[Federal Register Volume 63, Number 237 (Thursday, December 10, 1998)]
[Notices]
[Pages 68324-68326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32825]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40745; File No. SR-NASD-09-75]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval to Proposed Rule Change and Amendment No.
1 Thereto by National Association of Securities Dealers, Inc. Requiring
Certain NASD Member Firms To Participate in the Integrated, Industry-
Wide, Year 2000 Tests
December 3, 1998.
On December 3, 1998, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association''), through its wholly-owned
subsidiary, NASD Regulation, Inc. (``NASD Regulation''), submitted to
the Securities and Exchange Commission (``SEC'' or ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ Amendment No. 1 to
a proposed rule change described in Items I, II, and III below, which
Items have been prepared by NASD Regulation.\3\ The Commission is
publishing this notice and order to solicit comments on the proposed
rule change from interested persons and to grant accelerated approval
to the proposal and Amendment No. 1 thereto.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The initial filing, which was received on October 5, 1998,
was not noticed in the Federal Register.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation proposes to add a new rule, NASD Rule 3410, to the
Conduct Rules of the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association''), to require certain NASD members to
conduct or participate in computer tests designed to address the Year
2000 problem. Below is the text of the proposed rule change. Proposed
new language is in italics; proposed deletions are in brackets.
* * * * *
3400. COMPUTER SYSTEMS
3410. Mandatory Year 2000 Testing
[This rule will expire automatically on January 1, 2001]
(a) Members of the Association that determine their minimum net
capital requirement according to paragraphs (a)(2)(i) and/or (a)(4) of
Securities Exchange Act Rule 15c3-1, or are registered with the
Securities and Exchange Commission as government securities brokers or
dealers under Section 15C of the Securities Exchange Act of 1934 must
conduct or participate in such testing of computer systems as the
Association may prescribe.
(b) Every member required by the Association to conduct or
participate in testing of computer systems shall provide to the
Association such reports relating to the testing as the Association may
prescribe.
(c) Every member of the Association that clears securities
transactions on behalf of other broker-dealers must take reasonable
measures to ensure that each broker-dealer for which it clears
securities transactions conducts testing with such member.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD Regulation included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. NASD Regulation has prepared summaries, set
forth in Sections (A), (B), and (C) below, of the most significant
aspects of such statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(a) Purpose
The NASD is proposing to adopt a rule that would establish with
NASD's specific authority to require certain members to participate in
Year 2000 tests and to require reporting on the tests.\4\ The NASD is
proposing that the rule will expire in the year 2001 so that the NASD
will have specific authority to mandate testing and reporting, as
necessary, to correct problems that are not resolved prior to January
1, 2000, or to collect problems that arise after January 1, 2000.
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\4\ The proposed rule is not intended to limit the NASD's
existing authority by rule, contract, or otherwise, to mandate
testing or require reports from members. For example, the Nasdaq
Workstation II Subscriber Agreement, Section 1 states that
Nasdaq agrees to provide services to a subscriber on the terms and
conditions set forth in the agreement, which could include testing.
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On January 1, 2000, the internal date in computers should roll-over
from ``12/31/99'' to ``01/01/00.'' At that moment, if corrective
measures have not been taken, the program logic in the vast majority of
these computer systems will begin to produce erroneous results because
the systems will read the date as beginning in the year 1900 rather
than 2000. This problem, known as the ``Year 2000 Problem,'' could
cause significant disruption in the securities industry. There are
several stages involved in correcting the Year 2000 Problem, including:
assessing the problem; implementing corrective measures; conducting
internal, point-to-point, and integrated or industry-wide testing; and
establishing contingency plans.
The testing stage of correcting the Year 2000 Problem will be
critical to ensuring that the markets will operate with minimal
disruption after January 1, 2000. To facilitate testing on an
[[Page 68325]]
integrated, industry-wide basis, the Securities Industry Association
(``SIA'') has undertaken the task of coordinating such a test. Test
participants will include, among others, Nasdaq, the exchanges,
registered clearing corporations and depositories, data processors, and
broker-dealers. The first day of the integrated, industry-wide test is
scheduled for March 6, 1999.\5\
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\5\ The exact number of firms that will be able to participate
in the SIA test has not been conclusively determined.
