|Since 1993, an ever-increasing number of securities have been created to trade on the exchanges with the appearance of
preferred stock. The first of these were Fixed Rate Capital Securities, marketed under names like MIPs, QUIPs and
TOPrs. While more names were added to the mix over time, the actual structure of the securities also evolved.
Throw in regulatory change as well and, in the end, there are no rules that apply specifically to a given trade name.
There are QUIPs that are trusts and QUIPs that are partnerships. Some TOPRs have OID and others do not.
The terms of each and every issue must be examined to determine the proper treatment for information reporting.
And this is just Fixed Rate Capital Securities.
There are now Contingent Payment Obligations, Reverse Convertible Securities and others creating information reporting challenges.
This makes a list of Fixed Rate Capital securities that notes which securities pay interest rather than dividends insufficient for proper tax reporting.
Today's "Structured Securities" consist of multiple instruments, with distributions that are an aggregation of income from these varied sources, each having
different information reporting consequences. Additionally, the income components can be contingent upon market
factors such as the value of an index.
Wall Street Concepts (WSC) is the financial industry's sole source for security master information that is driven by compliance with information reporting obligations.
The framework for the glossary is exchange-traded, structured securities, as well as securities covered by other WSC services.
Information is drawn from the offering documents. Due to the complex issues involved in identifying securities and determining the correct tax characterizations of
payments WSC felt it was necessary to offer a comprehensive service covering all listed securities.
Some of the Issues Covered:
- Characterizing Distributions
Fixed Rate Capital Securities can be issued with a variety of structures, each with its own reporting requirements.
The Glossary distinguishes whether an issue's distributions are to be reported on a 1099 and which form.
In addition, it will keep track of when such issues defer their payments, becoming OID obligation.
Similarly, the Glossary will note when payments are resumed.
- Allocating Distributions
Some issues make distributions that are composed of funds from more than one source.
Often the payments have to be allocated among the different components to report them properly.
Reverse Convertible Securities, for example, usually consist of a debt instrument and an option (or forward contract).
The investor is typically selling the issuer the right to put an underlying asset.
Periodic distributions are usually interest, and option premium (or contract fee). At maturity, the investor can end up with cash or stock.
The glossary provides the allocation, by percentage, of the various distribution characterizations that are required, allowing a nominee to correctly report these amounts.
- Identifying Components
Beyond evaluating distributions, the fact that structured instruments can contain instruments
such as options or forward contracts raises issues of how appropriate an investment is for an account or whether additional account documentation should be obtained.
- Comparing Actual and Projected Payments
An issue such as a Contingent Payment Obligation has a schedule of projected payments that it
will make over its lifetime. The actual amounts distributed will likely vary from the projections.
When actual payments differ from the projected payments tax events occur.
A payment that exceeds the projection triggers a 1099-INT event. Nominees need a comparison of actual
payments to the projected amounts to determine reportable amounts. This comparison is made possible by the Glossary.
- Accounting for Deemed Payments
The structure of some issues creates 1099-reportable events even when no cash has been dispersed.
At the maturity of a Reverse Convertible issue; the investor might receive shares of common stock rather than cash.
These shares have been paid for by the proceeds of bond redemption that takes place within the original holding.
A 1099-B must be created for this event. The investor's basis in the shares is the amount of the proceeds.