[Federal Register Volume 64, Number 148 (Tuesday, August 3, 1999)]
[Rules and Regulations]
[Pages 42012-42031]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19824]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-41661; File No. S7-8-99]
RIN 3235-AH61
Year 2000 Operational Capability Requirements for Registered
Broker-Dealers and Transfer Agents
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting temporary Rules 15b7-3T, 17Ad-21T, and 17a-9T under the
Securities Exchange Act of 1934 (``Exchange Act''). Rules 15b7-3T and
17Ad-21T require registered broker-dealers and non-bank transfer agents
to ensure that their mission-critical computer systems are Year 2000
compliant by August 31, 1999, or to certify that any material Year 2000
problems in mission critical systems will be fixed no later than
November 15, 1999. Rule 17a9-T requires certain broker-dealers to make
and preserve a separate trade blotter and securities record or ledger
as of the close of business of the last three business days of 1999.
Rule 17Ad-21T requires non-bank transfer agents to make and preserve a
backup copy of all their master securityholder files so that the
records can be reconstructed if necessary for a possible transfer to
another Year 2000 compliant transfer agent. These rules are intended to
reduce the risk to investors and the securities markets posed by
broker-dealers and non-bank transfer agents that have not adequately
prepared their computer systems for the millennium transition.
EFFECTIVE DATE: August 30, 1999.
FOR FURTHER INFORMATION CONTACT: Broker-Dealers (Rule 15b7-3T) Sheila
Slevin, Assistant Director, 202-942-0796, Heidi Pilpel, Special
Counsel, 202-942-0791, Kevin Ehrlich, Attorney, 202-942-0778, or Robert
Long, Attorney, 202-942-0097; Transfer Agents (Rule 17Ad-21T) Jerry W.
Carpenter, Assistant Director, 202-942-4187, or Lori R. Bucci, Special
Counsel, 202-942-4187; Recordkeeping (Rule 17a-9T) Tom McGowan,
Assistant Director, 202-942-0177, Division of Market Regulation,
Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 20549-1002.
SUPPLEMENTARY INFORMATION:
I. Introduction
A. Background
Broker-dealers, transfer agents, and other securities market
participants will soon face a critical test of their automated systems
with the upcoming Year 2000. As the next millennium approaches, unless
proper modifications have been made, the program logic in many computer
systems will start to produce erroneous results because the systems
will incorrectly read dates such as ``01/01/00'' as being in 1900 or in
some other incorrect year.
The Commission views the Year 2000 problem as an extremely serious
issue and has taken various steps to address it. For example, we
adopted Rules 17a-5(e)(5) and 17Ad-18 under the Exchange Act \1\
requiring certain broker-
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dealers and non-bank transfer agents to file reports with us and their
designated examining authority (``DEA'') regarding their Year 2000
preparedness.\2\ We also provided interpretive guidance for public
companies, investment advisers, investment companies, and municipal
securities issuers regarding their disclosure obligations.\3\ Since
1996, we have monitored the Year 2000 efforts of the exchanges, Nasdaq,
and the clearing agencies. In addition, since the third quarter of
1996, we have included a Year 2000 examination module in our
examinations of regulated entities.\4\ The Commission also worked with
the Securities Industry Association as the March and April 1999
industry-wide test for Year 2000 was developed and implemented.\5\
Finally, we instituted public administrative and cease-and-desist
proceedings against broker-dealers and transfer agents that failed to
file all or part of the required Year 2000 forms in a timely manner.\6\
Through these efforts, we have made clear that broker-dealers and non-
bank transfer agents can not use their failure to address the Year 2000
problem as an excuse for failing to protect investors.
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\1\ Exchange Act Release No. 40162 (July 2, 1998), 63 FR 37668
(July 13, 1998); Exchange Act Release No. 40163 (July 2, 1998), 63
FR 37688 (July 13, 1998).
\2\ In addition, we later amended Rule 17a-5 and Rule 17Ad-18 to
require these entities to file a report prepared by an independent
public accountant regarding their process for preparing for the Year
2000. Exchange Act Release No. 40608 (Oct. 28, 1998), 63 FR 59208
(Nov. 3, 1998); Exchange Act Release No. 40587 (Oct. 22, 1998), 63
FR 58630 (Nov. 2, 1998).
\3\ Exchange Act Release No. 40277 (July 29, 1998), 63 FR 41394
(Aug. 4, 1998). We subsequently published guidance in the form of
Frequently Asked Questions to clarify recurring issues regarding
Year 2000 disclosure obligations. Exchange Act Release No. 40649
(Nov. 9, 1998), 63 FR 63758 (Nov. 16, 1998).
\4\ In addition, in June 1997 and 1998, our staff published
reports to Congress on the Readiness of the United States Securities
Industry and Public Companies to Meet the Information Processing
Challenges of the Year 2000. Both of these reports are available at
http://www.sec.gov/news/studies/yr2000.htm> (and yr2000-2.htm). Our
staff has submitted a similar report to Congress for 1999.
\5\ In addition, we are actively participating in international
Year 2000 efforts, including those sponsored by International
Organization of Securities Commissions (``IOSCO'').
\6\ See, e.g., Exchange Act Release No. 40573 [Adm. Proc. File
No. 3-9758] (Oct. 20, 1998) (broker-dealers that failed to file Form
BD-Y2K); Exchange Act Release No. 40895 [Adm. Proc. No. 3-9801]
(Jan. 7, 1999) (transfer agents that failed to file Form TA-Y2K). We
also filed 8 actions against investment advisors that failed to file
similar Year 2000 reports. See, e.g., Investment Advisors Act
Release No. 1800 [Adm. Proc. No. 3-9888] (May 4, 1999).
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Recently, the Commission's efforts have focused on examinations,
requiring broker-dealers and non-bank transfer agents to disclose their
Year 2000 readiness, and encouraging point-to-point and industry-wide
testing.\7\ Based on the experience and information obtained from these
efforts, the Commission in March determined to propose additional
safeguards to reduce any adverse effects of non-Year 2000 compliant
broker-dealers and non-bank transfer agents on investors and the
securities markets.
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\7\ We also reminded broker-dealers and non-bank transfer agents
that failure to adequately prepare for the Year 2000 will not be
considered a valid excuse for noncompliance with the requirements of
Exchange Act Rules 17a-3, 17Ad-6, and 17Ad-7 to make and keep
current books and records. See generally Exchange Act Release Nos.
40162 (July 2, 1998), 63 FR 37668 (July 13, 1998); 40163 (July 2,
1998), 63 FR 37688 (July 13, 1998). See also In re Lowell H.
Listrom, 50 SEC 883, n. 7 (1992) (Commission stating that ``if a
broker-dealer or its agent develops a computer-communications system
to facilitate regulatory compliance, failure of that system does not
excuse the broker-dealer from its obligation to comply with each of
its regulatory responsibilities.'')
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B. Year 2000 Rules
On March 5, 1999, the Commission proposed for comment new Rules
15b7-3T (17 CFR 240.15b7-3T), 17a-9T (17 CFR 240.17a-9T), and 17Ad-21T
(17 CFR 240.17Ad-21T) under the Exchange Act,\8\ addressing broker-
dealer and non-bank transfer agent operational capability in the
context of Year 2000.\9\ Proposed Rules 15b7-3T and 17Ad-21T required
registered broker-dealers and non-bank transfer agents to ensure that
their mission-critical systems would be Year 2000 compliant by August
31, 1999, or to certify that any material Year 2000 problems would be
fixed by October 15, 1999.\10\ Proposed Rule 17a-9T required large
broker-dealers to make and preserve additional copies of trade blotters
and securities records or ledgers for each of the last two business
days of 1999.\11\ Proposed Rule 17Ad-21T required every non-bank
transfer agent to maintain a segregated copy of its database, file
layouts, and all relevant files for a rolling five business day period
beginning August 31, 1999, and ending on March 31, 2000.
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\8\ 15 U.S.C. 78a et seq.
\9\ Exchange Act Release No. 41142 (Mar. 5, 1999), 64 FR 12127
(Mar. 11, 1999) (``Proposing Release''). On March 5, 1999, the
Commission also proposed Rule 15b7-2 and 17Ad-20 under the Exchange
Act. These rules would have codified a statutory requirement that
broker-dealers and non-bank transfer agents have sufficient
operational capability to conduct a securities business. The
Commission is deferring action on the general operational capability
rules at this time.
\10\ Proposed temporary Rules 15b7-3T and 17Ad-21T.
\11\ Proposed temporary Rule 17a-9T.
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The Commission received 42 comment letters on the proposed rules,
most of which were favorable.\12\ As discussed below, the Commission is
adopting the proposed rules with several modifications intended to
address commenters' concerns. These rules should facilitate the use of
a proactive approach in dealing with broker-dealers and non-bank
transfer agents that are not ready for Year 2000.
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\12\ The comment letters are in Public File S7-8-99, which is
available for inspection in the Commission's Public Reference Room.
The Commission received comment letters on behalf of the following:
American Institute of Certified Public Accountants (``AICPA'');
Associated Financial Services, Inc.; The Bond Market Association;
Brown & Brown Securities, Inc.; Patrick Calby; Charles Schwab & Co.,
Inc.; DST Systems, Inc.; Federated Investors, Inc.; Goffstown
Financial Investments; Gramercy Securities; Grodsky Associates,
Inc.; HBK Finance L.P. and HBK Securities Ltd; H.C. Denison & Co.;
H.M. Payson & Co.; Paul Henning; Holly Securities, Inc.; Instinet
Corporation; Intellivest Securities, Inc.; Investment Company
Institute (``ICI''); Dan Jamieson; L.P.; The Jeffrey Matthews
Financial Group, LLC; Lam Securities Investments, Inc.; Littlewood &
Associates, Inc.; M. Hadley Securities, Inc.; Dan McEwan; Monroe
Securities; Morgan Stanley & Co. Incorporated; National Association
of Securities Dealers, Inc. (``NASD''); Network 1 Financial
Securities, Inc.; Pershing Division of Donaldson, Lufkin & Jenrette
Securities Corporation (``Pershing''); Raymond James Financial,
Inc.; Registrar and Transfer Company (``RTC''); Howard Spindel;
Securities Industry Association (``SIA''); The Securities Transfer
Association (``STA''); Sierra Trading Group LLC; Stock USA, Inc.;
Treasure Financial Corp.; U.S. Bancorp Piper Jaffray; U.S.
Participation, Ltd.; Wall Street Capital Company; Dale W. Way.
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II. Discussion of Year 2000 Rules
A. Rule 15b7-3T
Proposed Rule 15b7-3T prohibited any broker-dealer having a
material Year 2000 problem on or after August 31, 1999, from conducting
a securities business unless the broker-dealer certified and could
demonstrate that it would fix the problem by October 15, 1999.\13\ The
proposal defined the term ``material Year 2000 problem,'' set forth
criteria giving rise to a presumption of a material Year 2000 problem,
and required firms having a material Year 2000 problem to notify the
Commission and satisfy certain conditions if they wished to continue
conducting a securities business.\14\
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\13\ See generally proposed Rule 15b7-3T.
\14\ See proposed Rule 15b7-3T(c), (d), and (e).
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Most of the comment letters on proposed Rule 15b7-3T were
favorable, although two commenters suggested that in lieu of the
proposed approach, the Commission should instead permit firms with Year
2000 problems simply to disclose to clients their readiness status and
the inherent risks of being non-Year 2000 compliant.\15\ As discussed
in detail below, the majority of commenters recommended specific
modifications to the proposed rule. The Commission has determined to
adopt Rule 15b7-3T substantially as proposed, but with certain
modifications suggested by the commenters.
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\15\ See letters from Intellivest Securities and Monroe
Securities.
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1. Scope of the Rule; Definition of Material Year 2000 Problem
As proposed, Rule 15b7-3T applied generally to all broker-dealers,
and stated that a broker-dealer has a material Year 2000 problem if:
(1) Any of its computer systems incorrectly identifies any date in the
Year 1999, the Year 2000, or in any year thereafter; and (2) the error
impairs or, if uncorrected, is likely to impair, any of its mission
critical computer systems.\16\
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\16\ See proposed Rule 15b7-3T(b)(1).
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Ten commenters suggested narrowing the scope of the proposed rule.
For example, several commenters urged the Commission to limit the
rule's applicability to clearing firms, firms with a large number of
customer accounts, firms that use computers for recordkeeping, order
execution or order transmission, or firms with high capital
requirements.\17\ One commenter recommended that the rule apply only to
self-clearing firms, firms that clear for other broker-dealers, and
market-makers.\18\
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\17\ See letters from Goffstown Financial Investments, Gramercy
Securities, Grodsky Associates, Holly Securities, HBK Finance,
Intellivest Securities, Dan Jamieson, Monroe Securities, U.S.
Participation, and Wall Street Capital Company.
\18\ See NASD letter.
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Several commenters suggested narrowing the definition of ``material
Year 2000 problem.'' One commenter stated generally that the definition
of ``material Year 2000 problem'' should have more specific
criteria.\19\ Other commenters stated that the rule should make clear
that ``a material Year 2000 problem is one in which a `mission
critical' system is experiencing a `material' problem arising from the
misreading of dates.'' \20\ In contrast, one commenter suggested
defining the term material Year 2000 problem more broadly than
proposed.\21\
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\19\ See AICPA letter.
\20\ See letters from Pershing and SIA.
\21\ See NASD letter. Specifically, the NASD recommended that
the rule should cover other date related processing errors and
incorporate references to functionality, data integrity, and
performance. The Commission believes that these concepts are already
included in the rule's definition of ``material Year 2000 problem''
and that this degree of specificity might cause confusion.
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In response to commenters' concerns that the scope of the proposed
rule is too broad, the Commission has modified the language of
paragraph (a) to clarify that the rule applies only to broker-dealers
that use computers in the conduct of their business as a broker or
dealer. Rule 15b7-3T is intended to focus on those broker-dealers whose
computer systems are necessary for processing securities transactions,
managing trading accounts, maintaining customer accounts, or delivering
funds and securities (i.e., broker-dealers for whom computer systems
are ``mission critical systems''). The rule is not intended to cover,
for example, a broker-dealer whose reliance on automation is limited to
the use of off-the-shelf word processing or payroll software. Likewise,
many smaller broker-dealers still transmit orders via the telephone.
The rule is not intended to cover these broker-dealers unless they use
computers in their broker-dealer business functions, the failure of
which could pose a risk to investors.
The Commission, however, has decided not to modify the definition
of ``material Year 2000 problem.'' Thus, as adopted, the rule states
that a broker-dealer has a material Year 2000 problem if, at any time
on or after August 31, 1999: (1) Any of its mission critical computer
systems incorrectly identifies any date in the Year 1999 or the Year
2000; and (2) the error impairs or, if uncorrected, is likely to
impair, any of its mission critical systems.\22\ The Commission
believes that any impairment of a mission critical system is inherently
material. The definition is not intended to include a broker-dealer
whose systems have minor technical problems regarding the reading of
dates if these problems do not adversely affect the broker-dealer's
core business.
