Subject: Re: Broker recommendations?
if the company pays a dividend that would normally be qualified while the shares are loaned out, the client still gets the dividend, but the dividend loses its qualified status, meaning it's taxed at a higher rate

It seems completely unfair to the client, and if it happens, the cost should surely be borne by the investor borrowing the shares, not the lender.

I agree with this completely. It seems like shares being loaned out is a behind the scenes detail that an investor shouldn't have to know or care about. But the IRS hasn't asked for my input on this yet. :-)

But my understanding (perhaps mistaken) is that you lose the 'qualified dividend' status just by virtue of having your shares in a margin account, not because anyone is necessarily borrowing them.

I'm not sure about this, I think it's only if they are loaned out, but I could be mistaken too. I do know that I have a margin account at E*Trade and last year all the dividends were qualified and were reported that way on my 1099. However, with E*Trade I think I have to allow them to loan the shares even though they're in a margin account, which I haven't for just this reason. It could be that if I allow E*Trade to loan them, that would be enough to make the dividends non-qualified.

Brian