURNS
__________________________________________________________
As you may know, in 1989 the Institute formed a liaison
group consisting of members of the Institute's Accounting/
Treasurers Committee (ATC) and its Broker/Dealer Advisory
Committee (BDAC) to coordinate the date by which broker-sold
funds registered in street name should provide year-end tax
information to broker/dealers and the manner in which that
information is provided. The discussions and any agreements of
this group are intended to apply to both open-end and closed-end
funds. On October 26, 1990, the liaison group met to discuss
reporting of 1990 tax information in January 1991.
Participating for the fund industry were:
Joe Connoly Dreyfus
Sue Cote Prudential Mutual Funds
John Gargana Lord, Abbett
Murray Goldsmith Prudential Mutual Funds
Richard Rose The Boston Company
Rich Silver Colonial
Participating for the broker/dealers*/1 were:
John Cirrito Prudential-Bache
Emil Polito PaineWebber
Al Rubin Shearson Lehman Bros.
John Scrobola Merrill Lynch
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Dan Spadaccini Shearson Lehman Bros.
Darryl Vines PaineWebber
Robin Wallick Piper Jaffray
ICI Staff:
Don Boteler
Keith Lawson
In addition, Sandy Manata of the National Securities Clearing
Corporation (NSCC) provided a brief description of an automated
reporting facility developed by NSCC that is expected to be made
available beginning in December 1990 for funds to report year-end
tax information to broker/dealers in a centralized standardized
environment.
1989 Information Returns Experience
During 1989, the liaison group agreed that funds would
endeavor to report the final year-end tax information (including
any post year-end dividend reclassifications) for 1989 no later
than Monday, January 15, 1990. The Institute then urged all of
its fund members to adopt the agreement as an industry standard.
(See Memorandum to Operations Members No. 29-89, SEC Rules
Members No. 54-89, Tax Members No. 33-89, Broker/Dealer Advisory
Committee No. 44-89 and Accounting/Treasurers Members No. 5-89,
dated October 4, 1989.)
Two problems developed with the 1989 agreement. First,
many fund groups were contacted by broker/dealers requesting the
information earlier than January 15, 1990, and in several
instances prior to the end of December, 1989. Second,
broker/dealers experienced some difficulty getting information
from certain fund groups by January 15, 1990.
October 26, 1990 Meeting
At the request of the BDAC members of the liaison group, on
behalf of the SIA's Technical Tax Committee, the October 26
meeting of the liaison group was arranged for the purpose of
determining a mutually agreeable tax reporting schedule for
January, 1991 and to discuss NSCC's centralized reporting
facility.
At least three major problems exist with reporting year-end
tax information to broker-sold accounts by January 31. First,
the funds confront numerous complexities in properly calculating
the tax information, some of which cannot be resolved by mid-
January. Second, broker/dealers face time constraints in
processing and reporting fund information by January 31 along
with tax information for their clients' other securities
positions. Third, logistical difficulties result from funds
having to report tax information to numerous broker/dealers and
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from broker/dealers having to collect the data from a large
number of funds.
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The October 26 meeting attempted to address each of these
three major problems. The third problem, relating to logistical
difficulties in reporting/collecting information, may have been
alleviated. In addition, shareholder confusion may be alleviated
somewhat by the funds' proposal, which produced a generally
favorable reaction, to draft a model letter informing
shareholders of amended information which the brokers would send
after 1099s were issued. However, the attempt to reach a
mutually-agreeable date by which fund groups must deliver tax
information to broker/dealers for all funds in a complex was
unsuccessful.
a. Reporting Deadline
The broker/dealer representatives of the group were unified
in their position that funds must deliver final tax information
by 5:00 p.m. on Friday, January 11, 1991, for the information to
be included in the broker/dealers' normal 1099 processing. The
brokers maintained that they would need three weekends in January
to process 1099 and other client information. During the
upcoming January, the second and third weekends (January 12-13
and 19-20) would be used to process 1099 data and the last
weekend (January 26-27) would be used to process clients' monthly
statements. Fund groups would thereby be left with only one
weekend (January 5-6) to perform their tax calculations.
The fund representatives informed the broker
representatives that numerous funds would be unable to meet a
January 11 deadline and described in detail several reasons why
tax information compiled in early January may be subject to
reclassification. Among the problems discussed were (i) capital
gain reclassifications arising from foreign currency gains or
losses, (ii) short-term to long-term and long-term to short-term
gain reclassifications for funds with loss deferrals from
straddles and mark-to-market gains and losses from section 1256
futures contracts, (iii) the application of wash sale rules, and
(iv) the 1989 statutory change requiring funds to accrue
dividends to be received on ex-dividend date.