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\22\ See temporary Rule 15b7-3T(b)(1). The term ``mission
critical system'' is defined as any system that is necessary,
depending on the nature of the broker-dealer's business, to assure
the prompt and accurate processing of securities transactions,
including order entry, execution, comparison, allocation, clearance
and settlement of securities transactions, the maintenance of
customer accounts, and the delivery of funds and securities.
Temporary Rule 15b7-3T(g)(1). The phrase ``depending on the nature
of their business'' is intended to tailor the definition of a
``material Year 2000 problem'' to different broker-dealers'
businesses and operations. The definition of ``mission critical
system'' is adopted as proposed.
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Moreover, the Commission has decided not to exclude from the rule
broker-dealers based on factors such as size or number of accounts.
Even small or introducing broker-dealers have the potential to affect
other market participants by, for example, introducing inaccurate or
corrupted data into other systems. Where appropriate, the Commission
believes it should have the ability to act to prevent a patently non-
compliant broker-dealer from continuing to do business before the
century date change.
2. Presumption of a Material Year 2000 Problem
The Commission proposed that a broker-dealer would be presumed to
have a material Year 2000 problem if it: (1) Does not have written
procedures designed to identify, assess, and remediate any Year 2000
problems in mission critical systems; (2) has not verified its Year
2000 remediation efforts through reasonable internal testing of mission
critical systems; (3) has not verified its Year 2000 remediation
efforts by satisfying any applicable Year 2000 testing requirements
imposed by a self-regulatory organization; or (4) has not remediated
all exceptions contained in any independent public accountant's report
prepared on behalf of the broker-dealer pursuant to Exchange Act Rule
17a-(5)(e)(5)(vi).\23\
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\23\ See proposed Rule 15b7-3T(b)(2).
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One commenter stated generally that a materiality standard should
be added to the proposed presumptions.\24\ A few commenters expressed
concern that, under the rule as proposed, a broker-dealer could be
presumed to have a material Year 2000 problem if a mission-critical
system under the control of its service bureau, clearing broker, or
other third party were not Year 2000 compliant.\25\ These commenters
argued that it would be unfair to hold a broker-dealer responsible for
a presumption that it could neither rebut nor cure.
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\24\ See SIA letter.
\25\ See letters from Dan Jamieson, Federated, NASD, and SIA.
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In response to the Commission's request for comment on whether
independent third party verification of remediation plans should be
required, two commenters said it should not.\26\ One commenter
expressed concern that there would be a lack of objective standards by
which to evaluate Year 2000 remediation plans.\27\ In addition, several
commenters raised concerns regarding the requirement that all
exceptions in an independent public accountant's report must be
remedied to avoid being presumed to be a Year 2000 problem.\28\
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\26\ See letters from Pershing and SIA.
\27\ See AICPA letter.
\28\ See letters from Jeffrey Matthew's Financial Group,
Pershing, RTC, SIA, and STA.
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The Commission is adopting the presumption with a few changes.
Because a broker-dealer cannot reasonably be expected to certify
regarding the Year 2000 status of a mission critical system that it
does not control, the Commission has limited the rule so that a broker-
dealer will not be presumed to have a material Year 2000 problem if its
written procedures or internal testing do not cover mission critical
systems under the control of
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third parties.\29\ As adopted, the presumptions of the rule regarding
written procedures and internal testing apply only to mission critical
systems over which the broker-dealer has some control. For example, a
broker-dealer has control over a mission critical system if it operates
and maintains the systems.
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\29\ Broker-dealers will still be expected to diligently inquire
into the status of their third parties' Year 2000 readiness, and to
make appropriate alternative arrangements if they are not satisfied.
Broker-dealers will still be responsible, however, if third party
failure causes the firm to be in violation of any provision under
federal securities laws other than Rule 15b7-3T. See supra note 7.
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In the Proposing Release, we stated that arrangements between
introducing and clearing brokers do not relieve either broker-dealer of
its responsibilities under proposed Rule 15b7-3T. The modification to
Rule 15b7-3T is intended to clarify that firms will not be held
responsible for failing to certify to the Year 2000 status of mission
critical systems controlled by third parties.\30\ Introducing broker-
dealers, however, will still be expected to diligently inquire into the
status of their clearing firm's Year 2000 readiness, and to make
arrangements with another clearing firm if they are not satisfied with
their clearing firm's progress or response.
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\30\ See supra note 7. A broker-dealer will still be responsible
if a third party failure causes the broker-dealer to be in violation
of any provision under the federal securities laws other than Rule
15b7-3T(b).
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The Commission has decided not to expressly narrow the scope of the
rule to only ``material'' exceptions in the independent public
accountant's report. These reports generally do not distinguish between
material and immaterial exceptions. In fact, it is likely that only
material problems will be sufficient to cause an exception in the first
instance.\31\
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\31\ The Commission notes that it expects to file actions
against firms for violating this rule in federal district court.
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Thus, as adopted, Rule 15b7-3T provides that a broker-dealer will
be presumed to have a material Year 2000 problem if, at any time on or
after August 31, 1999, it:
Does not have written procedures reasonably designed to
identify, assess, and remediate any Year 2000 problems in mission
critical systems under its control; \32\
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\32\ The appropriate scope of such procedures would vary
depending on the nature of a broker-dealer's business and the size
and complexity of its computer systems. To provide flexibility, we
are not prescribing specific written procedures. However, broker-
dealers should, at a minimum, use industry standards. For example,
the NASD has published a High-Level Plan, prepared by the SIA,
summarizing the standard components of a sample Year 2000 Project
Plan. NASD Year 2000 Member Information (1998).
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Has not verified its Year 2000 remediation efforts through
reasonable internal testing of mission critical systems under its
control; \33\
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\33\ The General Accounting Office has recommended a set of
testing guidelines that we believe is reasonable for broker-dealers
to follow. It describes five phases of Year 2000 testing activities,
beginning with establishing an organizational testing
infrastructure, followed by designing, conducting and reporting on
software unit testing, software integration testing, system
acceptance testing, and end-to-end testing. GAO Year 2000 Computing
Crisis: A Testing Guide (November 1998) (``GAO Guidelines'').
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Has not verified its Year 2000 remediation efforts by
satisfying Year 2000 testing requirements imposed by self-regulatory
organizations to which it is subject; \34\ or
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\34\ We have approved SRO rule changes that permit the SROs to
require their members to conduct Year 2000 testing. See Exchange Act
Release Nos. 40745 (Dec. 3, 1998), 63 FR 68324 (Dec. 10, 1998)
(NASD); 40836 (Dec. 28, 1998), 64 FR 1037 (Jan. 7, 1999) (American
Stock Exchange); 40837 (Dec. 28, 1998), 64 FR 1055 (Jan. 7, 1999)
(NYSE); 40838 (Dec. 28, 1998), 64 FR 1044 (Jan. 7, 1999) (Chicago
Board Options Exchange); 40839 (Dec. 28, 1998), 64 FR 1046 (Jan. 7,
1999) (Chicago Stock Exchange); 40870 (Dec. 31, 1998), 64 FR 1263
(Jan. 8, 1999) (Philadelphia Stock Exchange); 40871 (Dec. 31, 1998),
64 FR 1838 (Jan. 12, 1999) (Boston Stock Exchange); 40893 (Jan. 7,
1999) (Pacific Stock Exchange), 64 FR 2932 (Jan. 19, 1999); 40696
(Nov. 20, 1998), 63 FR 65829 (Nov. 30, 1998) (Depository Trust
Company); 40889 (Jan. 6, 1999), 64 FR 2691 (Jan. 15, 1999) (MBS
Clearing Corporation); and 40946 (Jan. 14, 1999), 64 FR 3328 (Jan.
21, 1999) (National Securities Clearing Corporation).
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Has not remediated all exceptions relating to its mission
critical systems contained in any independent public accountant's
report prepared on behalf of the broker-dealer pursuant to Exchange Act
Rule 17a-(5)(e)(5)(vi).
The failure of a broker-dealer to satisfy any of the four
conditions above will require the broker-dealer to provide notice to
the Commission. If a broker-dealer that has a material Year 2000
problem or that is presumed to have a material Year 2000 problem wishes
to continue operating beyond August 31, 1999, it must submit a
certificate to the Commission, as described below.
3. Notification to the Commission and DEA
As proposed, the rule required any broker-dealer that has or is
presumed to have a material Year 2000 problem at any time on or after
August 31, 1999, to immediately notify the Commission and its DEA of
the problem. The Commission received one comment on this provision
which supported the notice procedure to the Commission and the
DEAs.\35\
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\35\ See NASD letter.
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The Commission, therefore, is adopting this provision as proposed.
Notice to the Commission must be sent by overnight delivery to the
Division of Market Regulation, U.S. Securities and Exchange Commission,
450 Fifth Street, NW, Washington, DC 20549-1002 Attention: Y2K
Compliance. Notice also must be provided to the firm's DEA. The
notification requirement is intended to alert the Commission and DEA so
that we can assess the broker-dealer's condition and decide if its Year
2000 problems threaten customers or the integrity of the markets.\36\
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\36\ The Commission is adopting this requirement as proposed
except that notices will be sent to the Division of Market
Regulation directly, rather than to the Secretary's Office.
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4. Prohibition on Non-Compliant Broker-Dealers and Certification
a. Deadlines
The proposal stated that a broker-dealer that is not operationally
capable because it has a material Year 2000 problem would be
prohibited, on or after August 31, 1999, from effecting any transaction
in, or inducing the purchase or sale of, any security, receiving or
holding customer funds or securities, or carrying customer accounts,
unless it certifies and can demonstrate that it will fix the problem by
October 15, 1999.\37\ As proposed, a broker-dealer that is presumed to
have a material Year 2000 problem would have the burden to prove that
it did not have a material Year 2000 problem, and would be required to
come forward before October 15, 1999, with sufficient evidence to rebut
the presumption.\38\
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\37\ See proposed temporary Rule 15b7-3T(d).
\38\ Id.
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The Commission specifically sought comment on whether the proposed
August 31, 1999, deadline to notify the Commission of a material Year
2000 problem, and the proposed October 15, 1999, deadline to achieve
Year 2000 compliance, were appropriate. Several commenters stated that
the proposed dates were too early. One commenter stated that the
proposed deadlines should have been announced months or years ago to
provide firms adequate notice.\39\ In contrast, one commenter stated
that the proposed deadlines were too late, given the difficulty
associated with transferring accounts.\40\
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\39\ See H.M. Payson letter.
\40\ See letters from DST and Schwab.
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Several commenters expressed reservations about requiring a firm to
cease business if it failed to correct Year 2000 problems by the
proposed deadline.\41\ Commenters suggested that broker-dealers should
be permitted to
[[Page 42016]]
fix problems after the October 15, 1999, deadline without transferring
accounts.\42\ Another commenter, however, argued that, given the unique
nature of the Year 2000 problem, shutting down a firm with a material
Year 2000 problem was appropriate.\43\
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\41\ See letters from DST, Grodsky Associates, L.P. Littlewood
and Associates, NASD, Pershing, STA, and Stock USA.
\42\ See letters from NASD and Pershing.
\43\ See Schwab letter.
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Upon consideration of commenters' views, the Commission has
determined to push back the date to November 15, 1999, by which a
broker-dealer must certify that its material Year 2000 problems will be
remedied. Any broker-dealer that continues to have a material Year 2000
problem on or after November 15, 1999, will be required to cease
operations by December 1, 1999. The Commission expects that the broker-
dealer will use the period between November 15, 1999, and December 1,
1999, to unwind its business in an orderly fashion. Moving the deadline
to November 15, 1999, will provide broker-dealers with as much time as
possible to address Year 2000 problems, while permitting the Commission
to take proactive steps in the event a broker-dealer is not Year 2000
compliant by that date.
Several commenters expressed concern that the proposed October 15,
1999, deadline was too late given the difficulties associated with the
transfer of accounts. The Commission acknowledges that in the ordinary
course of business the transfer of funds and accounts might take
several months. However, in light of the Year 2000 problem, accounts
may need to be transferred on an expedited basis.\44\ The Commission
notes that the rule, both as proposed and adopted, permits the
Commission or a court of competent jurisdiction to order a broker-
dealer to comply with Rule 15b7-3T(d) (i.e., to cease its securities
business and transfer accounts) at any time after August 31, 1999, if
to do so would be in the public interest or for the protection of
investors. We expect to reserve this authority for situations in which
it is patently unrealistic that a broker-dealer will be able to conduct
sufficient remediation to achieve Year 2000 compliance by November 15,
1999.
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\44\ The Commission appreciates the difficulties associated with
an expedited transfer of accounts. See infra Section II. B. 5 for a
further discussion of this issue.
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b. Certification
Four comment letters addressed the certification requirement. One
commenter suggested that firms that file certificates be allowed to
operate beyond the October 15, 1999, deadline.\45\ Another commenter
asserted that requiring the firm's CEO to sign the document is
unnecessary. In addition, this commenter expressed concern that CEOs of
small firms would be the targets of enforcement actions as a
consequence of the rule.\46\ Another commenter expressed concern that
the certification requirement puts CEOs in the position of either
telling the truth and shutting down or lying in order to continue
operations.\47\ This commenter concluded that some CEOs would
inevitably lie, which would only provide false comfort and jeopardize
the credibility of the Commission and the securities markets.\48\ In
addition, this commenter stated that if enough CEOs told the truth,
i.e., that their firms had material Year 2000 problems, it would cause
panic.\49\ On the other hand, one commenter agreed that a firm's CEO is
the appropriate party to sign the certification.\50\
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\45\ See SIA letter.
\46\ See Dan Jamieson letter.
\47\ See Dale W. Way letter.
\48\ Id.
\49\ Id.
\50\ See NASD letter.
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As adopted, Rule 15b7-3T provides that a broker-dealer with (or
that is presumed to have) a material Year 2000 problem on or after
August 31, 1999, will be permitted to continue to operate until
December 1, 1999, if, in addition to providing the Commission and its
DEA with the notice required by paragraph (c) of the rule, it submits
to the Commission and its DEA a certificate signed by its chief
executive officer (or an individual with similar authority) stating:
The broker-dealer is in the process of remediating its
material Year 2000 problem;
The broker-dealer has scheduled testing of its affected
mission critical systems to verify that the material Year 2000 problem
has been remediated, and specifies the testing dates;
The date (which cannot be later than November 15, 1999) by
which the broker-dealer anticipates completing remediation of the
material Year 2000 problem in its mission critical systems, and will
therefore be operationally capable; and
Based on inquiries and to the best of its chief executive
officer's knowledge, the broker-dealer does not anticipate that the
existence of the material Year 2000 problem in its mission critical
systems will impair its ability, depending on the nature of its
business, to ensure prompt and accurate processing of securities
transactions, including order entry, execution, comparison, allocation,
clearance and settlement of securities transactions, the maintenance of
customer accounts, or the delivery of funds and securities; and the
broker-dealer anticipates that the enumerated remediation steps will
result in remedying the material Year 2000 problem on or before
November 15, 1999.
