[Federal Register Volume 64, Number 47 (Thursday, March 11, 1999)]
[Proposed Rules]
[Pages 12127-12139]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6043]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-41142; File No. S7-8-99]
RIN 3235-AH61
Operational Capability Requirements of Registered Broker-Dealers
and Transfer Agents and Year 2000 Compliance
AGENCY: Securities and Exchange Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Securities and Exchange Commission (``Commission) is
soliciting comment on new proposed Rules 15b7-2 and 17Ad-20 and
temporary Rules 15b7-3T, 17Ad-21T, and 17a-9T under the Securities
Exchange Act of 1934 (``Exchange Act''). Broker-dealers and transfer
agents are becoming increasingly reliant on computer systems to perform
their functions. Thus, it is critical that they have sufficient
operational capability. In addition, broker-dealers, transfer agents,
and other securities market participants are facing a critical test of
their operational capability with the upcoming Year 2000. These
proposed rules would require registered broker-dealers and transfer
agents to have sufficient operational capability and their computer
systems to be Year 2000 compliant. These proposed rules are intended to
protect investors and the securities markets by reducing the potential
systemic risk as a result of operational failures in general, and in
particular, computer systems failures related to the Year 2000 at
registered broker-dealers and non-bank transfer agents.
DATES: You should send us your comments so that they arrive at the
Commission on or before April 12, 1999.
ADDRESSES: You should submit three copies of your comments to Jonathan
G. Katz, Secretary, Mail Stop 0609, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549-0609. You can also
submit your comments electronically at the following E-mail address:
rule-comments@sec.gov. In your comment letters, you should refer to
File No. S7-8-99, which should be included on the subject line if E-
mail is used. We will make all comments received available for public
inspection and copying at the Commission's Public Reference Room, 450
Fifth Street, N.W., Washington, D.C. 20549. We will post electronically
submitted comment letters on our Internet web site (http://
www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Broker-Dealers (Rules 15b7-2 and 15b7-
3T) Sheila Slevin, Assistant Director, 202-942-0796, S. Kevin An,
Special Counsel, 202-942-0198, or Kevin Ehrlich, Attorney, 202-942-
0778; Transfer Agents (Rules 17Ad-20 and 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, N.W., Washington, D.C. 20549-
1001.
SUPPLEMENTARY INFORMATION:
I. Introduction and Executive Summary
Because of the tremendous growth in the volume and complexity of
securities trading in recent years, broker-dealers and transfer agents
are becoming increasingly reliant on computer systems to perform their
functions. Securities firms rely on computers to handle every aspect of
trading, from routing orders to various markets to maintaining customer
accounts. As with broker-dealers, the majority of transfer agents also
now rely on computers instead of manual processing to record changes of
ownership of securities, maintain issuer securityholder records, cancel
and issue certificates, and distribute dividends. Accordingly, it has
become more essential than ever that broker-dealers have sufficient
operational capability to process transactions for customers as well as
to maintain control of customer funds and securities, and for transfer
agents to assure the prompt transfer and processing of securities and
maintenance of securityholder files.
This obligation is not new. Broker-dealers and transfer agents have
always been expected under the federal securities laws to have the
ability to properly handle customer transactions, whether manually or
electronically. For example, in connection with the back office
problems in the 1960s, we warned broker-dealers that if they did not
have the personnel and facilities to enable them to promptly execute
and consummate all of their securities transactions, they could be in
violation of the antifraud provisions if they accepted or executed any
customer order.\1\ More recently, the Division of Market Regulation
stated that broker-dealers should take steps to prevent their
operational systems from being overwhelmed by high trading volume and
that they should have the systems capacity to handle exceptional
situations.\2\
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\1\ Exchange Act Rel. No. 8363 (July 29, 1968), 33 FR 11150
(August 7, 1968).
\2\ Staff Legal Bulletin No. 8 (September 9, 1998), which can be
found at http://www.sec.gov/rules/othern/slbmr8.htm>. At the time
we announced the Automation Review Policy Statement for self-
regulatory organizations (``SROs), we stated that broker-dealers
should also engage in systems testing. Exchange Act Rel. No. 27445
(November 16, 1989), 54 FR 48703 (November 24, 1989).
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In light of broker-dealers' and transfer agents' increasing
reliance on computer systems, we believe it is appropriate to provide
further guidance by setting objective standards relating to operational
capability that registered broker-dealers must meet under Section
15(b)(7) of the Exchange Act \3\ and that registered transfer agents
must meet under Section 17A(d)(1) of the Exchange
[[Page 12128]]
Act.\4\ We are proposing these standards at this time because broker-
dealers, transfer agents, and other securities market participants are
facing a critical test of their operational capability with the
upcoming Year 2000 (``Y2K'').\5\ 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. While we do not anticipate
widespread failures by broker-dealers or transfer agents as a result of
the Y2K problem, we want to reduce the potential risk to the markets by
reserving the right to take prophylactic measures against broker-
dealers and non-bank transfer agents whose systems will not be ready
for Year 2000. Accordingly, we are also proposing temporary rules to
specifically address the Year 2000 problem by giving us the ability to
take the steps necessary in the event that a broker-dealer or a non-
bank transfer agent will not be Year 2000 compliant.
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\3\ The Congress recognized the importance of the operational
capability of broker-dealers by including Exchange Act Section
15(b)(7) as part of the 1975 Amendments. Pub. L. No. 94-29, 89 Stat.
97 (1975). That section allows us to establish by rule such
operational capability standards as we find necessary or appropriate
in the public interest or for the protection of investors. We also
note that we have broad authority to promulgate rules and
regulations as necessary or appropriate in the public interest or
for the protection of investors to provide safeguards with respect
to the financial responsibility and related practices of broker-
dealers. Exchange Act Section 15(c)(3), 15 U.S.C. 8o(c)(3).
\4\ Exchange Act Section 17A(d)(1) gives us broad authority to
prescribe rules for registered transfer agent activity as necessary
or appropriate in the public interest, for the protection of
investors, or for the safeguarding of securities and funds.
\5\ See generally Exchange Act Rel. No. 40162 (July 2, 1998), 63
FR 37668 (July 13, 1998); Exchange Act Rel. No. 40163 (July 2,
1998), 63 FR 37688 (July 13, 1998).