The fund representatives then urged that, because of the
complex nature of the tax calculations they must perform, the
fund industry and the broker/dealers each have two weekends to
perform their respective year-end tasks. This approach of giving
two weekends to each group worked in January 1990 and should work
again in 1991. The brokers were insistent, however, that January
11 must be the deadline and that any dividend classifications or
reclassifications received from funds thereafter would be
processed and forwarded to shareholders as corrections. Although
the fund representatives strongly disagreed that January 11
should be the final deadline, we indicated that funds would make
every effort to provide tax information to brokers as early as
possible and to meet a January 11 date if they could. The fund
representatives will continue to discuss with the broker
representatives the "wisdom" of the January 11 final deadline.
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b. Shareholder/Client Relations
Reporting to shareholders as corrections all dividend
reclassifications received after 5:00 p.m. on January 11 presents
potentially serious shareholder and client relations problems.
For example, if a fund reclassifies its dividends for 1990 on
January 14, 1991, it will be unable to have the revised
information included on the shareholders' 1099 DIVs.
Shareholders later receiving the corrected information after
filing their tax returns can be expected to complain to their
brokers, who can in turn be expected to deflect responsibility to
the funds for not being "timely" in providing the information.
Funds, in turn, may be expected to respond to inquiries that such
information was available to brokers on a timely basis. To help
reduce this confusion, some but not all of the brokers agreed
that they would forward to their clients "Dear Shareholder"
letters prepared by the funds to explain why the revised tax
information was not included in the 1099s sent in January. The
fund representatives proposed to draft a model letter, review it
with the broker/dealer representatives of the liaison group and
then distribute it to the ICI Committees and mailing lists of
members.
c. Centralized Reporting
To alleviate much of the labor intensive and time consuming
reporting burden for both funds and broker/dealers, the NSCC has
developed an automated procedure whereby all funds can report
year-end tax information once, to NSCC, and NSCC will make that
information available to its broker/dealer participants. Funds
that currently participate in NSCC may use the facility at no
additional charge. It is expected that funds that are non-NSCC
participants will also be able to participate in this centralized
reporting network. This service is available to both open-end
and closed-end funds. For the present, NSCC will not charge non-
participating funds to use this facility. This centralized
reporting system is expected to be operational by December 1,
1990.
NSCC reported that information received from funds by 6:00
p.m. on any day will be available to brokers by 7:00 p.m. on that
same day. One important feature of this system is the ability to
indicate whether information has been revised. Thus, if a fund
provides information to NSCC on January 8 and revises that
information on January 10, all brokers will be on notice that the
original information was revised before the January 11, 1990
deadline. The brokers are encouraging funds to provide tax
information to NSCC as early as possible. NSCC is still seeking
to determine how late on January 11 funds can provide tax
information that can be available to broker/dealers by 5:00 p.m.
on January 11.
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The enclosed document prepared by NSCC describes this
reporting facility. Funds wishing to use this reporting facility
who are not NSCC participants may call one of the NSCC contacts
listed in the enclosed document for additional information.
CONCLUSION
It is clear that both the broker/dealer and the mutual fund
industries must continue to work together to provide accurate and
timely information to shareholders. A "take it or leave it"
position by brokers that funds must provide all tax information
by January 11, 1991 does not advance the "common cause". The
position by the broker community that the last weekend in January
(January 26-27, 1991) must be reserved to process their clients'
ordinary monthly statements is totally unacceptable. Broker
customers can be told in advance that their January statements
will be slightly delayed due to the production of tax
information. Everyone should understand and accept this
explanation.
The use of NSCC as a data source should greatly reduce the
brokers' need to individually contact each fund group. However,
in negotiating deadlines, the brokers should keep in mind that
funds may be required to provide data to NSCC one day before the
deadline to ensure that the information will be available to
brokers by the deadline. Any acceleration of the deadline puts
even more pressure on the funds.
Finally, in a time period where great emphasis is being
placed on quality service by brokers and funds, no benefits will
come from reporting incorrect tax information to shareholders.
It is costly and inefficient for brokers to impose such overly
stringent reporting deadlines on funds that incomplete or
inaccurate information is provided. When the information is
corrected, shareholders may become confused or annoyed,
especially if their tax returns have already been filed. If the
inaccurate information is not corrected, the investors will be at
risk if they are audited by IRS.
* * * *
We will continue to discuss year-end information reporting
procedures with the brokers and keep you informed of any
developments. In the meantime, fund groups are urged to make
every effort to provide brokers with timely tax information;
whenever possible, that information should be provided by January
11, 1991.
Donald E. O'Connor
Vice President - Operations
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Enclosure