1. Cost Basis Reporting NASPP San Francisco Chapter Presented by: Jennifer Sponzilli – KPMG LLP Andrew Schwartz – BNY Mellon May 12, 2010

2. Table of Contents Cost Basis Reporting Overview What is Cost Basis? Legislative History What changed? What does it mean for the securities industry? Complexities around cost basis Effects on employee plans Issuer responsibilities Q&A 2

3. What is Cost Basis? Definition: All costs incurred in purchasing a capital asset Example:  You purchase 100 shares of Broadcom at $34 per share, on May 11, 2010  You pay $25 in fees to purchase the shares  Your cost basis = (100 * $34) = $3,400 + $25 = $3,425 In the past, transfer agents and brokers were not obligated to:  retain cost basis information  or the purchase date  or any adjustments due to corporate actions (stock splits)  or transfer the information to a successor broker  or report the basis on Form 1099-B when the shares are sold Starting in 2011, this will change… 3 (Continued)

4. Legislative History Historical responsibility for cost basis on taxpayers IRS study On October 3, 2008, the Emergency Economic Stabilization Act of 2008 became law Comment period Proposed Regulations - December 2009 Second comment period Effective dates >January 1, 2011: stock/equities >January 1, 2012: mutual funds and Dividend Reinvestment Plans (DRIPs) >January 1, 2013: other securities (debt securities and options) Awaiting final regulations Burden shifted to brokers (including TAs), custodians, issuers 4

5. What changed? Noncovered vs. covered securities Permissible “lot selection” methods  FIFO  Specific ID  Average Cost (Mutual funds/DRP) Example: BUY1/2/1210 shares$50$ 500 BUY2/1/1220 shares$40$ 800 BUY3/1/1220 shares$10$ 200 50 shares$1500 Sell 10 shares FIFO: Basis is $50/share Sell 10 shares Specific ID from Feb lot: Basis is $40/share Sell 10 shares Avg Cost: Basis is $30/share, FIFO from Jan lot 5 (Continued)

6. What changed? S-Corp tracking & reporting IRS fines for non-compliance  $100 per 1099-B  $350,000 maximum per payor  10% of reportable income for intentional neglect Transfer statements (6045A) Corporate action reporting (6045B) 6 (Continued)

7. What changed? Tracking adjustments to cost basis  Wash sales  Return of Capital  Corporate Actions  Fees  Gifts  Death 7 (Continued)

8. What changed? Additional information required and filing deadline changes for Form 1099-B 8

9. What does it mean for the securities industry? Massive investment System changes, delays other development Communication program Very short timeframe Remaining uncertainty Tracking of cost basis by smaller transfer agents Third-party vendors Reputational / Financial Statement Risk 9 (Continued)

10. Complexities of the legislation Wash sales  De minimis effects  Sublot accounting Bifurcating covered/uncovered in same account Transfers due to gifts, death, private sales TA-Broker transfers and adjustments Corporate actions Dividend reinvestment plans 10 (Continued)

11. Complexities of the legislation Wash sale example: BUY 2/1/11 100 shares @ $50=$5,000 SELL 3/31/11100 shares @ $45=$4,500 Results in $500 loss BUY 4/3/11120 shares @ $47=$5,640 Result:  Disallowed loss added to basis of repurchased shares:  Adjust holding period of repurchased shares  Create sublots BUY 2/4/11100 shares @ $52=$5,200 BUY 4/3/11 20 shares @ $47=$ 940 11 (Continued)

12. Complexities of the legislation Bifurcating accounts: Dividend Reinvestment Plans BUY 4/1/10100 shares @ $40 (noncovered) BUY 2/1/11 50 shares @ $35 (uncovered purchase in DRP) BUY 3/2/11 40 shares @ $38 (covered-purchased at broker & tfr in) BUY 5/1/12 30 shares @ $42 (covered purchase in DRP) Shareholder elects average cost in June 2012 Which lots are available to be included? 12 (Continued)

13. Complexities of the legislation Gifts Transfers without reason assumed to be a gift Data required:  Original acquisition date  Adjusted cost basis  Date of gift  FMV on date of gift When FMV < Adjusted basis, then if: Sale price > Adjusted basis > FMV = Gain = Sales price - Adjusted basis Adjusted basis > Sale price > FMV = No gain or loss FMV > Sale Price < Adjusted basis = Loss = Sale price – FMV Gifts to multiple people = multiple lots per person 13 (Continued)

14. Complexities of the legislation Death Assets transferred to estate or beneficiary 2009 rule: Step-up basis  Acquisition date becomes date of death  Basis = FMV on date of death or valuation date six months later  All sales considered long-term 2010 rule: Carryover basis Uncertainty going forward 14 (Continued)

15. Complexities of the legislation Private Sale Certificate sold from one individual to another Not reportable on 1099-B by transfer agent Must be informed that it is a private sale-otherwise gift Basis to purchaser is purchase price How will TA know? 15 (Continued)

16. Complexities of the legislation Transfer adjustments TA only has to record original basis What if a sale in a TA account affects transferred shares? Who is responsible for updating adjusted basis? Is there a deadline for issuing corrected transfer statements? What if TA changes in interim? What if 1099-B has to be reissued? 16 (Continued)

17. Complexities of the legislation Corporate Actions Stock split Reverse split Mergers Stock dividends Spin – offs Tender offers Return of capital ADRs 17 (Continued)

18. Complexities of the legislation Dividend reinvestment plans Generally, shareholder can specifically identify securities up to settlement date Shareholder can elect average cost in a DRP account  then revoke within a year or before first sale  or can change with IRS permission  creating two or more calculation methods in the same account What defines a DRP – 10% rule 18 (Continued)

19. And if that’s not enough…Effects on Employee Plans Basic definition:  Cost Basis = Purchase price + ordinary income  + Fees (if proceeds reported gross on Form 1099-B) Proposed regulation  More guidance is coming on employee plans  Report only purchase price until 2013 (at earliest) >Will understate cost basis >Will confuse participants >STA comment letter 19 (Continued)

20. Effects on Employee Plans Necessity of issuer involvement  Example: Restricted stock vesting  Issuer administers plan in-house  Shares move from TA reserve to broker  Who is responsible for transferring cost basis? Option exercises  Non-Qualified  ISO >Disq. Disp. - Basis not known until sale 20 (Continued)

21. Effects on Employee Plans Employee Stock Purchase Plans  Non-Qualified >DRP rules  Qualified §423 plans >Basis not known until sale  Interplay with §6039 regulations  Effects on individual lots >Corporate actions >Wash sales >Transfers out of plan  Purchase price, FMV at beginning and end of offering period all need to be adjusted 21 (Continued)

22. Effects on Employee Plans How to prepare  Understand the calculations  Spot check the results  Be prepared for employee inquiries  Work closely with administrator, TA, broker  Ask questions 22 (Continued)

23. Q & A

24. CONTACT INFORMATION Jennifer Sponzilli Principal KPMG LLP (212) 872-6660 jsponzilli@kpmg.com Andrew L. Schwartz, CPA, CEP Vice President BNY Mellon Shareowner Services (201) 680-3340 andrew.schwartz@bnymellon.com