Beginning in tax year 2011, the Internal Revenue Service (IRS) expanded the cost basis reporting requirements for the Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. As a result of these IRS requirements, you will receive a newly designed tax reporting statement from National Financial. Key changes to the statement, which we plan to mail to all account owners no later than February 15, 2012, include the following:

• Additional information presented on Form 1099-B, that last year solely appeared in the Supplemental Realized Gain/Loss portion of the statement
• Presentation of the information in the Supplemental section, most notably in the detailed information sections for Forms 1000-DIV and 1099-INT
• A landscape orientation to help you more easily read the entire statement

The objective of the new reporting requirements is to help ensure investors accurately report realized gains and losses on securities sold in their tax statements. As such, the IRS now requires brokerage firms and mutual fund companies, including National Financial, to report the cost basis and gross proceeds of holdings the IRS classifies as covered securities. We are also required to identify whether the holding period for the security was short term or long term in nature. This reporting occurs on the Form 1099-B, which is included in the annual National Financial tax reporting statement.

• Stock in a corporation purchased on or after January 1, 2011
• Registered Investment Companies, including open-end mutual funds, and stocks acquired in dividend reinvestment plans purchased on or after January 1, 2012
• Additional types of securities, as determined by the Treasury Department, purchased on or after January 1, 2013

Note: We identify covered securities on Form 1099-B with the letter P (P = Information provided to the IRS).

In continuing with past practices, National Financial will send customers, and the IRS, tax reporting on the gross proceeds of their brokerage account activities on Form 1099-B. Beginning with tax year 2011, National Financial will report cost basis information for covered securities as described above on the Form 1099-B. In the past, only customers sent realized gain/loss information to the IRS.

This change in reporting does not mitigate the customer's responsibility to accurately complete all required tax forms, including Form 1040, Schedule D. In fact, the IRS is also asking customers to complete an additional IRS Form 8949, Sales and Dispositions of Other Assets, as part of the process of completing Schedule D. Form 8949 will require taxpayers to report their capital gains and losses in more detail than in previous years. For example, taxpayers must indicate whether cost basis was reported on the Form 1099-B (or that no 1099-B was received).

National Financial continues to follow IRS rules governing de minimis reporting. This means that we are not required to send you a tax statement or report to the IRS if the amount on each of the Forms 1099-DIV, 1099-INT, 1099-MISC, or 1099-OID is less than $10.00. However, if you had any reporting on Form 1099-B, in any amount, we will send you a complete tax statement and report the regulatory information to the IRS. We will also send you a tax statement and report to the IRS if there was any 2011 withholding to report on your statement or if any foreign tax paid is reported. Customers may view all statements online, including statements that were not mailed due to de minimis reporting rules.

Due to IRS reporting requirements, National Financial has enhanced tax reporting for holders of securities known as widely held fixed investment trusts ("WHFITs"). Generally, securities in this category include:

• Mortgage pools (such as securities issued by agencies commonly known as Ginnie Mae, Fannie Mae, and Freddie Mac)
• Unit investment trusts (trusts holding a specified group of stocks, bonds, options, or other assets)
• Royalty trusts (such as trusts holding interests in properties producing gas, oil, or minerals)
• Commodity trusts (such as certain trusts that hold precious metals)
• HOLDRS (certain trusts that hold a specified group of stocks)

For all of these types of securities, we provide your prorated share of gross income and your prorated share of all expenses, as well as information you may need to accurately report sales and resulting realized gains and losses. For example, this means that we provide your share of all expenses incurred by the trust and your share of all income received by the trust before the trust has made any deductions for expenses. Throughout this guide, when applicable, we will describe how this information appears on your tax reporting statement.

Mortgage Pool Securities Information -- We also wish to advise holders of mortgage pool securities, such as Ginnie Maes, Fannie Maes, and Freddie Macs, that we may mail you additional account tax information in a separate Mortgage Pool Statement by March 15. Due to IRS deadlines, National Financial does not receive this information in time to include it in your consolidated tax statement. This additional mortgage pool information may also make it necessary for us to send you a corrected tax form.

Royalty Trust Information -- Also by March 15, if you owned a royalty trust, National Financial may mail you additional information relayed to us by the trust. You may find this information useful as you complete your tax returns.

If your account was transferred to National Financial from another brokerage or clearing firm during 2011, your National Financial tax statement will only include activity from the time you started conducting business with us. Your former brokerage or clearing firm should provide Form 1099 and any other applicable tax reporting forms for 2011 activity that occurred prior to the transfer.

• How do I determine which of the dividends reported as qualified dividends on Form 1099-DIV are eligible to be taxed at one of the lower federal long-term capital gain tax rates of 15% or 0%?
  
  
• Which mutual fund dividends do not qualify for the lower tax rates?
  
  
• Do I use trade date or settlement date when determining my holding period for sales?