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II. Our Efforts to Date on the Y2K Problem
The Commission views the Y2K problem as an extremely serious issue
and has already taken various steps to address it. For example, we
adopted Rules 17a-5(e)(5) and 17Ad-18 under the Exchange Act requiring
certain broker-dealers and non-bank transfer agents to file reports
with us and their DEAs regarding their Year 2000 preparedness.\6\ We
also provided interpretive guidance for public companies, investment
advisers, investment companies, and municipal securities issuers
regarding their disclosure obligations about their Year 2000 issues.\7\
Since 1996, our Division of Market Regulation has periodically surveyed
the exchanges, Nasdaq, and the clearing agencies for detailed
information regarding their Year 2000 efforts. In addition, since the
third quarter of 1996, our Office of Compliance Inspections and
Examinations has included a Year 2000 examination module in its
examinations of transfer agents and selected broker-dealers.\8\
Finally, we instituted public administrative and cease-and-desist
proceedings against broker-dealers and transfer agents that failed to
file in a timely manner all or part of the required Y2K forms.\9\
Through these efforts, we have made clear that a failure to adequately
address the Y2K problem cannot serve as an excuse for failing to
protect investors.
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\6\ Id. 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 Rel. No. 40608 (October 28, 1998),
63 FR 59208 (November 3, 1998); Exchange Act Rel. No. 40587 (October
22, 1998), 63 FR 58630 (November 2, 1998).
\7\ Exchange Act Rel. No. 40277 (July 29, 1998), 63 FR 41394
(August 4, 1998). We subsequently issued a release publishing
guidance in the form of Frequently Asked Questions to clarify
recurring issues regarding Year 2000 disclosure obligations.
Exchange Act Rel. No. 40649 (November 9, 1998), 63 FR 63758
(November 16, 1998).
\8\ 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 will prepare a similar report in 1999.
\9\ See, e.g., Exchange Act Release No. 40573 [Adm. Proc. File
No. 3-9758] (October 20, 1998) (broker-dealers that failed to file
Form BD-Y2K); Exchange Act Release No. 40895 [Adm. Proc. No. 3-9801]
(January 7, 1999) (transfer agents that failed to file Form TA-Y2K).
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To date, our efforts have mostly focused on increasing broker-
dealer and transfer agent awareness of the Year 2000 problem, on
requiring broker-dealers and non-bank transfer agents to disclose their
Year 2000 readiness, and encouraging point-to-point and industry-wide
testing.\10\ Based on the experience and information obtained from
these efforts, we have determined that it would be prudent to adopt
additional safeguards to prevent or reduce any adverse effects of non-
Year 2000 compliant broker-dealers and non-bank transfer agents on
investors and the securities markets. It is crucial that all broker-
dealers and transfer agents be Year 2000 compliant because the problems
of any non-compliant broker-dealer or transfer agent could have
detrimental and potentially widespread consequences for other market
participants. For this reason, we have decided to propose measures that
would allow us to take a proactive approach in dealing with broker-
dealers and non-bank transfer agents that are not ready for Y2K.
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\10\ 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. Supra note 5. See also In re Lowell H.
Listrom, Adm. Proc. File No. 3-7156, footnote 7 (March 19, 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.a)
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III. Discussion of Proposed Rules
A. Proposed Rule 15b7-2
Proposed Rule 15b7-2 is intended to protect investors and the
securities markets in general by requiring registered broker-dealers to
have sufficient operational capability in order to conduct a securities
business.\11\ Under the proposed rule, registered broker-dealers must
have and maintain operational capability, taking into consideration the
nature of their business, to assure the prompt and accurate entry of
customer orders, execution, comparison, allocation, clearance and
settlement of securities transactions, the maintenance of customer
accounts, and the delivery of funds and securities.\12\ We are
proposing this rule under Exchange Act Section 15(b)(7), which allows
us to establish by rule such standards of operational capability as we
find necessary or appropriate in the public interest or for the
protection of investors.\13\
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\11\ Areas that would be encompassed by the term ``operational
capability include the following broker-dealer computer operations:
controls in the data center computer operations, such as facilities
management; controls regarding infrastructure and physical hazards,
staffing and operations practices of the data center; data security
practices and policies; controls, practices and policies to ensure
adequate development and maintenance of information systems;
capacity planning and testing to ensure the continual capability of
systems to handle varying amounts of data in a timely fashion; and
contingency planning, in particular, the plans and procedures to
resolve systems failures and to ensure adequate investor protection
in the case of systems failure.
\12\ Proposed Rule 15b7-2(a). The term ``customer'' includes a
broker or dealer so that a clearing broker that handles orders from
other brokers and carries their funds and securities would also be
covered by the rule. Proposed Rule 15b7-2(b).
\13\ We also note that the national securities exchanges and the
National Association of Securities Dealers (``NASD'') may deny
membership to broker-dealers that do not meet such standards of
operational capability as prescribed by their rules. Exchange Act
Sections 6(c)(3)(A), 15 U.S.C. 78f(c)(3)(A), and 15A(g)(3)(A), 15
U.S.C. 78o-3(g)(3)(A). For example, the New York Stock Exchange
(``NYSE'') may summarily suspend a member who is in such operating
difficulty that the exchange determines and so notifies us that the
member cannot be permitted to continue to do business. NYSE Rule
475(b)(ii). The NASD also has a similar rule under which the NASD
may impose various restrictions on its members experiencing
operational difficulties. NASD Rule 3130 and IM-3130.
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Broker-dealers have always been required to properly handle
customer orders. If a broker-dealer fails to comply with this
requirement, we can bring enforcement actions for, among other things,
violating the antifraud provisions of the Exchange Act and/or
[[Page 12129]]
violating the books and records provisions. However, these actions
generally can only be brought after customers are harmed by such a
failure. By codifying the operational capability requirement into a
Commission rule, we can take preventive measures before a broker-
dealer's operational problems adversely affect its customers or the
markets. For example, in a cease-and-desist proceeding, the Commission
would have the ability to require a broker-dealer experiencing an
operational difficulty to take remedial steps to effect compliance with
the proposed rule upon such terms and conditions and within such time
as the Commission may specify.\14\
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\14\ See 15 U.S.C. 78u-3.
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Because the rule is aimed at overall capacity and mission critical
systems that affect processing of customer securities transactions,
isolated systems problems unrelated to a broker-dealer's core business
would not violate the rule. For example, there can be occasional delays
or outages in electronic systems due to a high demand or software
glitches. However, if delays or system outages occur consistently due
to insufficient systems capacity that result in customer orders not
receiving timely executions or customers not receiving timely
confirmations, then a broker-dealer could be in violation of the
proposed rule and would need to take appropriate actions before it
could resume its normal operation.
Under the Exchange Act, we have broad authority to conduct
reasonable examinations of registered broker-dealers.\15\ We and the
SROs will conduct examinations of registered broker-dealers, including
their automated systems and records, as are necessary to assess their
operational capability and, as discussed below, whether they have a
material Year 2000 problem.\16\ We seek comment on whether we should
specifically include a requirement in the proposed rule for broker-
dealers to document their operational capability, and what types of
documents would suffice.
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\15\ See, e.g., 15 U.S.C. 78q(b).
\16\ We, of course, have the ability to bring enforcement cases
against those who violate these rules.
