Financial Industry Regulatory Authority (FINRA) has fined Oppenheimer & Co. $525k for allegedly misrepresenting the cost basis on over 1000 accounts. The firm has come into agreement with FINRA.
A sale of 150 shares of a customer resulted in a capital gain of $19,000. Nine months after the sale, the broker reached out to the backend team of the broking house to modify the sold lot as the one which had been purchased more recently. This resulted in the capital gains being pared down to $10,000.
Whether this was because of oversight at the initial stage or because of a later realization of the capital gains implication is difficult to know.
This transaction is representative of the rampant misrepresentation and negligence with regard to the cost basis information of shares sold, for which Oppenheimer & Co., a firm with almost 1900 registered brokers, has been fined $525,000 by the Financial Industry Regulatory Authority (FINRA). Over a thousand customer accounts and tax forms are understood to be impacted.
Censuring the firm, FINRA stated that “Emails and documents pertaining to these changes (where they exist) showed that the firm’s registered representatives and other operations personnel, for the most part, likewise lacked a proper understanding of the regulations applicable to post settlement cost basis changes.”
The Modus Operandi
It appears that brokers were allowed, or at least not discouraged, to adjust cost basis information pertaining to sale transactions in which customers sold a part of their holding of a certain security, even several months after a transaction had been settled. This conclusion, as articulated in the Letter of Settlement, was arrived at based on a review of transactions between 2014 and 2019 at the New York-based firm.
In case of sale of shares, the default cost (cost of acquisition including fees) is taken on a FIFO (First In, First Out) basis and needs to be reported to the Internal Revenue Service (IRS) on 1099 tax forms. The FIFO principle can be overridden by the broker specifying a more recently acquired lot as the one to which the sold shares belonged.
Oppenheimer, it seems, “regularly granted requests” to make cost basis changes long after the date of settlement. Changes, it appears, were designed to make it to the 1099 documents in time as well as reflect the beneficial tax implications on customer statements.
Impact of the Changes
Forms 1099 were inaccurate regarding a lot of shares actually sold.
Accurate recording and bookkeeping requirements of FINRA rules 2340and 4511 were violated.
Accurate quarterly customer account statements were not issued.
Violation of FINRA’s Rule 2010 requiring “high standards of commercial honor.”
Oppenheimer, without either admission or denial, has settled the charges and agreed to hire qualified external consultants for a review of its policies and procedures connected with the process of calculation and reporting of cost basis.
Whether these charges against Oppenheimer will also have IRS consequences for their clients, or even for the firm, like potentially erroneous tax payments, was not immediately clear from FINRA’s actions. Citing regulation preventing it from sharing individual taxpayer cases, IRS has declined comment on the subject.