In response to the comments, we made four changes to the
certification provision. First, as stated above, the date by which the
broker-dealer must expect to have remediated the material Year 2000
problem is now November 15, 1999 (rather than October 15, 1999).
Second, the Commission has added language to paragraph (e)(1)(i)(D) to
require that the certification include a statement that the chief
executive officer believes that the steps referred to in paragraphs (A)
through (C) will result in remedying the material Year 2000 problem no
later than November 15, 1999. In the rule as proposed, there was no
affirmative statement that the chief executive officer believed that
the described remediation steps would address the firm's problems
before a specified date.
Third, Rule 15b7-3T(d)(2) provides that a broker-dealer that has or
is presumed to have a material Year 2000 problem on or after August 31,
1999, will be permitted to operate until November 15, 1999, if it files
a certificate signed by its chief executive officer that contains the
representations specified in paragraph (e)(1)(i) of the rule. The
Commission is also adding paragraph (e)(1)(ii) to permit broker-dealers
to include additional information to show that their mission critical
systems are free of material Year 2000 problems.
Fourth, the rule as adopted requires broker-dealers that have
submitted a certificate pursuant to paragraph (e)(1)(i) to submit a
second certificate signed by the chief executive officer (or an
individual with similar authority) on or before November 15, 1999,
stating that, based on inquiries and to the best of the chief
executive's knowledge, the firm has remediated its Year 2000 problem or
that it intends to cease operations. The second certification is
designed to give firms the opportunity to certify to the Commission,
the public, and their customers that they have, in fact, remediated
their Year 2000 problem.\51\ In addition, the second certification will
provide information to the Commission regarding the firms that have
fixed their
[[Page 42017]]
Year 2000 problems and the firms that have not.
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\51\ The NASD recommended that a firm be permitted to file an
additional notice in the event the firm believes that it no longer
has a material Year 2000 problem. See NASD letter.
---------------------------------------------------------------------------
The Commission notes that the rule requires a broker-dealer to
notify the Commission of material Year 2000 problems it experiences on
or after August 31, 1999. Therefore, a broker-dealer filing a
certificate on August 31, 1999, must update it if the information
contained in the original certificate becomes materially inaccurate in
any respect. If a broker-dealer finds a new material Year 2000 problem
subsequent to August 31, 1999, it must promptly notify its DEA and the
Commission and submit a certificate in accordance with the rule.
5. Confidentiality of Notices and Certifications
In the Proposing Release, we indicated that the August 31, 1999,
notices and certifications would be made public so that customers and
counterparties of these broker-dealers could assess the potential
impact on them and take any appropriate action. One commenter stated
that making the notices public could result in a ``death sentence'' for
the affected firms because customers would take their business to
compliant firms, i.e., firms that did not file notices.\52\ This
commenter also believed that making the notices public would discourage
firms from reporting their problem[s] for fear of negative press.\53\
Another commenter, however, recognized that it is important to give
investors and market participants notice of Year 2000 problems.\54\ The
NASD did not object to making the notices public, but suggested that
Rule 15b7-3T permit firms to file a follow-up notice when the firm has
remediated its Year 2000 problem.\55\
---------------------------------------------------------------------------
\52\ See Pershing letter.
\53\Id.
\54\ See Schwab letter.
\55\ See NASD letter.
---------------------------------------------------------------------------
Consistent with the Commission's previous policy in making Year
2000 disclosures such as the Form BD-Y2K public, the Commission will
make the notices and certificates available to the public. The
Commission believes that the public and other market participants need
this information in order to make alternative arrangements, if
appropriate. In response to one commenter's suggestion, the Commission
has adopted a second certificate provision which gives firms the
opportunity to inform the Commission and the public that they have
remediated their Year 2000 problem. After December 1, 1999, the
Commission will also make public any actions taken against firms that
are not Year 2000 compliant under the rule.
6. Transfer of Accounts
In the event that a broker-dealer has a material Year 2000 problem
in a mission critical system that it cannot remediate by November 15,
1999, steps will have to be taken by December 1, 1999, to transfer
customer accounts to other broker-dealers that are Year 2000 compliant.
The Commission understands that broker-dealers may be reluctant to take
over customer accounts from a non-compliant firm. The Commission
intends to exercise a great degree of flexibility in accommodating
broker-dealers that accept customer accounts before or after December
1, 1999, from impaired firms. By moving the deadline for Year 2000
compliance from October 15, 1999, to November 15, 1999, the Commission
anticipates that fewer broker-dealers will be required to transfer
accounts due to a material Year 2000 problem.
The Commission has the ability to take action before December 1,
1999, to limit a firm's business in order to protect investors. After
August 31, 1999, the Commission will be reviewing notices and
certificates, and making follow-up inquiries regarding broker-dealers'
Year 2000 readiness. We can take action against a firm at any time
after August 31, 1999, regardless of whether a firm has filed a
certificate. Although the Commission expects that the vast majority of
firms will be ready for Year 2000, Rule 15b7-3T(f) makes clear that the
Commission will act proactively to address the isolated firms that will
clearly not be ready for the Year 2000.
B. Rule 17Ad-21T
Rule 17Ad-21T, applicable to non-bank transfer agents, is similar
to temporary Rule 15b7-3T, applicable to broker-dealers.\56\
Specifically, proposed Rule 17Ad-21T prohibited any registered non-bank
transfer agent from conducting transfer agent business unless the non-
bank transfer agent certified and could demonstrate that it would fix
the problem by October 15, 1999.\57\ The proposal defined the term
``material Year 2000 problem;'' set forth criteria giving rise to a
presumption of a Year 2000 problem; and required firms having a
material Year 2000 problem to notify the Commission and satisfy certain
conditions if they wished to continue conducting their transfer agent
business. The Commission is adopting temporary Rule 17Ad-21T with
several changes to respond to commenters' concerns.
---------------------------------------------------------------------------
\56\ The term ``non-bank transfer agent'' means a transfer agent
whose appropriate regulatory agency (``ARA'') is the Commission and
not the Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, or the Federal Deposit
Insurance Corporation. The term ARA is defined in Exchange Act
Section 3(a)(34), 15 U.S.C. 78c(a)(34).
\57\ See generally proposed Rule 17Ad-21T.
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1. Scope of the Rule; Definition of Material Year 2000 Problem
As proposed, Rule 17Ad-21T applied to all non-bank transfer agents,
and stated that a non-bank transfer agent has a material Year 2000
problem if: (1) Any of its computer systems incorrectly identifies any
date in the Year 1999, the Year 2000, or in any year thereafter; and
(2) the error impairs or, if uncorrected, is likely to impair, any of
its mission critical computer systems.\58\
---------------------------------------------------------------------------
\58\See proposed Rule 17Ad-21T(b)(1).
---------------------------------------------------------------------------
Much like the broker-dealer rule, commenters generally requested
that the Commission limit the application of Rule 17Ad-21T.\59\ For
instance, one commenter suggested that the definition of material Year
2000 problem be narrowed to exclude situations that do not result from
an error in the transfer agent's system for securityholder
recordkeeping and accounting.\60\ In addition, this commenter
recommended that the definition be further limited to exclude isolated
date identification failures.\61\ Another commenter, commenting on both
the broker-dealer rule and transfer agent rule, stated that the rule
should include a more thorough definition with specific criteria.\62\
---------------------------------------------------------------------------
\59\ See letters from DST, Federated, RTC, and STA.
\60\ See DST letter.
\61\ Id.
\62\ See AICPA letter.
---------------------------------------------------------------------------
Responding to comments that the scope of the proposed rule is too
broad, temporary Rule 17Ad-21T is being revised to apply only to non-
bank transfer agents that use computers in the course of their business
as transfer agents. The Commission also recognizes that some non-bank
transfer agents that use computers could conduct their business
manually without disrupting service. Therefore, the rule is not
intended to cover any non-bank transfer agent whose computer system is
not a mission critical system. This rule is intended to cover those
non-bank transfer agents that rely on computers and that cannot resort
to manual processing without causing disruption to service or without
posing a risk to their customers.
Similar to Rule 15b7-3T, the Commission has decided not to modify
Rule 17Ad-21T's definition of material Year 2000 problem.\63\ The
Commission
[[Page 42018]]
believes that any impairment of a mission critical system is inherently
material. The definition is not intended to include a non-bank transfer
agent whose system has a minor technical problem reading dates if such
problem does not adversely affect the transfer agent's core business.
The rules therefore do not apply to systems that have no bearing on the
core transfer agent functions and are less likely to have a negative
impact on the transfer agent's ability to conduct business for its
customers.
---------------------------------------------------------------------------
\63\ As adopted, temporary Rule 17Ad-21(b)(1) states that a non-
bank transfer agent has a material Year 2000 problem if, at any time
on or after August 31, 1999: (1) Any of its mission critical
computer systems incorrectly identifies any date in the Year 1999 or
the Year 2000; and (2) the error impairs or, if uncorrected, is
likely to impair, any of its mission critical systems. The term
``mission critical system'' is defined as any system that is
necessary, depending on the nature of the transfer agent's business,
to assure the prompt and accurate transfer and processing of
securities, the maintenance of master securityholder files, and the
production and retention of required records as described in
paragraph (d) of the rule.
---------------------------------------------------------------------------
2. Presumption of a Material Year 2000 Problem
The Commission proposed that a non-bank transfer agent would be
presumed to have a material Year 2000 problem if it: (1) Does not have
written procedures designed to identify, assess, and remediate any Year
2000 problems in mission critical systems; (2) has not verified its
Year 2000 remediation efforts through reasonable internal testing of
mission critical systems and reasonable testing of external links; or
(3) has not remediated all exceptions contained in any independent
public accountant's report prepared on behalf of the non-bank transfer
agent pursuant to Exchange Act Rule 17Ad-18(f).\64\
---------------------------------------------------------------------------
\64\ See proposed Rule 17Ad-21T(b)(2).
---------------------------------------------------------------------------
The Commission received one comment on the responsibility of non-
bank transfer agents for third-party systems. The commenter stated that
the rule should not require a firm to ``ensure'' that the third-party
provider is free from material Year 2000 problems.\65\ Rather, the
commenter suggested that the firm should be required to take
``reasonable steps'' to verify that third parties are Year 2000
compliant.\66\
---------------------------------------------------------------------------
\65\ See Federated letter.
\66\ Id.
---------------------------------------------------------------------------
Similar to the broker-dealer rule, the Commission is modifying the
presumption language so that a non-bank transfer agent will not be
presumed to have a material Year 2000 problem if its written procedures
or testing do not cover mission critical systems under the control of
third parties.\67\ As adopted, the rule is limited in scope to cover
only those written procedures and testing of mission critical systems
over which the non-bank transfer agent has some element of control.\68\
Non-bank transfer agents will still be expected to diligently inquire
into the status of their third parties' Year 2000 readiness, and to
make appropriate alternative arrangements if they are not satisfied. A
non-bank transfer agent will still be responsible, however, if third
party failure causes the non-bank transfer agent to be in violation of
any provision under federal securities laws other than Rule 17Ad-21T.
---------------------------------------------------------------------------
\67\ In the Proposing Release, we stated that arrangements
between registered non-bank transfer agent and other registered
transfer agents (variously referred to as the recordkeeping transfer
agent, co-transfer agent, or service company) do not relieve the
registered non-bank transfer agent of its responsibilities under
proposed Rule 17Ad-21T. The modification to Rule 17Ad-21T is
intended to clarify that firms will not be held responsible for
failing to certify to the Year 2000 status of mission critical
systems controlled by third parties.
\68\ For example, a non-bank transfer agent has control over a
mission critical system if it operates and maintains the system.
---------------------------------------------------------------------------
The rule as adopted provides that a non-bank transfer agent would
be presumed to have a material Year 2000 problem if, at any time on or
after August 31, 1999, it:
Does not have written procedures reasonably designed to
identify, assess, and remediate any Year 2000 problems in its mission
critical systems under its control; \69\
---------------------------------------------------------------------------
\69\ The appropriate scope of such procedures would vary
depending on the nature of a non-bank transfer agent's business and
size and complexity of its computer systems.
---------------------------------------------------------------------------
Has not verified its Year 2000 remediation efforts through
reasonable internal testing of its mission critical systems under its
control and reasonable testing of external links under its control;
\70\ or
---------------------------------------------------------------------------
\70\ Unlike broker-dealers, transfer agents do not belong to any
SROs, therefore unlike broker-dealers, non-bank transfer agents do
not have specific testing mandates. However, this rule contemplates
that transfer agents will conduct effective testing of internal
mission critical systems and external links under the control of the
non-bank transfer agent. We believe that it is reasonable for
transfer agents to rely on testing guidelines established by SROs.
---------------------------------------------------------------------------
Has not remediated all exceptions related to its mission
critical systems contained in any independent public accountant's
report prepared on behalf of the transfer agent pursuant to Exchange
Act Rule 17Ad-18(f).\71\
---------------------------------------------------------------------------
\71\ Similar to Rule 15b7-3T, the Commission has decided not to
expressly narrow the scope of the rule to ``material'' exceptions in
the independent public accountant's report. The Commission notes
that it expects to file actions against non-bank transfer agents for
violating this rule in a federal district court.
---------------------------------------------------------------------------
The failure of a non-bank transfer agent to satisfy any of the
three conditions above by August 31, 1999, will require the non-bank
transfer agent to provide notice to the Commission.
3. Notification to the Commission and Issuer
As proposed, the rule required any registered non-bank transfer
agent that has or is presumed to have a material Year 2000 problem at
any time on or after August 31, 1999, to immediately notify the
Commission of the problem. In the proposing release the Commission also
specifically asked for comment on whether non-compliant transfer agents
should notify their ``customers,'' which was defined in the proposed
rule to include issuers. The Commission received no comment on this
provision.
The Commission is adopting the notice provision as proposed with
two changes. First, because it is important for an issuer to know the
status of its transfer agent's preparation for Year 2000, any non-bank
transfer agent that has or is presumed to have a material Year 2000
problem must notify not only the Commission but also must notify its
issuers. Second, notices to the Commission must be sent to the Division
of Market Regulation instead of to the Secretary.\72\
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\72\ Notice to the Commission must be sent by overnight delivery
to the Division of Market Regulation, U.S. Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC 20549-1002
Attention: Y2K Compliance. Notice also must be provided to the non-
bank transfer agent's issuer.
---------------------------------------------------------------------------
4. Prohibition on Non-Compliant Non-bank Transfer Agents and
Certification
a. Deadlines
As proposed, a non-bank transfer agent that has or is presumed to
have a material Year 2000 problem will not be permitted, on or after
August 31, 1999, to engage in any transfer agent function, including:
(i) Countersigning securities upon issuance; (ii) monitoring the
issuance of securities with a view to preventing unauthorized issuance;
(iii) registering the transfer of securities; (iv) exchanging or
converting securities; or (v) transferring record ownership of
securities by book-keeping entry without physical issuance of
securities certificates, unless it certifies and can demonstrate that
it will fix the problem by October 15, 1999.\73\ As proposed, a non-
bank transfer agent that is presumed to have a material Year 2000
problem would have the burden to prove that it did not have a material
Year 2000 problem, and would be required to come forward before October
[[Page 42019]]
15, 1999, with sufficient evidence to rebut the presumption.\74\
---------------------------------------------------------------------------
\73\ Proposed Temporary Rule 17Ad-21T.