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Some brokers (``introducing broker-dealers'') have agreements with
another broker (``clearing broker-dealer'') pursuant to which the
clearing broker-dealer performs many of the functions related to
securities transactions.\17\ In these situations, the introducing and
clearing broker-dealers agree on the allocation of responsibilities for
handling customer trades and accounts and other matters.\18\ We note,
however, that such arrangements do not relieve either broker-dealer of
its responsibilities under the federal securities laws, including this
proposed rule and proposed temporary Rule 15b7-3T discussed below.\19\
For example, an introducing broker-dealer that has an arrangement with
a clearing broker-dealer should confirm that the clearing broker-dealer
is able to perform the functions it has agreed to perform. If an
introducing broker-dealer becomes aware that its clearing broker-dealer
is experiencing operational difficulty, the introducing broker-dealer
should promptly make other arrangements to assure appropriate
processing of its trades.
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\17\ Under these arrangements, in general, introducing brokers
transmit orders, funds, and securities of customers to the clearing
broker, which then executes the orders and maintains custody of the
funds and securities. In addition to holding funds and securities,
clearing brokers are contractually responsible for the settlement of
the securities transactions of the other broker-dealer and the
maintenance of certain records relating to those transactions. The
exact scope of the respective responsibilities depends upon the
individual arrangements.
\18\ See, e.g., NYSE Rule 382.
\19\ See 17 CFR 240.17a-4(i) (agreement with an outside entity
does not relieve broker-dealers from the responsibility to prepare
and maintain the required records). We note, however, that broker-
dealers that rely upon the systems of an SRO, including a registered
clearing agency, for processing securities transactions would not be
responsible in the event the SRO's systems fail.
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B. Proposed Temporary Rule 15b7-3T (Operational Capability in a Year
2000 Environment)
Proposed temporary Rule 15b7-3T specifically addresses what it
means to be operationally capable in the context of Y2K, and outlines
the procedures for those broker-dealers that are not Year 2000
compliant by August 31, 1999, but are in the process of remediating
their Y2K problems.
a. Material Year 2000 Problems
The rule states that a registered broker-dealer would not be
considered operationally capable if it has a material Year 2000
problem. We understand that the determination of whether a particular
broker-dealer has a material Year 2000 problem depends on the specific
facts and circumstances of a particular case. To provide some measure
of certainty in this regard, however, the proposed rule states that a
broker-dealer would have a material Year 2000 problem if, at any time
on or after August 31, 1999:
Any of its computer systems incorrectly identifies any
date in the Year 1999, the Year 2000, or in any year thereafter, and
The error impairs or, if uncorrected, is likely to impair,
any of its mission critical computer systems.\20\
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\20\ Proposed 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.
Proposed temporary Rule 15b7-3T(f)(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. For example, broker-dealers that do not
use computer systems in the conduct of their business may have
little or no direct obligations under this proposal. To the extent,
however, that some broker-dealers rely on third parties in
processing their securities transactions and related activities,
these broker-dealers should take reasonable steps to verify that
such third parties do not have material Y2K problems. Otherwise,
these broker-dealers would not be in compliance with the proposed
rules.
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The proposed 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.
A broker-dealer would be presumed to have a material Year 2000
problem (and would therefore be presumed to not be operationally
capable) if, at any time on or after August 31, 1999, it:
Does not have written procedures designed to identify,
assess, and remediate any Year 2000 problems in its mission critical
systems;\21\
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\21\ The appropriate scope of such procedures would obviously
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, as a
baseline, broker-dealers should, at a minimum, use industry
standards. For example, the NASD has published a High-Level Plan,
prepared by the Securities Industry Association, 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 its mission critical systems;\22\
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\22\ 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 any applicable Year 2000 testing requirements imposed by a
self-regulatory organization;\23\ or
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\23\ We have approved SRO rule changes that permit the SROs to
require their members to conduct Year 2000 testing. See Exchange Act
Rel. No. 40745 (December 3, 1998), 63 FR 68324 (December 10, 1998)
(NASD); Exchange Act Rel. No. 40836 (December 28, 1998), 64 FR 1037
(January 7, 1999) (American Stock Exchange); Exchange Act Rel. No.
40837 (December 28, 1998), 64 FR 1055 (January 7, 1999) (NYSE);
Exchange Act Rel. No. 40838 (December 28, 1998), 64 FR 1044 (January
7, 1999) (Chicago Board Options Exchange); Exchange Act Rel. No.
40839 (December 28, 1998), 64 FR 1046 (January 7, 1999) (Chicago
Stock Exchange); Exchange Act Rel. No. 40870 (December 31, 1998), 64
FR 1263 (January 8, 1999) (Philadelphia Stock Exchange); Exchange
Act Rel. No. 40871 (December 31, 1998), 64 FR 1838 (January 12,
1999) (Boston Stock Exchange); Exchange Act Rel. No. 40893 (January
7, 1999) (Pacific Stock Exchange), 64 FR 2932 (January 19, 1999);
Exchange Act Rel. No. 40696 (November 20, 1998), 63 FR 65829
(November 30, 1998) (Depository Trust Company); Exchange Act Rel.
No. 40889 (January 6, 1999), 64 FR 2691 (January 15, 1999) (MBS
Clearing Corporation); and Exchange Act Rel. No. 40946 (January 14,
1999), 64 FR 3328 (January 21, 1999) (National Securities Clearing
Corporation).
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[[Page 12130]]
Has not remediated all exceptions contained in any public
independent accountant's report prepared on behalf of the broker-dealer
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pursuant to Exchange Act Rule 17a-(5)(e)(5)(vi).
If a broker-dealer fails to meet any of the four conditions above, it
will be presumed to have a material Year 2000 problem.
b. Notification to the Commission and DEA
The proposed rule requires any registered broker-dealer that
experiences, detects, or continues 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.\24\ Broker-dealers that are
presumed to have a material Year 2000 problem must notify us as well.
Notice to the Commission must be sent by overnight delivery to the
attention of the Secretary, Mail Stop 0609, U.S. Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549-0609.
The notification requirement is intended to alert the Commission and a
broker-dealer's 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. We intend to make this information public so
that customers and counterparties of these broker-dealers can assess
the potential impact on them and take any appropriate action.
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\24\ Proposed temporary Rule 15b7-3T(c). This notification
requirement is in addition to the other requirements to file reports
with us under Rule 17a-5(e)(5), 17 CFR 240.17a-5(e)(5). We
anticipate that the vast majority of broker-dealers that have a
material Y2K problem will file one notice regarding their problem.
However, if a broker-dealer experiences another material problem
that was not discussed in an earlier notice, it would need to file
an additional notice to discuss the new problem.
