Oppenheimer & Co., a New York City-based broker-dealer with 1,900 reps, has been slapped with a fine of $525,000 by the Financial Industry Regulatory Authority, which said the B-D showed the wrong cost basis for liquidated securities on a thousand client statements. This had the effect of showing some clients that they’d racked up different capital gains on their 1099 forms than they actually had.

In one case, a client was shown a $10,000 capital gain on a transaction when the cost basis had been adjusted and the capital gain was actually $19,000, Finra said.

One of Oppenheimer’s problems, says the agency, flows from changes to the way broker-dealers have been required to record transactions since a 2008 change in the tax law.

The Emergency Economic Stabilization Act of 2008 required that broker-dealers begin reporting an adjusted cost basis for the price of sold securities on 1099 forms. Before that, the companies had only to report gross proceeds, Finra says. (Adjusted cost basis takes into account things like stock splits, mergers and capital distribution besides dividends.)

The second problem is that the law and the IRS also require brokers selling stocks purchased on different dates—thus, with different bases and with different tax lots—to be liquidated according to the first-in, first-out method unless the client asks to sell specific securities first. The FIFO method is the default, and it was during these partial transactions of differently dated securities that things got hairy for Oppenheimer.

“Under these requirements,” said Finra in its letter, “in the absence of timely, contrary instructions from the customer, broker-dealers are required to report the longest-held shares as sold first. When the market is trending upward, longer-held shares typically will have lower adjusted basis than more recently purchased shares and therefore their sale will generate a higher taxable gain and higher tax liability when sold.”

When Finra peeked into Oppenheimer’s treatment of adjusted cost basis in transactions that had already been settled for clients, it said that company supervisors and brokers had made or asked for improper changes to the cost basis of transactions after the settlements on these partial liquidations, not knowing the regulations on changes made after settlement.

“The firm was supposed to have kept track of manual changes to cost basis in a database system,” Finra said. “This system contained information about hundreds of thousands of cost basis changes. But the system lacked basic information … including the reason for the changes. The database system also contained fields that could be overwritten after the date of the change. As a result, there were numerous instances in which information concerning manual cost basis changes had been overwritten and could not be retrieved.”

Though changes to the cost basis can be made, Oppenheimer regularly granted requests to change the cost basis after the settlement date for the partial liquidations. In a quarter of those cases, the changes were made more than 30 days after the settlement date. Finra said other cost basis tweaks were made many months after the fact.

From January 2014 to December 2019, the company improperly changed the cost basis for 500 to 1,000 customer securities liquidations, and that led to 1,000 misrepresentations on customer account statements and Forms 1099, according to Finra.

“For example, a registered representative sold over 150 shares of stock in a customer’s account in March 2017,” Finra said. “Because the representative failed to identify the specific shares to sell prior to [the] settlement date, Oppenheimer’s system correctly defaulted to … the sale of the customer’s longest held shares, which were purchased in May 2009 and had an adjusted basis of roughly $3,000. The transaction resulted in approximately $19,000 in capital gains for the customer.”

However, "The registered representative contacted the firm’s operations group more than nine months after settlement date to request a change to cost basis to reduce those capital gains. Oppenheimer did so, which resulted in the firm misreporting on customer account statements that the customer’s shares purchased in May 2009 remained in the account when, in fact, they had been sold and that other, more recently purchased shares with a higher cost basis had been sold, when that was not the case.”

Because of the misrepresentation on the account statements, the customer would have seen $10,000 in capital gains when there were actually $19,000.

These misrepresentations ran afoul of Finra rules, resulting in the fine and censure.