\74\ Id.
---------------------------------------------------------------------------
The Commission specifically sought comment on whether the proposed
August 31, 1999, deadline to notify the Commission of an existing Year
2000 problem, and the October 15, 1999, deadline to achieve Year 2000
compliance, were appropriate. Two commenters stated that the August 31,
1999, and October 15, 1999, deadlines were too early because they will
not allow adequate time for testing with external vendors.\75\ One
commenter suggested that the August 31, 1999, deadline should be moved
to the end of September 1999.\76\ In order to facilitate the orderly
transfer of customer accounts, another commenter suggested that
transfer agents be permitted to temporarily operate beyond the August
31, 1999, cutoff date, during which time customer accounts could be
transferred.\77\
---------------------------------------------------------------------------
\75\ See letters from RTC and STA.
\76\ See STA letter.
\77\ See Federated letter.
---------------------------------------------------------------------------
Two commenters expressed reservations about forcing a transfer
agent to cease operations for not remediating Year 2000 problems.\78\
One of these commenters noted that requiring non-bank transfer agents
to cease processing, pursuant to Rule 17Ad-21T, would eliminate their
ability to use manual procedures while problems are being
corrected.\79\ The commenter stated that it would be more prudent to
prohibit the non-bank transfer agents from taking on new accounts or
relationships.\80\
---------------------------------------------------------------------------
\78\ See letters from RTC and STA.
\79\ See STA letter.
\80\ Id.
---------------------------------------------------------------------------
According to one commenter, transferring accounts from non-
compliant firms would be difficult.\81\ The commenter opined that it
would not be able to convert any issuer from any transfer agent
experiencing a material Year 2000 problem or a failure of operational
capability within the four-month period remaining between September 1,
1999, and December 31, 1999, because there is insufficient time to
adequately plan and test the conversion. This commenter went on to
suggest that it would be more appropriate and practicable to require
firms experiencing a Year 2000 problem to identify themselves, cease
accepting new business, accept financial responsibility for losses
incurred by their failure to become Year 2000 compliant, and use their
best efforts to become compliant or minimize the effects of their non-
compliance.
---------------------------------------------------------------------------
\81\ See DST letter.
---------------------------------------------------------------------------
The Commission has determined to push back to November 15, 1999,
the date by which a non-bank transfer agent must certify that its
material Year 2000 problems will be remedied. Any non-bank transfer
agent that has a material Year 2000 problem on or after November 15,
1999, will be required to start winding down its business and cease
operations by December 1, 1999. The Commission expects that the non-
bank transfer agent will use the period between November 15, 1999, and
December 1, 1999, to unwind its business in an orderly fashion. Moving
the deadline to November 15, 1999, will provide non-bank transfer
agents with as much time as possible to address Year 2000 problems,
while permitting the Commission to take proactive steps in the event a
non-bank transfer agent is not Year 2000 compliant.
The Commission acknowledges that in the ordinary course of business
the transfer of accounts might take several months. However, given the
nature of the Year 2000 problem, accounts may need to be transferred on
an expedited basis.\82\ The Commission notes that the rule, both as
proposed and as adopted, permits the Commission or a court of competent
jurisdiction to order a non-bank transfer agent to comply with Rule
17Ad-21T(d) (i.e., cease its transfer agent business and transfer
accounts) at any time after August 31, 1999, if to do so would be in
the public interest or for the protection of investors.\83\
---------------------------------------------------------------------------
\82\ The Commission appreciates the difficulties associated with
an expedited transfer of accounts. See infra Section II. B. 6 for a
further discussion of this issue.
\83\ This action would be appropriate where it is patently
unrealistic that a non-bank transfer agent will be able to conduct
sufficient remediation to achieve Year 2000 compliance by November
15, 1999.
---------------------------------------------------------------------------
b. Certification
As adopted, Rule 17Ad-21T provides that a non-bank transfer agent
with (or presumed to have) a material Year 2000 problem on or after
August 31, 1999, will be permitted to continue to operate until
December 1, 1999, if in addition to providing the Commission with the
notice required by paragraph (c) of the rule, it provides the
Commission and its issuers a certificate signed by its chief executive
officer (or an individual with similar authority) stating:
The non-bank transfer agent is in the process of
remediating its material Year 2000 problem;
The non-bank transfer agent has scheduled testing of its
affected mission critical systems to verify that the material Year 2000
problem has been remediated, and specifies the testing dates;
The date (which cannot be later than November 15, 1999) by
which the non-bank transfer agent anticipates completing remediation of
the material Year 2000 problem in its mission critical systems; and
Based on inquiries and to the best of its chief executive
officer's knowledge, the non-bank transfer agent does not anticipate
that the existence of the material Year 2000 problem in its mission
critical systems will impair its ability, depending on the nature of
its business, to assure the prompt and accurate transfer and processing
of securities, the maintenance of master securityholder files, or the
production and retention of required records; and the non-bank transfer
agent anticipates that the enumerated remediation steps will result in
remedying the material Year 2000 problem on or before November 15,
1999.
The Commission has made four changes to the certification
provision. First, as stated above, the date by which the non-bank
transfer agent must expect to have remediated the material Year 2000
problem is now November 15, 1999 (rather than October 15, 1999).
Second, the Commission has added language to paragraph (e)(1)(i)(D) to
require that the certification include a statement that the chief
executive officer believes that the steps referred to in paragraphs (A)
through (C) will result in remedying the material Year 2000 problem no
later than November 15, 1999. In the rule as proposed, there was no
affirmative statement that the chief executive officer believed that
the described remediation steps would address the firm's problems
before a specified date.
Third, Rule 17Ad-21T(d)(2) provides that a non-bank transfer agent
that has or is presumed to have a material Year 2000 problem on or
after August 31, 1999, will be permitted to operate until November 15,
1999, if it files a certificate signed by its chief executive officer
that contains the representations specified in paragraph (e)(1)(i) of
the rule. The Commission is also adding paragraph (e)(1)(ii) to permit
non-bank transfer agents to include additional information to show that
their mission critical systems are free of material Year 2000 problems.
Fourth, the rule as adopted requires non-bank transfer agents that
have submitted a certificate pursuant to paragraph (e)(1)(i) to submit
a second certificate signed by the chief executive officer (or an
individual with similar authority) on or before November 15,
[[Page 42020]]
1999, stating that, based on inquiries and to the best of the chief
executive's knowledge, the non-bank transfer agent has remediated its
Year 2000 problem or that it intends to cease operations. The second
certification is designed to give non-bank transfer agents the
opportunity to certify to the Commission, the public, and their
customers that they have, in fact, remediated their Year 2000 problem.
In addition, the second certification will provide information to the
Commission regarding the non-bank transfer agents that have fixed their
Year 2000 problems and those non-bank transfer agents that have not.
The Commission notes that the rule requires a non-bank transfer
agent to notify the Commission of material Year 2000 problems it
experiences on or after August 31, 1999. Therefore, a non-bank transfer
agent filing a certificate on August 31, 1999, must update it if the
information contained in the original certificate becomes materially
inaccurate in any respect. If a non-bank transfer agent finds a new
material Year 2000 problem subsequent to August 31, 1999, it must
promptly notify its issuers and the Commission and submit a certificate
in accordance with the rule.
5. Confidentiality of Notices and Certifications
In the Proposing Release, we indicated that the August 31, 1999,
notices and certifications would be made public so that customers of
these transfer agents could assess the potential impact on them and
take any appropriate action. Consistent with the Commission's previous
policy in making Year 2000 disclosures public, the Commission will make
the notices and certificates available to the public.\84\ After
December 1, 1999, the Commission will also make public any actions
taken against firms that are not Year 2000 compliant under the rule.
---------------------------------------------------------------------------
\84\ By requiring a second certificate, we are giving non-bank
transfer agents the opportunity to inform the Commission and the
public that they have remediated their Year 2000 problems.
---------------------------------------------------------------------------
6. Transfer of Accounts
In the event that a non-bank transfer agent has a material Year
2000 problem in a mission critical system that it cannot remediate by
November 15, 1999, it will have to take steps by December 1, 1999, to
transfer customer accounts to other Year 2000 compliant transfer
agents. The Commission understands that transfer agents may be
reluctant to take over customer accounts from a non-compliant firm. The
Commission intends to exercise a great degree of flexibility in
accommodating transfer agents that accept accounts before or after
December 1, 1999, from impaired transfer agents.\85\
---------------------------------------------------------------------------
\85\ 85 By moving the deadline for Year 2000 compliance from
October 15, 1999 to November 15, 1999, the Commission anticipates
that fewer transfer agents will be required to transfer accounts due
to a material Year 2000 problem.
---------------------------------------------------------------------------
The Commission can take action before December 1, 1999, to protect
investors. After August 31, 1999, the Commission will be reviewing
notices and certificates, and making follow-up inquiries regarding
transfer agents' Year 2000 readiness. Rule 17Ad-21T(f) makes clear that
the Commission can take action to protect investors regardless of
whether a firm has filed a certificate, to proactively address the few
firms that will clearly not be ready for the Year 2000.
In addition, the Commission encourages each firm that files a
notice and accompanying certificate by August 31, 1999, to begin
negotiations for a standby agreement with another transfer agent that
does not have a Year 2000 problem in case it becomes necessary to
transfer business. The Commission believes that having a standby
agreement to transfer business is prudent in light of the Year 2000
problem and the logistics involved in transferring accounts.\86\
---------------------------------------------------------------------------
\86\ The Commission is aware that the process of a shareholder
record conversion and transfer to another transfer agent can be a
time consuming process and requires the issuer to appoint or agree
to a successor transfer agent. In addition, over-printing of the
transfer agent and registrar signature panel on certificates will be
necessary.
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III. Recordkeeping Requirements
A. Transfer Agents
Proposed Rule 17Ad-21T contained a recordkeeping requirement for
non-bank transfer agents. As proposed, the rule required that,
beginning August 31, 1999, and ending March 31, 2000, every non-bank
transfer agent to make a daily backup copy of its database and file
layouts.\87\ The proposal specified that such backup records were to be
made at the end of each business day and preserved for a rolling five
business day period in a manner that allowed for the possible transfer
and conversion to a successor transfer agent.\88\ In the event of a
transfer agent failure, it may be impossible to retrieve files unless
the transfer agent has previously stored a separate set of backup
records. Thus, this requirement was intended to facilitate the transfer
to and conversion of records by another registered transfer agent if
necessary.
---------------------------------------------------------------------------
\87\ File layouts was defined in proposed Rule 17Ad-21T(g)(4) as
the description and location of informatioin contained in the
database.
\88\ We understand that most transfer agents already make and
preserve a separate copy of their record as a good business
practice.
---------------------------------------------------------------------------
The comments received regarding the recordkeeping requirement were
favorable. For example, two commenters opined that maintenance of
multiple day backup records is a conservative, inexpensive, and
responsible approach designed to enhance recovery capabilities.\89\
Three commenters stated that because a backup of daily work is
necessary, a recordkeeping requirement set forth in the proposed rule
should become a general, not a temporary rule.\90\ One commenter
suggested a more extensive recordkeeping program with a backup of three
generations of files,\91\ namely, copying the entire database at the
end of the week with a daily backup of changed files and transactions,
and storing these records for three weeks.
---------------------------------------------------------------------------
\89\ See letters from STA and RTC.
\90\ See letters from STA, RTC, and DST.
\91\ See STA letter.
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Another commenter, however, pointed out that while most larger
transfer agents already maintain the required records for longer than
five days, the proposed format for record retention appeared likely to
be onerous.\92\ This commenter explained that the proposed rule
employed the term ``database,'' and therefore would include
significantly more records than those required for a successful
conversion. It was suggested that the records required to be backed up
should be limited to computerized securityholder records that are
necessary for a conversion of the securityholder records to a successor
transfer agent.
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\92\ See DST letter.
---------------------------------------------------------------------------
Responding to the commenters' concerns, we have made several
changes. First, the Commission acknowledges that the requirement to
backup the entire database and file layouts on a daily basis might be
burdensome. Thus, the rule as adopted requires that backup records must
be made and preserved for all master securityholder files.\93\ As
adopted, the rule still requires that backup records be maintained for
a rolling five business
[[Page 42021]]
day period.\94\ In case the most recent backup records have been
corrupted, this five day preservation requirement gives the transfer
agent four more opportunities to obtain uncorrupted backup records from
which to reconstruct its critical computer files. In addition, the
Commission has also added language which provides for two additional
safeguards in case the records need to be reconstructed. First, if a
non-bank transfer agent has a material Year 2000 problem, it must
preserve for at least one year the five days of backup records
immediately preceding the day the problem was discovered. In addition,
the non-bank transfer agent must make and preserve for one year backup
records for the five business days prior to January 1, 2000.\95\
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\93\ The Commission recently proposed for comment amendments to
Rule 17Ad-7 (17 CFR 240.17Ad-7) that would allow registered transfer
agents to use electronic storage media for recordkeeping purposes.
Should the Commission adopt the proposed amendments, transfer agents
would be able to maintain their backup records in any format that is
allowed by Rule 17Ad-7, as amended, provided that all the conditions
imposed by the rule are met, that would allow for a successful
conversion and transfer to a Year 2000 compliant transfer agent.
Exchange Act Release No. 41442 (May 25, 1999), 64 FR 29608 (June 2,
1999).
\94\ As noted in the STA letter, some transfer agents currently
copy their entire database at the end of the business week with
daily backup copies of just the changed files and transactions, and
store these records for at least two weeks. We would consider this
procedure to comply with the backup requirement.
\95\ This rule requires that non-bank transfer agents make and
preserve a separate copy of an existing record. It does not require
non-bank transfer agents to create any new records.
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In summary, Rule 17Ad-21T provides that beginning August 31, 1999,
and ending March 31, 2000, a non-bank transfer agent must maintain
backup records for all master securityholder files.\96\ Such backup
records must be made at the close of each business day and must be
preserved for a rolling five business day period in a manner that will
allow for the transfer and conversion to a successor transfer agent. If
a non-bank transfer agent discovers a Year 2000 problem, it must
preserve for at least one year the five day backup records immediately
preceding the day the problem was discovered. In addition, the non-bank
transfer agent must make, at the close of business on December 27
through 31, 1999, a backup copy for all master securityholder files and
preserve these records for at least one year. Such backup records must
permit the timely restoration of such systems to their condition
existing prior to experiencing the material Year 2000 problem. Copies
of the backup records must be kept in an easily accessible place but
must not be located with or held in the same computer system as the
primary records. In addition, they must be able to be immediately
produced or reproduced. A non-bank transfer agent must furnish promptly
to a representative of the Commission such legible, true, and complete
copies of those records, as may be requested.
