December 14, 1993
TO: BANK BROKER/DEALER ADVISORY COMMITTEE NO. 26-93
BROKER/DEALER ADVISORY COMMITTEE NO. 35-93
INSURANCE BROKER-DEALER ADVISORY COMMITTEE NO. 23-93
MEMBERS - ONE PER COMPLEX NO. 82-93
OPERATIONS MEMBERS NO. 38-93
SMALL FUNDS MEMBERS NO. 18-93
TAX MEMBERS NO. 45-93
TRANSFER AGENT ADVISORY COMMITTEE NO. 58-93
RE: RESPONSIBILITY FOR 1099B TAX REPORTING FOR NSCC FUND/SERV
EXCHANGE TRANSACTIONS
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As specified in the following memoranda issued last year (Members No. 32-
92; Operations Members No. 34-92; Tax Members No. 61-92; Small Funds
Members No. 19-92; Broker/Dealer Advisory Committee No. 30-92; Insurance
Broker/Dealer Advisory Committee No. 14-92; Bank Broker Dealer Advisory
Committee No. 7-92; Transfer Agent Advisory Committee No. 54-92; all dated
October 1, 1992.), the Investment Company Institute urges all broker/dealer
Fund/Serv participants to assume (or continue to assume) Form 1099B reporting
responsibility for Fund/Serv Exchange Redemption Transactions. The Institute also
urges funds and brokers to confirm with each other their understanding of this
matter and their subsequent procedures with respect to tax reporting obligations
insofar as the January 1994 and all future tax reporting seasons are concerned.
A survey undertaken in 1992 by the Institute's Broker/Dealer Advisory
Committee determined that broker/dealers are more likely to assume responsibility
for Form 1099B reporting of Fund/Serv Exchange Redemption Transactions. As a
result, it was agreed, going forward, that broker/dealers would be responsible for
1099B reporting to clients for the sell side of Fund/Serv Exchanges.
While the announcement of this agreement was made last year, it appears
there may still be some confusion about this reporting responsibility and its
ramifications. To clarify the matter then, when an exchange is processed through
Fund/Serv, two transactions actually take place. The first of these is an exchange
redemption out of Fund A, and the second is a subsequent exchange purchase into
Fund B. The first transaction, the exchange redemption, is a taxable event which
must be reported to shareholders via Form 1099B.
It is important to note that failure to comply with this agreement will lead to one
of two undesirable scenarios. In the first of these, if neither the fund nor the broker
supply Form 1099B for Fund/Serv Exchange Redemption Transactions, the
shareholder will be without an important and mandatory tax reporting document. If,
on the other hand, both the fund and the broker supply Form 1099B for the same
Fund/Serv Exchange Redemption Transaction, shareholders will be disadvantaged
by having their proceeds from sales (Exchange Redemptions) of securities reported
twice.
To avoid both of these unwanted situations, the Institute recommends that all
members comply with the existing Institute sanctioned agreement whereby
broker/dealers assume Form 1099B shareholder reporting responsibility for
Fund/Serv Exchange Redemption Transactions. The Institute further recommends,
as mentioned above, that funds and brokers confirm with each other their
understanding of this matter and their subsequent procedures.
If you have questions regarding this memo or any part of its contents, please
do not hesitate to contact either Kevin Farragher (202 326-5848) or myself (202 326-
5845). Thank you, and here's to a timely and efficient tax reporting season.
Donald J. Boteler
Vice President - Operations