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The NASD believes it is essential that the firms that could cause
the most disruption in the market, if these firms have not corrected
the Year 2000 problem, conduct tests of all of their critical computer
systems that relate to their different types of businesses (e.g.,
equities, options, government securities, mortgage-backed securities).
Consequently, the NASD is proposing to require all market makers and
clearing firms to conduct tests to address the Year 2000 Problem. The
proposed rule also would require government securities brokers or
dealers that are not subject to the SEC's net capital rule, but are
NASD members, to conduct Year 2000 tests.
Some firms will be able to satisfy at least part of their testing
obligations by participating in the SIA-coordinated test or by tests
sponsored by self-regulatory organizations (``SROs''). The Government
Securities Clearing Corporation (``GSCC'') will test for government
securities. In addition, the Participants Trust Company (``PTC'') and
the MBS Clearing Corporation (``MBSCC'') will test for mortgage-backed
securities. Therefore, portions of the members' testing obligations
will be satisfied by participation in the tests offered by GSCC, PTC,
or MBSCC.
The proposed rule would provide specific authority to require
participation in organized, industry-sponsored tests, and require
``point-to-point'' testing between member firms and the NASD or other
systems, or internal tests of member systems. These other tests may be
particularly significant for smaller market makers and clearing firms
that may not be able to participate in the industry-sponsored tests.
Some members may be able to satisfy their testing obligation
without actually conducting tests themselves. For example, it is likely
that market makers that are not clearing firms and that only use Nasdaq
Workstation II (NWII) terminals for their market-making
activity will not be required to participate in mandatory testing
because the NASD has completed testing of the NWII system. Also,
members that use computer systems provided by service bureaus are not
likely to have to perform any additional tests of the systems provided
by the service bureaus if the service bureaus participate in the SIA
coordinated test, the members have conducted point-to-point testing
with their service bureaus, the service bureaus have conducted point-
to-point testing with the NASD, and the tests do not indicate any
problems. In the circumstances described above, the NASD and service
bureaus will act as proxies for the members for purposes of compliance
with the rule. Following approval of this rule proposal and Amendment
No. 1 thereto, the NASD will issue a Notice to Members describing the
types of tests that will be required for different types of market
makers and clearing firms, and the types of situations in which members
will be able to satisfy the testing requirement by proxy.
The NASD also believes that test results should be reported to the
Association. These reports will enable the NASD to identify those
members that have not adequately prepared for the Year 2000 so that
appropriate action can be taken to address these members' deficiencies,
including, for example, providing assistance to or easing the
transition of business to other firms. Accordingly, the proposal would
require members to file reports with the NASD about the tests. To
simplify the reporting requirement, the NASD will design a standardized
format firms will use to report to the NASD. In addition, to avoid
duplicative and burdensome reporting, the NASD will coordinate its
reporting requirements with other SROs as much as possible. For
example, the NASD may exclude from its reporting requirement those
firms for which the NASD is not the designated examining authority.
The NASD will issue Notices to Members specifying members'
reporting and testing obligations sufficiently in advance of specific
events, such as SIA-coordinated industry-wide tests, that members will
reasonably be able to comply. Regardless of when such Notices are
issued, nothing in this rule relieves member firms of their obligation
to take all necessary steps so that they may function properly--both
their internal systems and their ability to communicate and transact
business with other firms--on and after January 1, 2000.