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c. Prohibition on Non-compliant Broker-Dealers and Certification
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, inducing the purchase or sale
of, any security, receiving or holding customer funds or securities, or
carrying customer accounts.\25\ However, a broker-dealer with a
material Y2K problem on or after August 31, 1999, could continue to
operate its business if, in addition to providing us and its DEA with
the notice required by paragraph (c) of the rule, it provided us a
certificate signed by its chief executive officer (or an individual
with similar authority) stating:\26\
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\25\ Proposed temporary Rule 15b7-3T(d). A broker-dealer that is
presumed to have a material Year 2000 problem has the burden to
prove that it does not have a material Y2K problem, and must come
forward before October 15, 1999 with sufficient evidence to rebut
the presumption. We ask comment on the appropriate procedures for
rebutting the presumption.
\26\ Proposed temporary Rule 15b7-3T(e)(1). The Commission
expects that a broker-dealer that is presumed to have a material Y2K
problem would also rely upon this provision.
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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 October 15, 1999) by
which the broker-dealer anticipates it will have remediated the Year
2000 problem and will therefore be operationally capable; \27\ and
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\27\ We call this date ``the target remediation date.''
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Based on inquiries and to the best of his or her
knowledge, the broker or dealer does not anticipate that the existence
of the material Year 2000 problem 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.
We intend to make this information public so that customers and
counterparties of these broker-dealers can take any appropriate action.
There are two proposed limitations to this certification provision.
First, as stated above, the target remediation date cannot be later
than October 15, 1999.\28\ The purpose of this limitation is to protect
investors by providing sufficient time for a broker-dealer that does
not meet its target remediation date to unwind its business and to
either return funds and securities that belong to its customers or make
alternative arrangements with a Y2K compliant broker-dealer, as
appropriate.\29\ This date is also intended to require a broker-dealer
that is not Y2K compliant to cease operation so that it does not
communicate inaccurate and damaging information to the markets. Second,
notwithstanding the fact that a broker-dealer has filed a certificate,
the Commission or a court of competent jurisdiction can order a broker-
dealer to comply with Rule 15b7-3T(d) (i.e., to cease to do business)
if it is in the public interest or for the protection of investors. For
example, we would take action in the public interest under this
provision if the representations contained in the certificate were
false.
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\28\ We seek comment on whether the rule should specifically
allow for the filing of more than one such certificate in case a
broker-dealer does not complete its remediation efforts by a target
remediation date that precedes October 15, 1999 or in case it has
filed an additional notice discussing a new problem. We also seek
comment on whether the certificate should also be filed with DEAs.
\29\ We seek comment on whether the proposed date of October 15,
1999, would be too late or too early.
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C. Proposed Temporary Rule 17a-9T
Proposed temporary Rule 17a-9T would require certain broker-dealers
to make a separate copy of their trade blotter and their securities
record or ledger (``stock record'') for the last two business days of
1999.\30\ This proposed rule is intended to assist broker-dealers, the
Commission, the DEAs, and the
[[Page 12131]]
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 Year 2000
problems. Specifically, a broker-dealer that is required to maintain as
of December 30 and December 31, 1999, minimum net capital of $250,000
\31\ would be required to make and to preserve a separate copy of its
trade blotter and stock record as of the close of business of each of
the last two business days of 1999.\32\ The record may be kept on paper
or on any micrographic or electronic storage media acceptable under
Rule 17a-4(f). Proposed temporary Rule 17a-9T would only require
broker-dealers to make and preserve a separate copy of an existing
record and to ensure that the record is created at the close of
business on December 30 and December 31, 1999. It would not require a
broker-dealer to create any new record.\33\ The Commission requests
comment on whether we should provide for exemptions from any of the
requirements of this proposed rule, either unconditionally or on
specified terms and conditions.\34\
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\30\ Rule 17a-3(a)(1) requires every broker-dealer to make and
keep current a trade 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 trade
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
stock record 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 stock 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).
\31\ See 17 CFR 240.15c3-1(a)(2).
\32\ A broker-dealer that makes a stock record that reflects
both trade date and settlement date positions would not be required
to make a separate trade blotter.
\33\ We understand that most broker-dealers already make and
preserve a separate copy of their record as a good business
practice.
\34\ If such exemptions were to be included in Rule 17a-9T, the
Commission also asks comment on whether the Director of the Division
of Market Regulation should have delegated authority to grant such
exemptions on the Commission's behalf.
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D. Proposed Rule 17Ad-20
Under the proposed rules, transfer agents would be subject to
similar obligations. Specifically, all registered transfer agents would
be required to have operational capability, taking into consideration
the nature of their 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, including:
Countersigning such securities upon issuance;
Monitoring the issuance of such securities with a view to
preventing unauthorized issuance;
Registering the transfer of such securities;
Exchanging or converting such securities; and
Transferring record ownership of securities by book-
keeping entry without physical issuance of securities certificates.\35\
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\35\ Proposed Rule 17Ad-20.
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We are proposing this rule under Exchange Act Section 17A(d)(1),
which allows us to prescribe rules for registered transfer agent
activity as necessary or appropriate in the public interest, for the
protection of investors, or for the safeguarding of securities and
funds.
Some registered transfer agents have agreements with another
registered transfer agent (variously referred to as the recordkeeping
transfer agent,\36\ co-transfer agent,\37\ or service company \38\)
pursuant to which the third party performs many of the transfer agent
functions. The exact scope of the respective responsibilities depends
upon individual arrangements. Such arrangements do not relieve the
registered transfer agent of its responsibilities under the federal
securities laws, including this proposed rule and proposed temporary
Rule 17Ad-21T. For example, a registered transfer agent that has an
arrangement with a service company should ensure that the service
company has sufficient operational capability to perform the functions
it has agreed to perform, or if a registered transfer agent becomes
aware that its service company is experiencing operational difficulty,
the registered transfer agent should promptly make appropriate
arrangements.
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\36\ ``Recordkeeping transfer agent,'' as defined in Rule 17Ad-
9(h), 17 CFR 240.17Ad-9(h), means a registered transfer agent that
maintains and updates the master securityholder file.
\37\ ``Co-transfer agent,'' as defined in Rule 17Ad-9(i), 17 CFR
240.17Ad-9(i), means a registered transfer agent that transfers
securities but does not maintain and update the master
securityholder file.
\38\ ``Service company,'' as defined in Rule 17Ad-9(k), 17 CFR
240.17Ad-9(k), means a registered transfer agent engaged by another
registered transfer agent to perform transfer agent functions.
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Similar to our ability to examine broker-dealers, the Exchange Act
gives us broad authority to conduct reasonable examinations of
registered transfer agents.\39\ We plan to conduct examinations of
registered non-bank transfer agents, including their automated systems
and records, as necessary to assess their operational capability and
whether they have a material Year 2000 problem, as discussed below. We
seek comment on whether we should specifically include a requirement to
document their operational capability and what types of documents would
suffice.
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\39\ 15 U.S.C. 78q(b).