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\96\ Because transfer agents maintain the only inclusive records
of the owners of issuers' outstanding securities and are necessary
for the continuous trading and transfer of ownership of those
securities, the Commission believes that it is prudent to require
transfer agents to begin maintaining backup records at the end of
August 1999. Furthermore, because there are potential Year 2000
problems that may arise because 2000 is a leap year, the
recordkeeping period will extend through March 31, 2000.
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B. Broker-Dealers
Proposed Rule 17a-9T would have required certain broker-dealers to
make a separate copy of their blotters and their securities record or
ledger (``securities record'') for the last two business days of
1999.\97\ Specifically, the proposed rule would have obligated broker-
dealers that, as of December 30 and 31, 1999, are required under Rule
15c3-1(a)(2) to maintain minimum net capital of $250,000 \98\ to make
and to preserve a separate copy of their blotters and securities record
as of the close of business on December 30 and 31, 1999. Under the
proposed rule, broker-dealers could have kept the records on paper or
on any micrographic or electronic storage media acceptable under Rule
17a-4(f). Proposed Rule 17a-9T would only have required broker-dealers
to make and preserve a separate copy of an existing record and to
ensure that the record was created at the close of business on December
30 and December 31, 1999. It would not have required a broker-dealer to
create any new record.\99\ This rule was intended to assist broker-
dealers, the Commission, the DEAs, and the Securities Investor
Protection Corporation in identifying all securities positions carried
by the broker-dealer and the location of the securities in the event a
broker-dealer experiences Year 2000 problems.
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\97\ Rule 17a-3(a)(1) requires every broker-dealer to make and
keep current a blotter containing an itemized daily record of all
purchases and sales of securities, all receipts and deliveries of
securities (including certificate numbers), all receipts and
disbursements of cash and all other debits and credits. The blotter
is required to show the account for which each transaction was
effected, the name and amount of securities, the unit and aggregate
purchase or sale price (if any), the trade date, and the name or
other designation of the person from whom purchased or received or
to whom sold or delivered. 17 CFR 240.17a-3(a)(1). Rule 17a-3(a)(5)
requires every broker-dealer to make and keep current a securities
record or ledger reflecting separately for each security all long or
short positions (including securities in safekeeping and securities
that are the subject of repurchase or reverse repurchase agreements)
carried by the broker-dealer for its account or for the account of
its customers, including the name or designation of the account in
which each position is carried. The securities record is also
required to show the location of all securities long and the
offsetting position to all securities short, including long security
count differences and short security count differences classified by
the date the differences were discovered. 17 CFR 240.17a-3(a)(5).
\98\ See 17 CFR 240.15c3-1(a)(2).
\99\ We understand that most broker-dealers already make and
preserve a separate copy of these records as a good business
practice. However, because of the time-sensitive nature of the
securities markets, this temporary rule requires that broker-dealers
keep a copy of these records separate from other records required
under Rules 17a-3 and 17a-4.
---------------------------------------------------------------------------
Several commenters expressed concerns about the proposed
recordkeeping rule. One commenter, for example, argued that the
recordkeeping rule should apply only to those broker-dealers that
failed to file a Form BD-Y2K, those that have failed industry testing,
and those that report Year 2000 problems after August 31, 1999.\100\
Another commenter thought that the recordkeeping requirement should
apply only to large firms.\101\ One commenter opposed the recordkeeping
requirement on the grounds that such records would be difficult to make
and the additional requirements would be time consuming and
expensive.\102\ In addition, this commenter argued that the rule as
proposed did not allow sufficient flexibility in recordkeeping methods.
Specifically, this commenter argued that such records should not be
kept on non-rewritable and non-erasable storage media, but rather that
broker-dealers be permitted to use temporary storage means.\103\
---------------------------------------------------------------------------
\100\ See Pershing letter.
\101\ See Monroe Securities letter.
\102\ See Schwab letter.
\103\ Id.
---------------------------------------------------------------------------
Other commenters agreed that records should be kept, but had
concerns regarding how and when to make and keep those records. In its
comment letter, the NASD stated that the proposed recordkeeping
requirements should be extended to cover the last three business days
of 1999, in order to assist in identifying securities trades that may
not have settled as of year end.\104\ In addition, the NASD suggested
that broker-dealers should maintain month-end records for November
1999.\105\
---------------------------------------------------------------------------
\104\ See NASD letter.
\105\ Id.
---------------------------------------------------------------------------
The Commission believes that the recordkeeping rule provides a
safeguard against unforeseen Year 2000 problems. Should a Year 2000
problem disrupt a broker-dealer, its account positions and transactions
must be reconstructed. It is therefore crucial to assure that broker-
dealers maintain all the necessary records to permit reconstruction.
The Commission is adopting Rule 17a-9T with several changes to
respond to commenters' concerns and to clarify the rule language. The
Commission agrees with the commenters that broker-dealers should keep
records for the length of the three day settlement cycle to assure that
sufficient records exist in the event of a problem. Thus, the rule
[[Page 42022]]
as adopted requires broker-dealers to keep records for December 29,
December 30, and December 31, 1999. The Commission is also adding
language to clarify that such records must be made before January 1,
2000 to assure that separate records are made before the date change
and the possibility of data corruption. The rule requires that broker-
dealers make separate blotters for each of the final three business
days of the year. In addition, the Commission deleted the proposed
language that would have allowed a broker-dealer to avoid preserving
separate blotters if its securities record reflected both trade date
and settlement date positions. The Commission deleted this language
because the information contained in blotters, which is different from
the information contained in securities records, may be important in
reconstructing account positions and transactions.
The Commission is adding paragraph (d) to Rule 17a-9T to clarify
that the records may be maintained in any format that is now acceptable
under Rules 17a-3 and 17a-4, so long as broker-dealers comply with all
the conditions in those rules. In addition, the Commission is
clarifying that broker-dealers that retain the records using
micrographic or electronic storage media must comply with all the
conditions set forth in paragraph (f) of Exchange Act Rule 17a-4.\106\
---------------------------------------------------------------------------
\106\ 17 CFR 240.17a-4. We note that one of the conditions set
forth in paragraph (f) of the rule requires that records be made
immediately available.
---------------------------------------------------------------------------
IV. Conclusion
For the reasons discussed above, the Commission believes that
adopting new temporary Rules 15b7-3T, 17Ad-21T, and 17a-9T under the
Exchange Act will help the Commission and market participants identify
broker-dealers and non-bank transfer agents that will not be ready for
Year 2000. The temporary rules provide a schedule for broker-dealers
and non-bank transfer agents to remediate Year 2000 problems. The
temporary rules balance the need to permit broker-dealers and non-bank
transfer agents with sufficient time to address their Year 2000
problems with the need of customers and the financial markets to have
time to make alternative arrangements before harm is done. Because of
the risks to investors and the financial markets, the temporary rules
provide an additional mechanism for regulatory authorities to identify
isolated problems and to take action to address those problems before
the Year 2000.
V. Costs and Benefits of the Rules
The Commission believes that the benefits of the rules justify the
associated costs. To assist the Commission in its evaluation of the
costs and benefits and the effect on competition, efficiency and
capital formation that may result from the new rules, commenters were
requested to provide analysis and data, if possible, relating to costs
and benefits associated with the proposal. The Commission received only
one comment that that touched on this issue.\107\
---------------------------------------------------------------------------
\107\ One commenter stated that the Commission presented an
inadequate relationship between the costs to brokerage firms (of
being shut down) and the benefits to the investing public. See
Grodsky Associates letter.
---------------------------------------------------------------------------
The Commission believes that temporary Rules 15b7-3T, 17Ad-21T, and
17a-9T are necessary to protect investors and the integrity of the
securities markets during the transition to the Year 2000. The rules
are designed to protect investors and the markets from the risks posed
by any broker-dealers or non-bank transfer agents who do not succeed in
making their mission critical systems Year 2000 compliant by the end of
1999. In addition, the rules provide for the retention of records which
will assist broker-dealers, non-bank transfer agents, the Commission,
DEAs, and the Securities Investor Protection Corporation in identifying
all securities positions and the location of securities in the event
that a broker-dealer or non-bank transfer agent experiences a Year 2000
problem.
Since the Proposing Release was issued, the rule language has been
changed to incorporate several suggestions provided by commenters. In
particular, the Commission clarified that (1) only broker-dealers and
non-bank transfer agents that use computers in the course of their
business as broker-dealers and non-bank transfer agents are subject to
the rules; (2) the rules only cover mission critical systems; and (3)
for purposes of these rules, broker-dealers and non-bank transfer
agents will not be presumed to have a material Year 2000 problem for
failing to have written procedures to address Year 2000 problems in
mission critical systems if they are under another entity's control. As
a result of the changes, the costs have been reduced because the rule
affects fewer broker-dealers and non-bank transfer agents. Nonetheless,
we recognize that, as described below, these rules will impose costs on
broker-dealers and non-bank transfer agents. We believe, however, that
the benefits of this rule justify the costs.
A. Benefits
The Commission believes that the rules will provide the following
benefits:
Broker-dealers and non-bank transfer agents will be
required to focus on the serious issue of Year 2000 readiness
Capital formation will be facilitated by the smooth
functioning of the U.S. securities markets during the transition to the
Year 2000
The rules will help ensure that investors are able to
promptly access their accounts and execute transactions at the turn of
the century
Investors will be protected in their investment activities
by reduced individual firm risk and systemic risk that would result
from computer system failures.
The risks non-Year 2000 compliant broker-dealers and non-
bank transfer agents pose to the financial system will be reduced,
permitting financial markets to efficiently operate without delays in
executions and settlements.
The temporary recordkeeping requirements will assist the
Commission, broker-dealers, DEAs, Securities Investor Protection
Corporation, and non-bank transfer agents in reconstructing records
that are lost or damaged due to computer problems associated with the
Year 2000, if any occur.
The costs associated with these temporary rules are much
lower than the costs that would be incurred if Year 2000 problems were
left unchecked.
B. Costs
We recognize that these rules will impose certain costs on broker-
dealers and transfer agents. To avoid being presumed to have a material
Year 2000 problem, broker-dealers and non-bank transfer agents must, on
or after August 31, 1999, have written procedures, have verified their
Year 2000 remediation efforts through appropriate testing, and have
addressed all exceptions contained in any public independent
accountant's report. Although these rules may result in some firms
accelerating their remediation programs, these are costs most broker-
dealers and non-bank transfer agents already must incur in order to
comply with other Commission and/or SRO rules. In addition, virtually
all broker-dealers and non-bank transfer agents must already incur
these costs in order to take the necessary steps to become Year 2000
compliant and therefore to stay in business post-Year 2000.
[[Page 42023]]
Broker-dealers and transfer agents that have material Year 2000
problems or do not have the operational capability to conduct their
respective businesses could bear additional costs, i.e., the costs of
not being able to engage in their business. However, the market itself
may impose these costs on them once it became clear that they were not
ready for the Year 2000 or do not have the required operational
capability.
Finally, as described below, these rules will impose additional
costs on firms required to file notices and certificates with the
Commission. The rules will also impose additional costs on firms
subject to the recordkeeping requirements of the rules.
1. Rule 15b7-3T
The Commission staff estimates that approximately 39 brokers-
dealers will be affected by the rule.\108\ The Commission staff
estimates that each respondent will submit one notice. The Commission
staff estimates that the aggregate cost burden for 39 broker-dealers to
submit notices will be $1,950.\109\
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\108\ There are approximately 8,300 registered broker-dealers
and the Commission staff estimates that approximately 3,900 will
have systems that will need to be Year 2000 compliant. The
Commission staff estimates that approximately one percent of these
broker-dealers might be required to submit notices and may choose to
submit certificates under the rule. This estimate is consistent with
the estimates provided to the Commission by various SROs. The
Commission notes that the estimated number of broker-dealers that
will have systems that will need to be Year 2000 compliant has been
reduced because adopted Rule 15b7-3T is narrower in scope than the
proposed rule. In the Proposing Release, the Commission estimated
that the 59 broker-dealers would be affected by the rule.
\109\ This amount was calculated by multiplying 39 broker-
dealers by $50. The Commission staff estimates that the cost for
each respondent submitting a notice will be $50 (0.5 hours at $100
per hour).
---------------------------------------------------------------------------
The Commission staff expect that most, if not all, broker-dealers
with Year 2000 problems on or after August 31, 1999, will choose to
submit an initial certificate in order to continue operations. Broker-
dealers that submit an initial certificate must file a second
certificate. The Commission staff estimates that the aggregate cost
burden for 39 broker-dealers to submit both certificates will be
$3,900.\110\
---------------------------------------------------------------------------
\110\ This amount was calculated by multiplying 39 broker-
dealers by $100. The Commission staff estimates that the cost for
each respondent submitting a certificate will be $50 (0.5 hours at
$100 per hour). Therefore, filing two certificates will cost a
broker-dealer $100.
---------------------------------------------------------------------------
The Commission estimates the aggregate burden on broker-dealers to
file one notice and two certificates will be $5,850.
2. Rule 17Ad-21T
The Commission staff estimates that there will be approximately 6
non-bank transfer agents affected by rule.\111\ The Commission staff
also estimates that each respondent will submit one notice under the
rule. The Commission staff estimates that the aggregate cost burden for
6 non-bank transfer agents to submit notices will be $300.\112\
---------------------------------------------------------------------------
\111\ The Commission staff estimates that there are
approximately 600 non-bank transfer agents. The Commission staff
estimates that approximately one percent of those non-bank transfer
agents might be required to submit notices and may choose to submit
certificates under the rule. The Commission emphasizes the serious
difficulty in estimating the number of non-bank transfer agents that
will have material Year 2000 problems at some point in the future.
The Commission expects that most non-bank transfer agents will not
have such problems.
\112\ This amount was calculated by multiplying 6 non-bank
transfer agents by $50. The Commission staff estimates that the cost
for each respondent submitting a notice will be $50 (0.5 hours at
$100 per hour).
---------------------------------------------------------------------------
The certificate requirement is optional. The Commission, however,
expects most, if not all, non-bank transfer agents with material Year
2000 problems on or after August 31, 1999, to submit the initial
certificate in order to continue performing certain functions. Non-bank
transfer agents that submit an initial certificate must file a second
certificate. The Commission staff estimates that the aggregate cost
burden for 6 non-bank transfer agents to submit both certificates will
be $600.\113\
---------------------------------------------------------------------------
\113\ This amount was calculated by multiplying 6 non-bank
transfer agents by $100. The Commission staff estimates that the
cost for each respondent submitting a certificate will be $50 (0.5
hours at $100 per hour). Therefore, it will cost a non-bank transfer
agent $100 to file both certificates.
---------------------------------------------------------------------------
The Commission estimates that the aggregate burden on non-bank
transfer agents to file one notice and two certificates will be $900.
