Effective January 3, 2011, Penson Financial Services, Inc. (“Penson”) will launch a new Cost Basis System. This new system will offer Cost Basis Accounting to customers, as well as assist them with complying with the Emergency Economic Stabilization Act of 2008.

The Emergency Economic Stabilization Act of 2008 requires broker dealers to track and report cost basis to the IRS in three phases over the next three tax years. Penson is committed to providing with timely and relevant information regarding each of the three phases of implementation.

The three phases are as follows:

2011: Equity securities 2012: Mutual funds and dividend reinvestment plan shares 2013: Debt securities, options and all other financial instruments

The first phase of the cost basis regulation goes into effect on January 1, 2011. The tax reporting for the clients will change regarding covered securities. A covered security is defined as an equity security purchased or acquired on or after January 1, 2011.

Penson has historically reported gross proceeds on Form 1099-Bs in past years as required. In addition to the proceeds from sales currently available on Form 1099-B, the following information will be available for covered securities for tax year 2011 (received in 2012).

	Adjusted cost basis Amount of realized gain/loss Whether the gain or loss is short or long-term

Please keep in mind that the customer should consider the tax implications before they sell an investment because the methods for computing the gain or loss cannot be changed after the trade settles.

When a customer sells an investment or covers a short sale, Penson will use the default tax relief method on the account. For equities, the default method will be First-in First-out (FIFO). Clients will have the ability to match specific tax lots at their discretion up to and including settlement date.

Cost Basis Accounting – Frequently Asked Questions

What are the latest cost basis reporting requirements?

	Congress passed the Emergency Economic Stabilization Act on October 3, 2008, which requires firms like ours to report adjusted cost basis for taxable accounts to the IRS via Form 1099-B beginning in 2011. The final ruling was issued by the IRS on October 12, 2010. You can review the final regulation via the following link: http://www.irs.gov/taxpros/article/0,,id=225080,00.html

What are some other important considerations regarding the rule changes?

	Penson Cost Basis System will account for the rules regarding cost accounting: o Gifts o Inheritances o Wash sales o Short sales
	Cost Basis is the original purchase price you paid for an investment. Adjusted cost basis is the original cost basis and any adjustments due to wash sales, corporate actions, and any other transactions that affect cost basis.

When are the various phases and what is covered?

Covered under the legislation: o Equities purchased or acquired on or after January 1, 2011 o Mutual funds and DRIPs purchased or acquired on or after January 1, 2012 o Options, bonds and all other securities purchased or acquired on or after January 2013

What account tax relief default methods are available?

Penson Cost Basis will offer First-In First Out (FIFO) and Last-In First-Out (LIFO). Clients also have the ability to perform a selected lot method up to and including settlement date. The tax lots can be matched at the discretion of the client.

Will clients’ responsibility for filing capital gains and losses on a Schedule D change?

	No, taxpayers will still be responsible for reporting capital gains and losses on Scheduled D based on an aggregate view of all holdings across all of their accounts that have the same social security number or tax ID.
	Clients will need to consult their tax advisor for assistance, if they have more detailed questions about their personal tax reporting.

How will clients be notified about their cost basis on a transaction and where will they go to choose the method (FIFO, LIFO or selected lot) that they want to use for any unsettled transactions?

	A message will be displayed on all client confirmations directing them to access their broker’s website.
	The Penson Cost Basis System will be located in the “Tools” menu on https://online.penson.com.

How will the client know if a security will have a gain/loss reported or not?

	Penson Cost Basis System will display whether a security is covered or uncovered.
	Only covered securities will have gain/loss reported on the 1099-B.

What is Penson’s responsibility regarding the sharing of cost basis data with other clearing firms in the event of a transfer in-kind of equities?

	Penson must transmit cost basis information for all covered securities to the contra firm in the event of a transfer in-kind.
	Penson will utilize The Depository Trust & Clearing (DTCC) system, Cost Basis Reporting Service (CBRS), to automate the transfer of this data.
	If the contra firm is not a CBRS member, Penson will utilize a paper transfer statement that will be mailed to the contra firm.
	All transfers into Penson that receive cost basis information, either via CBRS or paper transfer statement, will be updated accordingly in Penson Cost Basis System.