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E. Proposed Temporary Rule 17Ad-21T (Operational Capability in a Year
2000 Environment)
a. Definition of Material Year 2000 Problem
This proposed rule, applicable to non-bank transfer agents, is
similar to proposed temporary Rule 15b7-3T, applicable to broker-
dealers.\40\ In this regard, proposed temporary Rule 17Ad-21T defines a
``material Year 2000 problem.'' According to the proposed rule, a non-
bank transfer agent would have a material Year 2000 problem if, at any
time on or after August 31, 1999:
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\40\ Registered transfer agents that are also banks are subject
to the jurisdiction of the federal banking agencies. This proposed
rule would only apply to registered transfer agents that are not
banks. 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).
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Any of its computer systems incorrectly identifies any
date in the Year 1999, the Year 2000, or in any year thereafter, and
The error impairs or, if uncorrected, is likely to impair,
any of its mission critical computer systems.\41\
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\41\ Proposed temporary Rule 17Ad-21T(b)(1). 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).
Proposed temporary Rule 17Ad-21T(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 transfer agents'
businesses and operations. Some non-bank transfer agents rely on
third parties to handle their transfer agent functions. In order for
such transfer agents to be in compliance with the proposed rules,
the transfer agents should take reasonable steps to verify that
third parties do not have material Year 2000 problems.
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The proposed definition is not intended to include a non-bank
transfer agent whose system has a minor technical problem regarding the
reading of dates if such problem does not adversely affect the transfer
agent's core business.
b. Presumption of a Material Year 2000 Problem
In order to provide additional guidance, the proposed rule would
provide that a non-bank transfer agent would be presumed to have a
material Year 2000 problem (and would therefore be presumed to not be
operationally capable) if, at any time on or after August 31, 1999, it:
Does not have written procedures designed to identify,
assess, and
[[Page 12132]]
remediate any Year 2000 problems in its mission critical systems; \42\
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\42\ See supra note 21.
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Has not verified its Year 2000 remediation efforts through
reasonable internal testing of its mission critical systems and
reasonable testing of its external links; \43\ or
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\43\ Unlike broker-dealers, transfer agents do not belong to any
SROs. Accordingly, this proposed rule permits any reasonable testing
of external links. We believe, however, that it would be reasonable
for certain transfer agents to rely on testing guidelines
established by SROs. We specifically seek comment on whether testing
requirements established by national securities exchanges, the NASD,
the Federal banking regulators, or the Depository Trust Company
could be used for the purposes of the proposed rule. See also GAO
Guidelines, supra note 22.
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Has not remediated all exceptions contained in any public
independent accountant's report prepared on behalf of the transfer
agent pursuant to Rule 17Ad-18(f).
If a non-bank transfer agent fails to meet any of the three
conditions above, it would be presumed to have a material Year 2000
problem.
c. Notification to the Commission
The rule would require any registered non-bank transfer agent that
experiences, detects, or continues to have a material Year 2000 problem
at any time on or after August 31, 1999, to immediately notify us of
the problem.\44\ Non-bank transfer agents that are presumed to have a
material Year 2000 problem must notify us as well. As with broker-
dealers, this information would be released to the public.
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\44\ Proposed temporary Rule 17Ad-21T(c). This notification
requirement is in addition to the other requirements to file reports
with us under Rule 17Ad-18. Notice must be sent by overnight
delivery to the attention of the Secretary, U.S. Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549-
0609.
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d. Prohibition on Non-compliant Transfer Agents and Certification
Similar to proposed temporary Rule 15b7-3T, a non-bank transfer
agent that is not operationally capable because it has a material Year
2000 problem would not be permitted to, on or after August 31, 1999,
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.\45\ A transfer
agent with a material Year 2000 problem on or after August 31, 1999,
would be permitted to continue to operate its business if, in addition
to providing us the notice required by paragraph (c) of the rule, it
provided us with a certificate of its chief executive officer (or an
individual with similar authority).\46\
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\45\ Proposed temporary Rule 17Ad-21T(d). A transfer agent that
is presumed to have a material Year 2000 problem has the burden to
prove that it does not have a material Y2K problem, and must come
forward before October 15, 1999 with sufficient evidence to rebut
the presumption. We ask comment on the appropriate procedures for
rebutting the presumption.
\46\ Proposed temporary Rule 17Ad-21T(e)(1). The Commission
expects that a transfer agent that is presumed to have a material
Y2K problem would also rely upon this provision. The required
contents of the certificate of transfer agents are similar to the
broker-dealer certificate, as discussed earlier. As with broker-
dealers, this information will be released to the public.
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There are two proposed limitations to this certification provision.
First, the target remediation date cannot be later than October 15,
1999.\47\ The purpose of this limitation is to provide sufficient time
for a non-bank transfer agent that does not meet its target remediation
date to unwind its business and to transfer and convert its database,
file layouts, and securityholder files to a compliant registered
transfer agent.\48\ Second, notwithstanding the fact that a transfer
agent has filed a certificate, we or a court of competent jurisdiction
can order a non-bank transfer agent to comply with proposed Rule 17Ad-
21T(d) if it is in the public interest or for the protection of
investors; that is, we can order it to cease doing business.
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\47\ We seek comment on whether the rule should specifically
allow for the filing of more than one such certificate in case a
transfer agent does not complete its remediation efforts by a target
remediation date that precedes October 15, 1999.
\48\ We seek comment on whether the proposed date of October 15,
1999 would be too late or too early.
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e. Recordkeeping
Proposed temporary Rule 17Ad-21T contains a recordkeeping
requirement.\49\ Specifically, the rule would require every non-bank
transfer agent to maintain a segregated copy of its database, file
layouts (defined in the rule as ``the description and location of
information contained in the database''), and all relevant files
beginning August 31, 1999, and ending in March 31, 2000. This back-up
copy of the database and file layouts must not be located with or held
in the same computer system as the primary records. These records must
be copied at the end of every business day and must be stored for five
business days in a manner that will allow for the possible transfer and
conversion to a transfer agent that is Year 2000 compliant.\50\ 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
back-up records. Thus, this requirement would help facilitate the
transfer to and conversion of records to another registered transfer
agent, if necessary.\51\
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\49\ Proposed temporary Rule 17Ad-21T(f).
\50\ We understand that most transfer agents already make and
preserve a separate copy of their record as a good business
practice.
\51\ We understand that the logistics of the transfer and
conversion process could be time consuming and would involve getting
approval from the issuers to the appointment of the successor
transfer agent.
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IV. Request for Comments
We solicit commenters' views on all aspects of the proposed rules.
In addition, we solicit comments on alternative ways of minimizing the
risk that broker-dealers or non-bank transfer agents that are not Year
2000 compliant may harm investors and the securities markets in
general.