Further, although the NASD is not proposing to require all members
of the Association (e.g., introducing firms that do not make markets)
to conduct external testing, such testing is a key element of Year 2000
compliance for all firms.\6\ Specifically, the NASD still wants all
member firms to test their computer systems and take whatever remedial
measures are necessary to deal with Year 2000 issues. NASD Regulation
staff has held 35 Year 2000 seminars in 14 cities and has been told by
introducing firms that their computer systems are dependent upon, and
in some cases provided by, their clearing firms and that cooperation by
and coordination with the clearing firms is necessary. Based on these
comments, the NASD is proposing that clearing firms must take
reasonable measures to ensure that their introducing firms test with
them. The NASD expects that ``reasonable measures'' in this context
would include providing reasonable notice of the existence of tests
that are scheduled as well as such access to the systems and personnel
of the clearing firm as may be necessary. The NASD wants clearing firms
to give it the results of the tests conducted with the introducing
firms.
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\6\ Member firms that choose--or are required--to participate in
external testing should recognize that internal testing is a
prerequisite for external testing and participation in SIA-
coordinated tests and should act accordingly.
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Finally, there is no more significant issue confronting the
financial industry than the Year 2000 Problem, and the NASD thus will
respond decisively to members' failure to respond to initiatives
designed to determine their readiness. The NASD informed members that
failure to respond to the NASD Year 2000 survey could result in
disciplinary action. Similarly, disciplinary actions have been and will
be instituted against members that fail to file SEC Form BD-Y2K. In
addition, members will be subject to disciplinary action if they fail
to conduct the required tests, fail to report the results of the tests
to the NASD, or fail to take reasonable measures to ensure that their
introducing firms have an opportunity to test with them.
(b) Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Exchange
Act, which requires, among other things, that the Association's rules
must be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and
[[Page 68326]]
open market and a national market system, and, in general, to protect
investors and the public interest. NASD Regulation believes the
proposed rule is necessary to protect investors and the public
interest. The NASD rule requiring certain members to conduct or
participate in Year 2000 tests, and to file reports about the tests,
will enable NASD Regulation, those participating in the tests, and
others to evaluate the readiness of securities industry for the Year
2000. The firms that would be required to conduct testing perform
critical functions in the markets and these firms' inability to perform
these functions beyond January 1, 2000 could cause disruptions in the
markets and cause harm to investors.
(B) Self-Regulatory Organization's Statement on Burden on Competition
NASD Regulation does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act, as
amended.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
After careful consideration, the Commission has concluded, for the
reasons set forth below, that the proposed rule change is consistent
with the requirements of the Exchange Act and the rules and regulations
thereunder. Mandating Year 2000 testing and reporting is consistent
with Section 15A(b)(6) \7\ of the Exchange Act. Section 15A(b)(6) of
the Exchange Act requires that the NASD's rules be designed, among
other things, to foster cooperation and coordination with persons
engaged in regulating, clearing, settling, processing information with
respect to, and facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest. The Commission believes that the proposed rule change
will facilitate the NASD's efforts to ensure the securities markets'
continued smooth operation on and after January 1, 2000.
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\7\ 15 U.S.C. 78o-3(b)(6).
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The Commission finds good cause for approving the proposal and
Amendment No. 1 thereto prior to the 30th day after the date of
publication of notice of the filing in the Federal Register. It is
vital that SROs have the authority to mandate that their member firms
participate in Year 2000 testing and that they report test results (and
other Year 2000 information) to their SRO's. The proposed rule change
will help the NASD participate in coordinating industry-wide and other
testing. This, in turn, will help ensure that the SIA's tests and the
NASD's Year 2000 efforts are successful. The proposed rule change will
also help the NASD work with its member firms, the SIA, and other SROs
to minimize any possible disruptions the Year 2000 may cause.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
DC 20549. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the NASD. All submissions should refer to the file
number in the caption above and should be submitted by December 31,
1998.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\8\ that the proposal, SR-NASD-98-75, including Amendment
No. 1 thereto, be and hereby is approved on an accelerated basis.\9\
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\8\ 15 U.S.C. 78s(b)(2).
\9\ In approving the proposal, the Commission has considered the
rule's impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32825 Filed 12-9-98; 8:45 am]
BILLING CODE 8010-01-M