C. Recordkeeping Requirements
1. Transfer Agents
The Commission staff estimates that there are approximately 600
non-bank transfer agents that will be impacted by Rule 17Ad-21T's
recordkeeping requirements. The Commission estimates that the
recordkeeping costs to each non-bank transfer agent under the rule will
be minimal because the Commission is simply codifying what is already
an existing and established business practice.\114\ The Commission
reached this conclusion after considering that these records will
already exist and the rule only requires non-bank transfer agents to
make separate copies. The Commission staff estimates the aggregate cost
burden of 600 non-bank transfer agents to comply with this
recordkeeping requirement to be approximately $4,590,000.\115\ The
Commission notes that a substantial portion of this cost is already
incurred by non-bank transfer agents because they perform this
recordkeeping in the course of their business.\116\
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\114\ The RTC estimated that compliance with this recordkeeping
requirement, if not already performed would take approximately \1/2\
hour to 4 hours of computer operations each night at a cost of
between $50 to $2,000 per night. The cost of preserving the data on
disk was estimated by RTC to be a one time cost of between $50 and
$200. The RTC also estimated that preparation of the certification
would consume 1.5 hours of labor and cost less than $1,000. See RTC
letter.
\115\ This amount was computed by adding $4,530,000 (600 non-
bank transfer agents multiplied by 151 days--the period between
August 31, 1999, and March 31, 2000--multiplied by $50 for labor)
and $60,000 (600 non-bank transfer agents multiplied by $100 for
disks). The Commission staff estimates that the total burden for
each non-bank transfer agent for the period between August 31, 1999,
and March 31, 2000 will be approximately 38 hours (approximately 151
business days at 0.25 hours per business day). With respect to
burden hours, the Commission staff estimates that the aggregate
burden for all non-bank transfer agents under the rule will be
approximately 22,800 hours (600 transfer agents at 38 hours per non-
bank transfer agent).
\116\ In its comment letter, the STA stated that backing up
files is a standard and good practice, which is part of the cost of
doing business. See STA letter. In addition, the RTC stated in their
comment letter that ``All responsible information technology
professionals already perform daily database and processing system
file back-ups'' and that ``Maintenance of multiple day record back-
ups is a conservative, inexpensive and responsible approach designed
to enhance recovery capabilities.'' See RTC letter.
---------------------------------------------------------------------------
The rule also requires non-bank transfer agents that have a
material Year 2000 problem to preserve for at least one year backup
records for the five days immediately preceding the day the Year 2000
problem was discovered. The Commission staff estimates that the non-
bank transfer agents that must comply with this provision will incur an
aggregate cost burden of $1,200.\117\
---------------------------------------------------------------------------
\117\ This amount was computed by multiplying 6 (the number of
non-bank transfer agents the Commission estimates might have a
material Year 2000 problem) by $200 (the cost to store five days of
all master securityholder files for one year).
---------------------------------------------------------------------------
The rule requires that non-bank transfer agents make at the close
of business on December 27 through 31, 1999, a backup copy of all
master securityholder lists and preserve these records in an easily
accessible place for at least one year. The Commission staff estimates
the aggregate cost burden to comply with this recordkeeping requirement
to be approximately $120,000.\118\
---------------------------------------------------------------------------
\118\ This amount was computed by multiplying 600 (the number of
non-bank transfer agents) by $200 (the cost to store five days of
master securityholder files for one year).
---------------------------------------------------------------------------
The records required to be made and kept under the rule are records
that are currently kept by non-bank transfer
[[Page 42024]]
agents. Thus, the Commission is not promulgating rules that require
respondents to generate new records. Rather, the rules only require
that a back-up copy be made and kept. The rules will aid the
Commission, non-bank transfer agents, and the public in the event of
operational failures by non-bank transfer agents. The Commission
believes that the rules will guard against Year 2000 problems.
2. Broker-Dealers
The Commission staff estimates that approximately 1,100 broker-
dealers will be affected by Rule 17a-9T.\119\ The Commission staff
estimates that the aggregate cost burden for 1,100 broker-dealers to
make and preserve the records required by this rule will be
approximately $15,000.\120\
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\119\ Only those broker-dealers that are required to maintain
certain net capital pursuant to Rule 15c3-1(a)(2)(i), 17 CFR
240.15c3-1(a)(2)(i), will be required to comply with the rule.
\120\ The Commission staff estimates that each such broker-
dealer subject to the rule will incur an average burden of
approximately 0.75 hours to make and keep the records. The
Commission believes that the recordkeeping function may be performed
by clerical staff at a rate of $25 per hour. The Commission staff
estimates that the total aggregate burden under the rule will be
approximately 825 hours (1,100 brokers or dealers at 0.75 hours per
broker or dealer).
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The records required to be copied and kept under the rule are
records that are currently kept by broker-dealers.\121\ Thus, the
Commission is not promulgating a rule that requires respondents to
generate new records. Rather, the rules only require that back-up
copies be made and kept. The records required by this rule will benefit
the Commission and the public in the event of operational failures by
broker-dealers. The records will assist in the identification of all
securities positions carried by the broker-dealer, and the transfer to
and conversion of records to another entity.
---------------------------------------------------------------------------
\121\ See Rule 17a-3(a)(1), 17 CFR 17a-3(a)(1) and Rule 17a-
3(a)(5), 17 CFR 17a-3(a)(5).
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VI. Effects on Competition, Efficiency and Capital Formation
Section 23(a)(2) of the Exchange Act requires that the Commission,
when adopting rules under the Exchange Act, consider the
anticompetitive effects of those rules, if any, and balance any
anticompetitive impact against the regulatory benefits gained in terms
of furthering the purposes of the Exchange Act.\122\ In the Proposing
Release, the Commission solicited comment on the effects of the rules
on competition, efficiency and capital formation. The Commission
received one comment regarding these issues.\123\ The commenter stated
that the proposals would harm all of these areas.\124\ Specifically,
the commenter stated that the rules would place smaller firms under
unnecessary burdens.\125\ The commenter also objected to the filing and
recordkeeping requirements as being inefficient.\126\
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\122\ 15 U.S.C. 78w(a)(2).
\123\ See Dan Jamieson letter.
\124\ Id.
\125\ Id.
\126\ Id.
---------------------------------------------------------------------------
The Commission has considered Rules 15b7-3T, 17Ad-21T, and 17a-9T
in light of the comment received and the standards cited in Section
23(a)(2) of the Exchange Act.\127\ The Commission believes that these
new rules do not impose any significant burden on competition not
necessary or appropriate in furtherance of the Exchange Act. With the
Year 2000 quickly approaching, all firms should be preparing for the
Year 2000. Testing computer systems and remediating Year 2000 problems
is a matter of good business practice that is necessary for the
protection of investors and the securities markets. A firm that expends
resources preparing for the Year 2000 will no longer be at a
competitive disadvantage to another firm that does not expend any
resources preparing for the Year 2000.
---------------------------------------------------------------------------
\127\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
The Commission believes that the rules are necessary for the U.S.
securities markets to operate efficiently at the turn of the century.
Without the rules, non-compliant firms that interact with other market
participants could have detrimental and potentially widespread
consequences on other market participants. The new rules reduce the
likelihood of a firm's Year 2000 problem affecting the securities
markets to the detriment of investors and the public. By reducing the
likelihood of firms experiencing Year 2000 problems (e.g., problems
have the potential to delay executions and slow the settlement
process), the Commission is promoting efficiency.
The rules will not hinder capital formation. The rules are
necessary to ensure that the U.S. securities markets function
efficiently in the Year 2000 and, more specifically, that broker-
dealers and non-bank transfer agents are able to provide their
customers prompt and efficient service.
VII. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis (``FRFA'') has been
prepared in accordance with Section 4 of the Regulatory Flexibility Act
(``RFA'').\128\ It relates to new temporary Rules 15b7-3T, 17a-9T, and
17Ad-21T under the Exchange Act.
---------------------------------------------------------------------------
\128\ See 5 U.S.C. 604.
---------------------------------------------------------------------------
An Initial Regulatory Flexibility Analysis (``IRFA'') was prepared
in accordance with 5 U.S.C. 603 and was made available to the
public.\129\
---------------------------------------------------------------------------
\129\ See Proposing Release.
---------------------------------------------------------------------------
A. Need for and Objectives of Amendments
Unless proper modifications have been made, many computer systems
in the Year 2000 will incorrectly read the date ``01/01/00'' as being
in the year 1900 or another incorrect date. Year 2000 problems could
have negative repercussions throughout the financial system because of
the extensive interrelationship between broker-dealers, transfer
agents, other market participants and markets. The new rules are
intended to reduce the chances of harm to investors and the potential
systemic risk to the public and the financial markets as a result of
operational failures by registered broker-dealers and non-bank transfer
agents.
1. Rule 15b7-3T
Temporary Rule 15b7-3T is needed to protect investors and the
integrity of the securities markets during the transition to the Year
2000. The objective of the rule is to help ensure that broker-dealers
operating at the turn of the century are Year 2000 compliant. To
accomplish this objective, Rule 15b7-3T requires broker-dealers that
have or are presumed to have a material Year 2000 problem on or after
August 31, 1999, to notify the Commission and their DEA. Those broker-
dealers that have or are presumed to have a material Year 2000 problem
must cease to conduct their securities business.
The rule, however, provides those brokers or dealers that are not
Year 2000 compliant on or after August 31, 1999, the opportunity to
remediate their Year 2000 problem by submitting a certificate to the
Commission. By filing a certificate, firms have until November 15,
1999, to remediate their Year 2000 problems. A broker-dealer that
continues to have a material Year 2000 problem on November 15, 1999,
has until December 1, 1999, to unwind its business. If a broker-dealer
submits a certificate stating that it will remediate its Year 2000
problem by November 15, 1999, that broker-dealer is required to submit
a second certificate to the Commission stating that it has remediated
its Year 2000 problem or it intends to cease operations.
[[Page 42025]]
2. Rule 17Ad-21T
Temporary Rule 17Ad-21T is needed to protect investors and the
national market system during the transition to the Year 2000. The
objective of the rule is to help ensure that that non-bank transfer
agents will be capable of performing their functions in the Year 2000.
To accomplish this objective, Rule 17Ad-21T requires non-bank transfer
agents that have or are presumed to have a material Year 2000 problem
on or after August 31, 1999, to notify the Commission. Non-bank
transfer agents that have a material Year 2000 problem on or after
August 31, 1999, must cease to conduct their transfer agent operations.
The rule, however, permits those non-bank transfer agents that have
or are presumed to have a material Year 2000 problem on or after August
31, 1999, the opportunity to submit a certificate stating their Year
2000 status and intent to remediate the problem. By filing a
certificate, firms have until November 15, 1999, to remediate their
Year 2000 problems. A non-bank transfer agent that continues to have a
material Year 2000 problem on November 15, 1999, has until December 1,
1999, to unwind its business. If a non-bank transfer agent submits a
certificate stating that it will remediate its Year 2000 problem by
November 15, 1999, that non-bank transfer agent is required to submit a
second certificate to the Commission stating that it has remediated its
Year 2000 problem or it intends to cease operations.
In addition, Rule 17Ad-21T contains a recordkeeping requirement.
The objective of the rule's recordkeeping requirement is to help
facilitate the transfer to and conversion of records to a Year 2000
compliant transfer agent, if necessary. The rule requires that
registered non-bank transfer agents implement daily backup procedures
and maintain backup records for all master securityholder files
beginning August 31, 1999, and ending March 31, 2000. Records backup
must be performed at the close of each business day. The records must
be preserved for a five business day period.
If a firm has a material Year 2000 problem, the rule mandates that
it must preserve, for at least one year, the backup records for the
five days immediately preceding the day the problem was discovered. In
addition, firms must make, at the close of business on December 27
through 31, 1999, a backup copy of all master securityholder files and
preserve these records in an easily accessible place for at least one
year.
3. Rule 17a-9T
Temporary Rule 17a-9T is needed to assist broker-dealers, the
Commission, the DEAs, and the Securities Investor Protection
Corporation in identifying all securities positions carried by the
broker-dealer and the location of the securities in the event that a
broker-dealer experiences a Year 2000 problem. The rule requires
certain broker-dealers to make before January 1, 2000, separate
blotters pursuant to Rule 17a-3(a)(1) \130\ and a separate securities
record or ledger pursuant to Rule 17a-3(a)(5) for each of the last
three business days of 1999. These records must be preserved for a
period of not less than one year.
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\130\ 17 CFR 240.17a-3(a)(1).
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B. Significant Issues Raised by Public Comments
No public comments were received in response to the IRFA and no
comments specifically addressed that analysis. Commenters did, however,
discuss limiting the scope of the proposed rules to exclude small
firms. For example, several commenters urged the Commission to limit
the applicability of Rule 15b7-3T to clearing firms, firms with larger
numbers of customer accounts, firms that use computers for record
keeping, order execution or order transmission, or firms with higher
capital requirements.\131\
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\131\ See letters from US Participation, Goffstown Financial
Investments, Holly Securities, HBK Finance, Intellivest Securities,
Grodsky Associates, Dan Jamieson, Monroe Securities, Gramercy
Securities, and Wall Street Capital Company.
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In response to commenters' concerns that the scope of the proposed
Rule 15b7-3T is too broad, the Commission has modified the language of
Rule 15b7-3T to clarify that the rule applies only to broker-dealers
that use computers in the conduct of their business as a broker or
dealer. In order to clarify the rule's scope, the Commission noted in
this adopting release that Rule 15b7-3T is not intended to cover a
broker-dealer whose reliance on automation is limited to the use of
off-the-shelf word processing or accounting software. Moreover, smaller
broker-dealers that still transmit orders via the telephone are not
intended to be covered; only broker-dealers that use computers to
conduct their business as broker-dealers are subject to the rule.
The Commission further clarified in the release and rule that only
material problems in mission critical systems trigger the provisions of
this rule. In other words, only problems that might pose a risk to
investors and markets are covered by this rule.
The Commission has decided not to exclude broker-dealers from the
rule based on factors such as size or number of accounts. The
Commission believes that even small or introducing broker-dealers have
the potential to affect other market participants by, for example,
introducing inaccurate or corrupted data into other systems. The
Commission believes the more appropriate test for applicability is
whether a broker-dealer uses computers in the conduct of its business
as a broker-dealer.
Although the Commission did not receive any comments requesting
that Rule 17Ad-21T be limited to exclude small non-bank transfer
agents, the Commission has determined to limit Rule 17Ad-21T to non-
bank transfer agents that use computers in the conduct of their
business as a transfer agent.
C. Legal Basis
Proposed Rules 15b7-3T and 17a-9T are being proposed pursuant to
Sections 3(b), 15(b) and (c), 17, and 23(a) of the Exchange Act [15
U.S.C. 78c(b), 78o(b) and (c), 78q and 78w(a)]. Proposed Rule 17Ad-21T
is being proposed pursuant to Sections 17(a), 17A(d), and 23(a) of the
Exchange Act [15 U.S.C. 78q(a), 78q-1(d) and 78w(a)].
D. Small Entities Subject to the Rule
For purposes of Commission rulemaking, paragraph (c) of Rule 0-10
under the Exchange Act \132\ defines the term ``small business'' or
``small organization'' to include any broker or dealer that: (1) Had
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to 240.17a-5(d) or, if not
required to file such statements, a broker or dealer that had total
capital (net worth plus subordinated liabilities) of less than $500,000
on the last business day of the preceding fiscal year (or in the time
that it has been in business, if shorter); and (2) Is not affiliated
with any person (other than a natural person) that is not a small
business or small organization as defined in this section.