In addition to the specific comments we ask in other parts of this
release, we also seek comment on the following issues:
Whether the proposed standards for Rules 15b7-2 and 17Ad-
20 are sufficiently objective or whether there are alternative
standards that could be used;
Whether the scope of the proposed rules is appropriate or
certain broker-dealers or transfer agents should be excluded from the
rules;
Whether August 31, 1999 as the date after which a
notification to us is required is reasonable, or whether another date
would be more appropriate;
Whether the proposed definition of a material Year 2000
problem is appropriate;
Whether the proposed testing as required by SROs would
provide an appropriately consistent testing method for broker-dealers,
or whether there is another alternative testing method that can be used
for broker-dealers and non-bank transfer agents; \52\
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\52\ We note that the banking regulators recently published
interagency guidelines establishing Year 2000 standards that also
included the scope of required testing. Interagency Guidelines
Establishing Year 2000 Standards for Safety and Soundness, 63 FR
55486 (October 15, 1998). Would such testing requirement be
appropriate for broker-dealers or non-bank registered transfer
agents?
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The appropriate division of responsibilities of
introducing and clearing brokers and of registered transfer agents and
service companies regarding operational capability and Year 2000
compliance;
Whether the proposed rules should expressly require that
broker-dealers and non-bank transfer agents that are
[[Page 12133]]
not Year 2000-compliant notify their customers of their non-compliant
status in addition to notifying the Commission and, in the case of
broker-dealers, DEAs;
Whether the proposed date of October 15, 1999, as the
final date after which no broker-dealers and non-bank transfer agents
that are not Year 2000-compliant could continue to operate is
appropriate or should be earlier or later;
Whether the proposed definitions of ``mission critical
system'' are appropriate, too narrow, or too broad, and whether the
phrase ``depending on the nature of the business'' is clear or provides
sufficient flexibility;
Whether we should require that an independent third party
verify the remediation efforts, and if so, whether such third party
must be an outside auditor or consultant or could be a qualified
independent internal party;
Whether there are any practical concerns regarding chief
executive officers (or individuals with similar authority) signing the
certificate, and if so, whether there are any ways to mitigate such
concerns;
Whether the conditions set out for presuming broker-
dealers and non-bank transfer agents to have a material Year 2000
problem are appropriate or whether we should also include as a
condition that the registrant has not complied with the applicable
requirements of Rule 17a-5(e)(5) and of Rule 17Ad-18; \53\
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\53\ Broker-dealers with a minimum net capital requirement of
$5,000 or more must file Form BD-Y2K. Transfer agents that are not
banks or savings associations must file Form TA-Y2K. The next
reports are due on April 30, 1999. 17 CFR 240.17a-5(e)(5) and 17 CFR
240.17Ad-18.
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Whether the proposed recordkeeping requirements are
appropriate (for example, whether the proposed one-year retention
period for broker-dealers and the proposed five-day period for non-bank
transfer agents is too short or too long; whether the proposed period
of August 31, 1999 to March 31, 2000, for non-bank transfer agents is
too long or too short; and whether we should require broker-dealers to
make separate records for more than the proposed two days);
Whether we should permit the filing of another notice in
the event broker-dealers and non-bank transfer agents that have filed a
notification and/or a certificate believe that they no longer have a
material Year 2000 problem; and
Whether compliance with the Commission's automation review
program standards should create a presumption that broker-dealers are
operationally capable.\54\
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\54\ See Exchange Act Rel. No. 27445 (November 16, 1989), 54 FR
48704 (``ARP I''); Exchange Act Rel. No. 29185 (May 9, 1991), 56 FR
22489 (``ARP II''). ARP I and ARP II were published in response to
operational difficulties experienced by SRO automated systems during
the October 1987 market break. While the program did not directly
apply to broker-dealers, the Commission noted that all broker-
dealers should engage in testing and use the policy statement as a
guideline. See ARP I, 54 FR at 48706; ARP II, 56 FR at 22493, at
n.15.
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V. Costs and Benefits of the Proposed Rule and Its Effect on
Competition, Efficiency and Capital Formation
We request that commenters provide analyses and data relating to
the costs and benefits associated with the proposed rules. This
information will assist us in our evaluation of the costs and benefits
that may result from the proposed rules.
We recognize that the proposed rules may 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 remediated all exceptions contained in any public
independent accountant's report. However, 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.
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--that is, 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.
Moreover, we believe that the benefits of the proposed rules are
significant. The implementation of these rules will (1) protect
investors by reducing individual firm risk and systemic risk as a
result of computer systems failures at broker-dealers and transfer
agents, and (2) minimize any potential disruptions to the functioning
of the securities markets. Customers of broker-dealers and transfer
agents that are not ready for the Year 2000 could suffer severe
consequences, including loss of their ability to effect transactions in
their accounts in a timely manner. Non-Year 2000 compliant broker-
dealers and non-bank transfer agents also pose risks to the financial
system as a whole. If buyers and sellers of securities are unable to
effect transactions, the financial markets will not efficiently operate
and investors will be subject to unnecessary risk. By providing the
ability to take prophylactic measures designed to minimize these risks,
we believe that the proposed rules will offer significant benefits to
investors and markets as a whole.
We also recognize that the proposed rules will place burdens to
make and keep records on broker-dealers and non-bank transfer agents.
The records required to be made and kept under the proposed rules are
records that are currently kept by broker-dealers and transfer agents.
Thus, we are not proposing that respondents generate new records but
only requiring that a back-up copy be made and kept. The proposed rules
will aid the Commission and the public in the event of operational
failures by broker-dealers and non-bank transfer agents in identifying
all securities positions carried by the broker-dealer, and transferring
to and conversion of records to another entity. We believe that the
proposed rules will offer significant benefits of guarding against the
impact of Year 2000 problems.
Section 23(a)(2) of the Exchange Act requires us to consider the
anti-competitive effects of proposed rules, if any.\55\ We ask for
comment on any anti-competitive effects of the proposed rules. We also
solicit commenters' views regarding the effects of the proposed rules
on competition, efficiency, and capital formation. For purposes of the
Small Business Regulatory Enforcement Fairness Act of 1996, we also
seek comments on the proposed rules' potential impact (including any
empirical data) on the economy on an annual basis, any increase in
costs or prices for consumers, and any effect on competition,
investment or innovation.
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\55\ 15 U.S.C. 78w(a)(2).
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VI. Initial Regulatory Flexibility Analysis
This initial regulatory flexibility analysis (``IRFA''), which has
been prepared in accordance with the provisions of the Regulatory
Flexibility Act (``RFA''),\56\ relates to the proposed new Rules 15b7-
2, 15b7-3T, 17a-9T,
[[Page 12134]]
17Ad-20, and 17Ad-21T under the Exchange Act.
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\56\ 5 U.S.C. 603(a).
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A. Reason for Proposed Action
It is essential that broker-dealers and transfer agents have
sufficient operational capability to process transactions for their
customers. In addition, unless proper modifications have been made,
many computer systems 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 reason for
the proposed rules is 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.
B. Objectives
a. Proposed Rule 15b7-2
The objective of proposed Rule 15b7-2 is to require that every
registered broker-dealer has the operational capability to conduct its
business. The proposed rule prohibits registered broker-dealers that
are not operationally capable from effecting any transactions in
securities, inducing the sale or purchase of securities, receiving or
holding customer funds or securities, or carrying customer accounts.
b. Proposed Temporary Rule 15b7-3T
The objective of proposed temporary Rule 15b7-3T is to require
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
designated examining authority. Those broker-dealers that have a
material Year 2000 problem must also cease to conduct securities
business. The proposed rule, however, is also intended to permit those
brokers or dealers that are not operationally capable as a result of
having a material Year 2000 problem on or after August 31, 1999 to
submit a certificate containing certain attestations regarding their
Year 2000 status and still continue to operate their business, but in
no event later than October 15, 1999.
c. Proposed Temporary Rule 17a-9T
The objective of proposed temporary Rule 17a-9T is to require
certain broker-dealers to make and preserve a separate trade blotter
pursuant to Rule 17a-3(a)(1) \57\ and a separate securities record
pursuant to Rule 17a-3(a)(5) as of the close of business each of the
last two business days of 1999. Proposed Rule 17a-9T would only require
a broker-dealer to make and preserve a copy of an existing record and
to ensure that the record is created at the close of business on
December 30 and December 31, 1999. Proposed temporary Rule 17a-9T would
also require those brokers or dealers to keep and make available those
records for a period of not less than one year.
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\57\ 17 CFR 240.17a-3.
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d. Proposed Rule 17Ad-20
The objective of proposed Rule 17Ad-20 is to require that every
registered transfer agent has the operational capability to conduct its
business. The proposed rule would prohibit transfer agents from
engaging in any transfer function unless they have and maintain
operational capability to assure the prompt and accurate transfer or
processing of securities, the maintenance of master securityholder
files, and the production and retention of required records.
e. Proposed Temporary Rule 17Ad-21T
The objective of proposed temporary Rule 17Ad-21T is to require
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.
Those transfer agents that have a material Year 2000 problem must also
cease to conduct transfer agent business. The proposed rule, however,
is also intended to permit those transfer agents that are not
operationally capable as a result of having a material Year 2000
problem on or after August 31, 1999 to submit a certificate containing
certain attestations regarding their Year 2000 status and still
continue to operate their business, but in no event later than October
15, 1999.
In addition, the proposed temporary rule would require registered
non-bank transfer agents to maintain a separate copy of its database,
file layouts and all relevant files in an easily accessible off-site
location from August 31, 1999 to March 31, 2000. The proposed rule
would require such records to be stored for five business days. The
objective of this recordkeeping requirement is to help facilitate the
transfer to and conversion of records to a Year 2000 compliant transfer
agent, if necessary.
C. Legal Basis
Proposed Rules 15b7-2, 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-20 and 17Ad-21T are 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 Rules
For purposes of Commission rulemaking, paragraph (c) of Rule 0-10
under the Exchange Act \58\ 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. For purposes
of Commission rulemaking, paragraph (h) of Rule 0-10 under the Exchange
Act \59\ 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 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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\58\ 17 CFR 240.0-10(c).
\59\ 17 CFR 240.0-10(h).
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The Commission staff estimates that approximately 5200 registered
brokers or dealers qualify as ``small entities'' for purposes of the
RFA. All registered brokers or dealers would be subject to the
requirements of proposed Rule 15b7-2 and proposed temporary Rule 15b7-
3T.
The Commission staff estimates that approximately 750 out of 1,120
registered transfer agents (thus subject to proposed Rule 17Ad-20)
qualify as ``small entities'' for purposes of the RFA. Approximately
430 out of 600 non-bank transfer agents (thus subject to
[[Page 12135]]
proposed Rule 17Ad-21T) qualify as small entities.
Proposed temporary 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 30 and 31, 1999. Because of the
minimum capital requirement, the Commission staff estimates that 4,300
of the 8,000 registered broker-dealers would be required to comply.
E. Reporting, Recordkeeping, and Other Compliance Requirements
The Commission believes that, for business reasons, prudent broker-
dealers and transfer agents should already have developed plans for
potential computer problems caused by Year 2000 problems. Therefore,
the Commission believes that the reporting obligations of broker-
dealers and transfer agents subject to the proposed rules relate to
notifying the Commission of material Year 2000 problems on or after
August 31, 1999 and submitting the certificate signed by their chief
executive officer to continue to operate their business beyond August
31, 1999.
Proposed temporary Rule 17a-9T provides that only those broker-
dealers required to maintain a minimum net capital of $250,000 would be
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 two business days of 1999. The trade blotter and securities record
or ledger would only require a broker-dealer to make and preserve a
copy of an existing record. The Commission notes that this is not a
continuing obligation, but would only be for December 30 and 31, 1999.
Proposed Rule 17Ad-21T(f) would require non-bank registered
transfer agents to maintain a separate copy of their database, file
layouts and all relevant files in an easily accessible off-site
location beginning August 31, 1999, and ending March 31, 2000. The
proposed rule would require that such records are copied at the end of
every business day and stored for five days on a rolling basis in a
manner that will allow for the possible transfer and conversion to a
transfer agent that is Year 2000 compliant.
F. Duplicative, Overlapping or Conflicting Federal Rules
The Commission believes that there are no rules that duplicate,
overlap, or conflict with the proposed rules.
G. Significant Alternatives
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 Commission has incorporated
such a compliance threshold for proposed temporary Rule 17a-9T. This
threshold, based on capital, would exclude many smaller broker-dealers
from the rule. The Commission believes it is important for all
registered broker-dealers and transfer agents to be operationally
capable and report material Year 2000 problems to the Commission and,
in the case of broker-dealers, their designated examining authority.
Regarding the second alternative, the Commission believes that the
proposal could not be formulated differently for small entities and
still achieve the stated objectives. The Commission notes that it
considered small entities in developing proposed Rule 17a-9T and
incorporated a minimum capital level for compliance.
Regarding the third alternative, the proposed rules incorporate the
use of performance standards because they do not require how broker-
dealers or transfer agents become operationally capable, but only
require them to be operationally capable in order to be able to perform
their functions for investors. Similarly, the notice requirements do
not specify the form those notices must take. Adequate notice must be
provided to the Commission for purposes of temporary Rules 15b7-3T and
17Ad-221T, but the Commission is not proposing to determine the design
or the format of those notices.
Regarding the fourth alternative, the Commission notes that smaller
broker-dealers would be exempt from the requirements of proposed
temporary Rule 17a-9T. The Commission believes, however, that with
respect to the other proposed rules including all registered broker-
dealers and transfer agents is important in protecting investors from
operational and Year 2000 problems.