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\132\ 17 CFR 240.0-10(c).
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For purposes of Commission rulemaking, paragraph (h) of Rule 0-10
under the Exchange Act \133\ defines the term ``small business'' or
``small organization'' to include any transfer agent that: (1) Received
less than 500 items for transfer and less than 500 items for processing
during the preceding six months (or in the time that it has been in
business, if shorter); (2) Transferred items only of issuers that
[[Page 42026]]
would be deemed ``small businesses'' or ``small organizations'' as
defined in this section; (3) Maintained master shareholder files that
in the aggregate contained less than 1,000 shareholder accounts or was
the named transfer agent for less than 1,000 shareholder accounts at
all times during the preceding fiscal year (or in the time that it has
been in business, if shorter); and (4) Is not affiliated with any
person (other than a natural person) that is not a small business or
small organization under this section.
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\133\ 17 CFR 240.0-10(h).
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All registered brokers or dealers that use computers in the conduct
of their business are subject to the requirements of Rule 15b7-3T. The
Commission staff estimates that there are 8,300 registered broker-
dealers, of which approximately 5,200 qualify as ``small entities'' for
purposes of the RFA. Not all of the 5,200 broker-dealers that qualify
as ``small entities'' will be subject to the new rule. Specifically,
broker-dealers that do not use computers in the conduct of their
business will not be subject to the rule.
All registered non-bank transfer agents that use computers in the
conduct of their business are subject to Rule 17Ad-21T. The Commission
staff estimates that there are approximately 1,120 registered transfer
agents. Approximately 600 are non-bank transfer agents. Of these, 430
qualify as ``small entities'' for purposes of the RFA. Not all of the
430 non-bank transfer agents that qualify as ``small entities'' will be
subject to the new rule, however. Specifically, non-bank transfer
agents that do not use computers in the conduct of their business will
not be subject to the rule.
Rule 17a-9T applies only to broker-dealers that are required to
maintain a minimum net capital of $250,000 pursuant to Rule 15c3-
1(a)(2)(i) as of December 29, 30, and 31, 1999. The Commission
estimates that of the 8,300 registered broker-dealers, 1,100 are
required to maintain a minimum net capital of $250,000. The Commission
staff estimates that 15 of these broker-dealers may qualify as ``small
entities,'' as defined in the RFA.
E. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The Commission believes that, for business reasons, prudent broker-
dealers should already have developed plans to address potential
computer problems caused by the Year 2000. Therefore, Rule 15b7-3T is
not placing new burdens on broker-dealers to develop plans or address
computer problems. The rule does, however, require broker-dealers that
are not Year 2000 compliant to (1) notify the Commission and their DEAs
of material Year 2000 problems on or after August 31, 1999, (2) submit
a certificate to the Commission if they wish to continue operations
beyond August 31, 1999, and (3) submit a second certificate to the
Commission if they previously filed a certificate and wish to stay in
business.
The Commission believes that, for business reasons, prudent non-
bank transfer agents should already have developed plans to address
potential computer problems caused by the Year 2000. Therefore, Rule
17Ad-21T is not placing new burdens on non-bank transfer agents to
develop plans or address computer problems. The rule does, however,
require non-bank transfer agents that are not Year 2000 compliant to
(1) notify the Commission of material Year 2000 problems on or after
August 31, 1999, (2) submit a certificate to the Commission if they
wish to continue operations beyond August 31, 1999, and (3) submit a
second certificate to the Commission if they previously filed a
certificate and wish to stay in business.
In addition, Rule 17Ad-21T contains a recordkeeping requirement.
The rule requires that registered non-bank transfer agents implement
daily backup procedures and maintain backup records for all master
securityholder files beginning August 31, 1999, and ending March 31,
2000. Records backup must be performed at the close of each business
day. The records must be preserved for a rolling five business day
period. The rule also requires that if a firm has a material Year 2000
problem, it must preserve for at least one year the five day backup
records immediately preceding the day the problem was discovered. In
addition, firms must make, at the close of business on December 27
through 31, 1999, a backup copy for all master securityholder files and
preserve these records in an easily accessible place for at least one
year. The recordkeeping requirement does not require non-bank transfer
agents to make any new records, but only to preserve a separate copy of
an existing record.
Temporary Rule 17a-9T provides that only those broker-dealers
required to maintain a minimum net capital of $250,000 are required to
make and preserve a separate trade blotter and a separate securities
record or ledger as of the close of business of each of the last three
business days of 1999. The recordkeeping requirement does not require
such broker-dealers to make any new records, but only to preserve a
separate copy of an existing record. The records are required to be
kept in an easily accessible place for a period of not less than one
year. The Commission notes that this is not a continuing obligation,
but only applies on December 29, 30, and 31, 1999.
F. Duplicative, Overlapping or Conflicting Federal Rules
The Commission believes that there are no rules that duplicate,
overlap, or conflict with the adopted rules.
G. Steps to Minimize Impact on Small Entities
The RFA directs the Commission to consider significant alternatives
that would accomplish the stated objective, while minimizing any
significant adverse economic impact on small entities. Pursuant to
Section 3(c) of the RFA, the Commission considered the following
alternatives:
(a) The establishment of differing compliance or reporting
requirements or timetables the take into account the resources
available to small entities;
(b) the clarification, consolidation, or simplification of
compliance and reporting requirements under the rules for such small
entities;
(c) the use of performance rather than design standards; and
(d) an exemption from coverage of the rules, or any part thereof,
for such small entities.
Regarding the first alternative, the compliance and reporting
requirements contained in 15b7-3T and 17Ad-21T are narrowly tailored to
help ensure all firms are Year 2000 compliant and not subjected to
unnecessary burdens. In an effort to allow firms with Year 2000
problems the maximum amount of time possible to remedy them, the
Commission has extended the deadline one month, from October 15, 1999,
to November 15, 1999. Pushing back the deadline provides small entities
which may have limited resources extra time to become Year 2000
compliant. Rather than allowing only small entities to take advantage
of the extra month, the Commission decided to allow all firms to take
advantage of the extension.
Regarding the second alternative, the Commission notification
requirements contained in Rules 15b7-3T and 17Ad-21T simply state that
notice must be made. The certification provisions were designed to
clearly and succinctly set forth the information necessary to be
included in the certificate. As for Rule 17a-9T, which contains a
minimum net capital requirement of $250,000, the Commission anticipates
that very few small entities, if any, will be obligated to comply with
the rule.
Regarding the third alternative, Rules 15b7-3T and 17Ad-21T
incorporate the
[[Page 42027]]
use of performance standards because they do not set forth the method
for broker-dealers or non-bank transfer agents to become Year 2000
compliant, but only require them to be Year 2000 compliant and able to
perform their ordinary business functions for investors. Similarly, the
notice requirements do not specify the form the notices must take.
Adequate notice must be provided to the Commission for purposes of
Rules 15b7-3T and 17Ad-21T, but the Commission is not determining the
design or the format of those notices.
Regarding the fourth alternative, Rules 15b7-3T and 17Ad-21T
exclude from coverage firms that do not use computers to conduct their
business. This exclusion, which was created in response to commenters'
concerns, is primarily designed to benefit small firms. In addition,
smaller broker-dealers, i.e., firms that are not required to maintain
minimum net capital of $250,000, would be exempt from the requirements
of Rule 17a-9T. The Commission believes, however, that all registered
broker-dealers and transfer agents that do not fit into the exclusions
set forth above are important to protecting investors and the national
securities market from Year 2000 problems.
Therefore, having considered the foregoing alternatives, the
Commission believes the rules include regulatory alternatives that
minimize the impact on small entities while achieving the stated
objectives.
VIII. Paperwork Reduction Act
As explained in the proposing release, certain provisions of the
rules contain ``collection of information'' requirements within the
meaning of the Paperwork Reduction Act of 1995 (``PRA'') (44 U.S.C.
3501 et seq.). Accordingly, the Commission submitted the collection of
information requirements contained in the rules to the Office of
Management and Budget (``OMB'') for review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11. OMB approved the new collections and
assigned the following control numbers: Rule 15b7-3T, OMB No. 3235-
0526; Rule 17a-9T, OMB No. 3235-0524; Rule 17Ad-21T(c) and (e), OMB No.
3235-0525; and Rule 17Ad-21T(f), OMB No 3235-0525. The new rules are
necessary to protect investors and the financial markets from Year 2000
problems. An agency may not sponsor, conduct, or require response to an
information collection unless a currently valid OMB control number is
displayed.
In the Proposing Release, the Commission requested comment on the
proposed collections of information. Only one comment was received that
specifically addressed the PRA submission.\134\ However, other comments
touched on PRA related issues. Based on these comments, the Commission
has revised the collections of information required under the rules, as
discussed below.
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\134\ In its comment letter, RTC estimated that the notification
and certification requirement of Rule 17Ad-21T would consume 1.5
hours.
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A. Rules 15b7-3T and 17Ad-21T(c) and (e)
As more fully described in Section II. A and B above, the
Commission has added a second certification requirement to Rules 15b7-
3T and 17Ad-21T.\135\ The second certification provision is designed to
give firms the opportunity to certify to the Commission, the public,
and their customers that they have, in fact, remediated their Year 2000
problem. In addition, the second certification notifies the Commission
of which firms have fixed their Year 2000 problems and which firms have
not.
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\135\ The Commission requested comment in the Proposing Release
on whether to have more than one certification provision in case a
broker-dealer does not complete its remediation efforts by a target
date. See Proposing Release.
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There are approximately 8,300 registered broker-dealers and 600
registered non-bank transfer agents. The Commission staff estimates
that approximately 3,900 broker-dealers and 600 non-bank transfer
agents will have systems that will need to be Year 2000 compliant.\136\
Based on information provided by the SROs, the Commission staff
estimates that approximately one percent of these broker-dealers might
be required to submit notices and choose to submit certificates under
the rule. Thus, the Commission staff estimates that there will be
approximately 39 broker-dealers that will be affected by the rule.
Similarly, the Commission staff estimated that one percent of non-bank
transfer agents (approximately 6 entities) will be affected by the
rule.
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\136\ In the Proposing Release, the Commission estimated that
5,900 broker-dealers would have systems that would need to be Year
2000 compliant. This estimate was reduced to 3,900 broker-dealers
after the rule was changed to specifically exclude broker-dealers
that do not use computers in the conduct of their businesses.
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In the Proposing Release, the Commission staff estimated that each
respondent submitting a notice of a material Year 2000 problem will
incur an average burden of 0.5 hours, and that each respondent
submitting a certificate will incur an average burden of 0.5 hours. The
burden for submitting a second certificate is estimated by the
Commission staff to be an additional 0.5 hours. Hence, the Commission
estimates that the total burden per broker-dealer and non-bank transfer
agent will be 1.5 hours.
The notice requirement of the rule is mandatory for all affected
broker-dealers and non-bank transfer agents. The certification process
is optional. The Commission, however, expects most broker-dealers and
non-bank transfer agents with material Year 2000 problems after August
31, 1999, to submit the initial certificate and the follow-up
certificate in order to continue performing certain functions. Thus,
the aggregate burden for 39 broker-dealer respondents will be
approximately 58.5 hours (39 broker-dealers multiplied by 1.5 hours),
and the aggregate burden for 6 non-bank transfer agent respondents will
be approximately 9 hours (6 non-bank transfer agents multiplied by 1.5
hours). The Commission notes that its estimate of the paperwork burden
for Rules 15b7-3T and 17Ad-21T(c) and (e) has changed slightly from
that approved by OMB. Accordingly, the Commission has submitted a PRA
Change Worksheet to OMB.
B. Rule 17Ad-21T(g)
In response to the comments received, the Commission made several
changes to Rule 17Ad-21T, particularly with regard to the type of
records required to be retained. Nevertheless, the Commission estimates
that the burden on transfer agents will stay the same. The Commission
estimates that the recordkeeping burden to non-bank transfer agents
under the rule should be minimal because the records will already exist
and the rule only requires non-bank transfer agents to make separate
copies. The Commission staff estimates that there are approximately 600
non-bank transfer agents. The Commission staff estimates that non-bank
transfer agents will incur a burden of 0.25 hours per business day to
comply with the recordkeeping requirement.\137\ Thus, the Commission
staff estimates that the total burden for each non-bank transfer agent
for the period between August 31, 1999, and March 31, 2000, will be
approximately 38 hours (approximately 151 business days at 0.25 hours
per business day). The Commission staff estimates that the aggregate
burden for all non-bank transfer agents under the rule will be
approximately 22,800 hours (600
[[Page 42028]]
transfer agents at 38 hours per transfer agent). The Commission notes
that a substantial portion of this burden is already assumed by non-
bank transfer agents.\138\
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\137\ The RTC estimated that compliance with this recordkeeping
requirement, if not already performed, as is the case with RTC,
would take approximately \1/2\ hour to 4 hours of computer
operations each night. See RTC letter.
\138\ In the STA comment letter, the STA stated that backing up
files is a standard and good practice, which is part of the cost of
doing business. See STA letter. In addition, the RTC stated in their
comment letter that ``All responsible information technology
professionals already perform daily database and processing system
file back-ups'' and that ``Maintenance of multiple day record back-
ups is a conservative, inexpensive and responsible approach designed
to enhance recovery capabilities.'' See RTC letter.
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C. Rule 17a-9T
As more fully described in Section III. B above, the Commission
extended 17a-9T's recordkeeping requirement from the last two business
days of 1999 to the last three business days of 1999. The Commission
has made no other substantive changes to the rule because the rule does
not require broker-dealers to make new records, but only to preserve a
copy of existing records.
In the Proposing Release, the Commission estimated that each
broker-dealer subject to the rule would incur an average burden of 0.5
hours (0.25 hours per day). Because the Commission has extended the
recordkeeping requirement to include December 29, 1999, the Commission
staff now estimates that each broker-dealer will incur an average
burden of 0.75 hours.
Since the Proposing Release, the Commission has also revised its
estimate regarding the number of broker-dealers that will be required
to comply with the rule. In the Proposing Release, the Commission
estimated that approximately 4,300 broker-dealers would be subject to
the rule's requirement. After reviewing current filings with the
Commission, we now estimate that approximately 1,100 broker-dealers
will meet the net capital requirements necessary to be subject to the
rule.\139\ The Commission staff estimates that the total aggregate
burden under the rule will be approximately 825 hours (1,100 broker-
dealers at 0.75 hours per broker-dealer). The Commission staff's
estimate of the aggregate paperwork burden to comply with Rule 17a-9T
has decreased from 2,150 hours to 825 hours.\140\ Accordingly, the
Commission has submitted to OMB a revision of the currently approved
collection.
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\139\ Only those broker-dealers that are required to maintain
certain net capital pursuant to Rule 15c3-1(a)(2)(i), 17 CFR
240.15c3-1(a)(2)(i), will be required to comply with this rule. As a
result of the rule's limited scope, the Commission staff estimates
that approximately 1,100 registered broker-dealers will be required
to comply with the rule.
\140\ See Proposing Release.
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IX. Effective Date
The effective date for Rules 15b7-3T, 17Ad-21T and 17a-9T is August
30, 1999. Section 553(d) of the Administrative Procedure Act requires
that, unless an exception applies, a substantive rule may not be made
effective less than 30 days after notice of the rule has been published
in the Federal Register.\141\ One exception to the 30-day requirement
is when an agency finds good cause for a shorter notice period. We find
that good cause exists in this situation.
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\141\ 5 U.S.C. 553(d)
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The need to implement the rules less than 30 days after publication
arises from the time-sensitive nature of the Year 2000 problem as well
as from the specific date components of the rule. Because the date by
which Year 2000 problems in mission critical computer systems must be
repaired cannot be changed, the effectiveness of these rules cannot be
delayed beyond August 30. The rule will permit us to act to reduce the
risk to investors and the securities markets posed by broker-dealers
and non-bank transfer agents that have not adequately prepared their
computer systems for the millennium transition.
We also believe that this early effectiveness will not impose any
significant burdens on broker-dealers and transfer agents subject to
the rule. First, we are adopting these rules in an open meeting more
than 30 days before they become effective. Our formal Federal Register
notice will provide less than 30 days notice because of the time
required to prepare the rule for publication. As a result, many broker-
dealers and non-bank transfer agents subject to the rule will, in fact,
have more than 30 days notice before the rules become effective.
Moreover, these rules will be effective only a few days earlier than
they otherwise would have been. This minimizes the burden imposed by
early effectiveness.
Second, we believe that the broker-dealers and transfer agents
subject to these rules are effectively already in preparation for their
effectiveness. In particular, broker-dealers and transfer agents are
already aware that we are treating the Year 2000 problem as a serious
problem. In addition, because a broker-dealer or transfer agent that
does not fix its computer systems by the end of the year will likely
not be able to continue in business, virtually all persons directly
affected by this rule are already fixing their systems. Indeed, many
broker-dealers are already subject to testing requirements imposed by
their SROs. We therefore find that good cause exists to make these
rules effective less than thirty days after publication in the Federal
Register.
X. Statutory Basis
Pursuant to the Exchange Act of 1934 and particularly Sections
3(b), 15(b) and (c), 17, and 23(a) thereof [15 U.S.C. 78c(b), 78o(b)
and (c), 78q and 78w(a)], the Commission is adopting 240.15b7-3T and
240.17a-9T of Title 17 of the Code of Federal Regulation in the manner
set forth below. Pursuant to the Exchange Act of 1934 and particularly
Sections 17(a), 17A(d), and 23(a) thereof [15 U.S.C. 78q(a), 78q-1(d)
and 78w(a)], the Commission is adopting 240.17Ad-21T of Title 17 of the
Code of Federal Regulation in the manner set forth below.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and
80b-11, unless otherwise noted.
* * * * *
2. By adding Sec. 240.15b7-3T to read as follows:
Sec. 240.15b7-3T Operational capability in a Year 2000 environment.
(a) This section applies to every broker or dealer registered
pursuant to Section 15 of the Act, (15 U.S.C. 78o) that uses computers
in the conduct of its business as a broker or dealer. If you have a
material Year 2000 problem, then you do not have operational capability
within the meaning of Section 15(b)(7) of the Act (15 U.S.C.
78o(b)(7)).
(b)(1) You have a material Year 2000 problem under paragraph (a) of
this section if, at any time on or after August 31, 1999:
(i) Any of your mission critical computer systems incorrectly
identifies any date in the Year 1999 or the Year 2000; and
(ii) The error impairs or, if uncorrected, is likely to impair, any
of your mission critical systems.
[[Page 42029]]
(2) You will be presumed to have a material Year 2000 problem if,
at any time on or after August 31, 1999, you:
(i) Do not have written procedures reasonably designed to identify,
assess, and remediate any Year 2000 problems in mission critical
systems under your control;
(ii) Have not verified your Year 2000 remediation efforts through
reasonable internal testing of mission critical systems under your
control;
(iii) Have not verified your Year 2000 remediation efforts by
satisfying Year 2000 testing requirements imposed by self-regulatory
organizations to which you are subject; or
(iv) Have not remediated all exceptions related to your mission
critical systems contained in any independent public accountant's
report prepared on your behalf pursuant to Sec. 240.17a-5(e)(5)(vi).
(c) If you have or are presumed to have a material Year 2000
problem, you must immediately notify the Commission and your designated
examining authority of the problem. You must send this notice to the
Commission by overnight delivery to the Division of Market Regulation,
U.S. Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-1002 Attention: Y2K Compliance.
(d)(1) If you are a broker or dealer that is not operationally
capable because you have or are presumed to have a material Year 2000
problem, you may not, on or after August 31, 1999:
(i) Effect any transaction in, or induce the purchase or sale of,
any security; or
(ii) Receive or hold customer funds or securities, or carry
customer accounts.
(2) Notwithstanding paragraph (d)(1) of this section, you may
continue to effect transactions in, or induce the purchase or sale of,
a security, receive or hold customer funds or securities, or carry
customer accounts:
(i) Until December 1, 1999, if you have submitted a certificate to
the Commission in compliance with paragraph (e) of this section; or
(ii) Solely to the extent necessary to effect an orderly cessation
or transfer of these functions.
(e)(1)(i) If you are a broker or dealer that is not operationally
capable because you have or are presumed to have a material Year 2000
problem, you may, in addition to providing the Commission the notice
required by paragraph (c) of this section, provide the Commission and
your designated examining authority a certificate signed by your chief
executive officer (or an individual with similar authority) stating:
(A) You are in the process of remediating your material Year 2000
problem;
(B) You have scheduled testing of your affected mission critical
systems to verify that the material Year 2000 problem has been
remediated, and specify the testing dates;
(C) The date by which you anticipate completing remediation of the
material Year 2000 problem in your mission critical systems, and will
therefore be operationally capable; and
(D) Based on inquiries and to the best of the chief executive
officer's knowledge, you do not anticipate that the existence of the
material Year 2000 problem in your mission critical systems will impair
your ability, depending on the nature of your business, to ensure
prompt and accurate processing of securities transactions, including
order entry, execution, comparison, allocation, clearance and
settlement of securities transactions, the maintenance of customer
accounts, or the delivery of funds and securities; and you anticipate
that the steps referred to in paragraphs (e)(1)(i)(A) through (C) of
this section will result in remedying the material Year 2000 problem on
or before November 15, 1999.
(ii) If the information contained in any certificate provided to
the Commission pursuant to paragraph (e) of this section is or becomes
misleading or inaccurate for any reason, you must promptly file an
updated certificate correcting such information. In addition to the
information contained in the certificate, you may provide the
Commission with any other information necessary to establish that your
mission critical systems will not have material Year 2000 problems on
or after November 15, 1999.
(2) If you have submitted a certificate pursuant to paragraph
(e)(1) of this section, you must submit a certificate to the Commission
and your designated examining authority signed by your chief executive
officer (or an individual with similar authority) on or before November
15, 1999, stating that, based on inquiries and to the best of the chief
executive officer's knowledge, you have remediated your Year 2000
problem or that you will cease operations. This certificate must be
sent to the Commission by overnight delivery to the Division of Market
Regulation, U.S. Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-1002 Attention: Y2K Compliance.
(f) Notwithstanding paragraph (d)(2) of this section, you must
comply with the requirements of paragraph (d)(1) of this section if you
have been so ordered by the Commission or by a court.
(g) For the purposes of this section:
(1) The term mission critical system means any system that is
necessary, depending on the nature of your business, to ensure prompt
and accurate processing of securities transactions, including order
entry, execution, comparison, allocation, clearance and settlement of
securities transactions, the maintenance of customer accounts, and the
delivery of funds and securities; and
(2) The term customer includes a broker or dealer.
(h) This temporary section will expire on July 1, 2001.
3. By adding Sec. 240.17a-9T to read as follows:
Sec. 240.17a-9T Records to be made and retained by certain exchange
members, brokers and dealers.
This section applies to every member, broker or dealer registered
pursuant to Section 15 of the Act, (15 U.S.C. 78o), that is required to
maintain, as of December 29, December 30 and December 31, 1999, minimum
net capital of $250,000 pursuant to Sec. 240.15c3-1(a)(2)(i).
(a) You must make before January 1, 2000, for each of December 29,
December 30 and December 31, 1999, separate copies of the blotters
pursuant to Sec. 240.17a-3(a)(1).
(b) You must make before January 1, 2000, as of the close of
business for each of December 29, December 30 and December 31, 1999, a
separate copy of the securities record or ledger pursuant to
Sec. 240.17a-3(a)(5).
(c) You must preserve these records for a period of not less than
one year.
(d) The provisions of Sec. 240.17a-4(i) shall apply as if part of
this Sec. 240.17a-9T.
(e) You may preserve these records in any format that is acceptable
and in compliance with the conditions described in Sec. 240.17a-4(f).
(f) You must furnish promptly to a representative of the Commission
such legible, true and complete copies of those records, as may be
requested.
(g) This temporary section will expire on July 1, 2001.
4. By adding Sec. 240.17Ad-21T to read as follows:
Sec. 240.17Ad-21T Operational capability in a Year 2000 environment.
(a) This section applies to every registered non-bank transfer
agent that uses computers in the conduct of its business as a transfer
agent.
(b)(1) You have a material Year 2000 problem if, at any time on or
after August 31, 1999:
[[Page 42030]]
(i) Any of your mission critical computer systems incorrectly
identifies any date in the Year 1999 or the Year 2000, and
(ii) The error impairs or, if uncorrected, is likely to impair, any
of your mission critical systems under your control.
(2) You will be presumed to have a material Year 2000 problem if,
at any time on or after August 31, 1999, you:
(i) Do not have written procedures reasonably designed to identify,
assess, and remediate any material Year 2000 problems in your mission
critical systems under your control;
(ii) Have not verified your Year 2000 remediation efforts through
reasonable internal testing of your mission critical systems under your
control and reasonable testing of your external links under your
control; or
(iii) Have not remediated all exceptions related to your mission
critical systems contained in any independent public accountant's
report prepared on your behalf pursuant to Sec. 240.17Ad-18(f).
(c) If you have or are presumed to have a material Year 2000
problem, you must immediately notify the Commission and your issuers of
the problem. You must send this notice to the Commission by overnight
delivery to the Division of Market Regulation, U.S. Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-1002
Attention: Y2K Compliance.
(d)(1) If you are a registered non-bank transfer agent that has or
is presumed to have a material Year 2000 problem, you may not, on or
after August 31, 1999, engage in any transfer agent function,
including:
(i) Countersigning such securities upon issuance;
(ii) Monitoring the issuance of such securities with a view to
preventing unauthorized issuance;
(iii) Registering the transfer of such securities;
(iv) Exchanging or converting such securities; or
(v) Transferring record ownership of securities by bookkeeping
entry without physical issuance of securities certificates.
(2) Notwithstanding paragraph (d)(1) of this section, you may
continue to engage in transfer agent functions:
(i) Until December 1, 1999, if you have submitted a certificate to
the Commission in compliance with paragraph (e) of this section; or
(ii) Solely to the extent necessary to effect an orderly cessation
or transfer of these functions.
(e)(1)(i) If you are a registered non-bank transfer agent that has
or is presumed to have a material Year 2000 problem, you may, in
addition to providing the Commission the notice required by paragraph
(c) of this section, provide the Commission and your issuers a
certificate signed by your chief executive officer (or an individual
with similar authority) stating:
(A) You are in the process of remediating your material Year 2000
problem;
(B) You have scheduled testing of your affected mission critical
systems to verify that the material Year 2000 problem has been
remediated, and specify the testing dates;
(C) The date by which you anticipate completing remediation of the
material Year 2000 problem in your mission critical systems; and
(D) Based on inquiries and to the best of the chief executive
officer's knowledge, you do not anticipate that the existence of the
material Year 2000 problem in your mission critical systems will impair
your ability, depending on the nature of your business, to assure the
prompt and accurate transfer and processing of securities, the
maintenance of master securityholder files, or the production and
retention of required records; and you anticipate that the steps
referred to in paragraphs (e)(1)(i)(A) through (C) of this section will
result in remedying the material Year 2000 problem on or before
November 15, 1999.
(ii) If the information contained in any certificate provided to
the Commission pursuant to paragraph (e) of this section is or becomes
misleading or inaccurate for any reason, you must promptly file an
updated certificate correcting such information. In addition to the
information contained in the certificate, you may provide the
Commission with any other information necessary to establish that your
mission critical systems will not have material Year 2000 problems on
or after November 15, 1999.
(2) If you have submitted a certificate pursuant to paragraph
(e)(1) of this section, you must submit a certificate to the Commission
and your issuers signed by your chief executive officer (or an
individual with similar authority) on or before November 15, 1999,
stating that, based on inquiries and to the best of the chief executive
officer's knowledge, you have remediated your Year 2000 problem or that
you will cease operations. This certificate must be sent to the
Commission by overnight delivery to the Division of Market Regulation,
U.S. Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-1002 Attention: Y2K Compliance.
(f) Notwithstanding paragraph (d)(2) of this section, you must
comply with the requirements of paragraph (d)(1) of this section if you
have been so ordered by the Commission or by a court.
(g) Beginning August 31, 1999, and ending March 31, 2000, you must
make backup records for all master securityholder files at the close of
each business day and must preserve these backup records for a rolling
five business day period in a manner that will allow for the transfer
and conversion of the records to a successor transfer agent. If you
have a material Year 2000 problem, you must preserve for at least one
year the five day backup records immediately preceding the day the
problem was discovered. In addition, you must make at the close of
business on December 27 through 31, 1999, a backup copy for all master
securityholder files and preserve these records for at least one year.
Such backup records must permit the timely restoration of such systems
to their condition existing prior to experiencing the material Year
2000 problem. Copies of the backup records must be kept in an easily
accessible place but must not be located with or held in the same
computer system as the primary records, and you must be able to
immediately produce or reproduce them. You must furnish promptly to a
representative of the Commission such legible, true, and complete
copies of those records, as may be requested.
(h) For the purposes of this section:
(1) The term mission critical system means any system that is
necessary, depending on the nature of your business, to assure the
prompt and accurate transfer and processing of securities, the
maintenance of master securityholder files, and the production and
retention of required records as described in paragraph (d) of this
section;
(2) The term customer includes an issuer, transfer agent, or other
person for which you provide transfer agent services;
(3) The term registered non-bank transfer agent means a transfer
agent, whose appropriate regulatory agency is the Commission and not
the Office of the Comptroller of the Currency, the Board of Governors
of the Federal Reserve System, or the Federal Deposit Insurance
Corporation; and
(4) The term master securityholder file has the same definition as
defined in Sec. 240.17Ad-9(b).
(i) This temporary section will expire on July 1, 2001.
By the Commission.
[[Page 42031]]
Dated: July 27, 1999.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-19824 Filed 8-2-99; 8:45 am]
BILLING CODE 8010-01-P