Therefore, having considered the foregoing alternatives in the
context of the proposed rules, the Commission believes the proposed
rules include regulatory alternatives that minimize the impact on small
entities while achieving the stated objectives.
H. Solicitation of Comments
The Commission encourages the submission of written comments with
respect to any aspect of the IRFA. Such comments will be considered in
the preparation of the Final Regulatory Flexibility Analysis, if the
proposed rules are adopted, and will be placed in the same public file
as comments received on the proposed rules themselves. Comments should
be submitted in triplicate to Jonathan G. Katz, Secretary, Mail Stop
0609, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549-0609. Comments also may be submitted
electronically at the following e-mail address: rule-comments@sec.gov.
All comment letters should refer to File No. S7-8-99; this file number
should be included on the subject line if e-mail is used. Comment
letters will be available for public inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549-0609. Electronically submitted comment letters will also be
posted on the Commission's Internet web site (http://www.sec.gov).
VII. Paperwork Reduction Act
Certain provisions of the proposed rules and rule amendments
contain ``collection of information'' requirements within the meaning
of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), and
the Commission has submitted them to the Office of Management and
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5
CFR 1320.11. The titles for the collections of information are: ``Rule
15b7-3T,'' ``Rule 17a-9T,'' ``Rule 17Ad-21T(c) and (e),'' and ``Rule
17Ad-21T(f),'' all under the Exchange Act.\60\ The proposed 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.
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\60\ Proposed rules 15b7-2 and 17Ad-20 do not contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act.
---------------------------------------------------------------------------
A. Rule 15b7-3T
Proposed temporary Rule 15b7-3T requires every registered broker or
dealer that has or is presumed to have a material Year 2000 problem at
any
[[Page 12136]]
time on or after August 31, 1999, to immediately notify the Commission
and its designated examining authority of the problem. In addition,
such a broker or dealer may provide a certificate stating that they are
in the process of remediating the Year 2000 problem, describing
associated testing procedures, stating the date by which they expect to
be operationally capable, and asserting that the existence of the Year
2000 problem will not impair their ability to carry out certain
functions.
The Commission staff estimates that there would be approximately 59
brokers or dealers that would be affected under the proposed rule.
There are approximately 8,000 registered broker-dealers and the
Commission staff estimates that approximately 5,900 will have their own
systems that will need to be Year 2000 compliant. Based on experience
with the Year 2000 problem, the Commission staff estimates that
approximately one percent of those broker-dealers might be required to
submit notices and may choose to submit certificates under the proposed
rule. The Commission emphasizes the serious difficulty in estimating
the number of broker-dealers that will have material Year 2000 problems
at some point in the future. The Commission expects that most broker-
dealers will not have such problems. The Commission staff also
estimates that each affected broker-dealer would, on average, submit
one certificate and one notice under the proposed rule.
The Commission staff's estimates for burden hours associated with
submitting notices and certificates are based on the Commission staff's
experience with notices made pursuant to other Commission rules. The
Commission staff estimates that each respondent submitting a notice of
a material Year 2000 problem would incur an average burden of 0.5
hours. In addition, the Commission staff estimates that each respondent
submitting a certificate would incur an average of 0.5 hours. The
notice requirement of the proposed rule is mandatory for all affected
brokers and dealers. The certificate requirement is optional for those
brokers or dealers that have material Year 2000 problems on or after
August 31, 1999. The Commission, however, expects most brokers or
dealers with material Year 2000 problems after August 31, 1999 to
submit such certificates in order to continue performing certain
functions. Thus, the aggregate burden for 59 broker-dealer respondents
would be approximately 59 hours.
All notices and certificates filed under proposed Rule 15b7-3T will
not be considered confidential and will be made available to the public
so that customers and counterparties of those broker-dealers can assess
the potential impact on them and take any appropriate action.
B. Rule 17a-9T
Proposed temporary Rule 17a-9T would require certain broker-dealers
to make a separate copy of their trade blotter and their securities
record or ledger for the last two business days of 1999. It would not
require such broker-dealers to make any new records, but only to
preserve a separate copy of an existing record. The records would be
required to be kept in an easily accessible place for a period of not
less than one year. The records required to be preserved would be
considered confidential and would not be available to the public.
The Commission staff estimates that there are approximately 4,300
broker-dealers affected under the proposed rule.\61\ The Commission
staff estimates that each such broker-dealer would incur an average
burden of approximately 0.5 hours to make and keep the records. The
Commission staff estimates that the total aggregate burden under the
proposed rule would be approximately 2,150 hours (4,300 brokers or
dealers at 0.5 hours per broker or dealer).
---------------------------------------------------------------------------
\61\ The Commission staff estimates that there are approximately
8,000 registered broker-dealers. 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), would be required to comply
with the proposed rule. The Commission staff estimates that
approximately 3,700 broker-dealers would not be required to comply
with the proposed temporary rule due to the net capital standard.
Thus, the Commission staff estimates that approximately 4,300
registered broker-dealers would be required to comply with the
proposed temporary rule.
---------------------------------------------------------------------------
C. Rule 17Ad-21T(c) and (e)
Proposed Rule 17Ad-21T(c) requires every non-bank registered
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 addition, proposed Rule 17Ad-21T(e)
permits such non-bank transfer agents to provide a certificate stating
that they are in the process of remediating the Year 2000 problem,
describing associated testing procedures, stating the date by which
they expect to be operationally capable, and asserting that the
existence of the Year 2000 problem will not impair their ability to
carry out certain functions.
The Commission staff estimates that there would be approximately 6
non-bank transfer agents that would be affected under the proposed
rule. The Commission staff estimates that there are approximately 600
non-bank transfer agents. Based on experience with the Year 2000
problem, 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 proposed 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. The Commission staff also
estimates that each respondent would, on average, submit one
certificate and one notice under the proposed rule.
The Commission staff's estimates for burden hours associated with
submitting notices and certificates are based on the Commission staff's
experience with notices made pursuant to other Commission rules. The
Commission staff estimates that each respondent submitting a notice of
a material Year 2000 problem would incur an average burden of 0.5
hours. In addition, the Commission staff estimates that each respondent
submitting a certificate would incur an average of 0.5 hours. The
notice requirement of the proposed rule is mandatory for all non-bank
transfer agents with a material Year 2000 problem on or after August
31, 1999. The certificate requirement is optional for those non-bank
transfer agents that have material Year 2000 problems on or after
August 31, 1999. The Commission, however, expects most non-bank
transfer agents with material Year 2000 problems on or after August 31,
1999, to submit such certificates in order to continue performing
certain functions. Thus, the Commission staff estimates that the annual
aggregate burden for 6 non-bank transfer agent respondents would be 6
hours.
All notices and certificates filed under proposed Rule 17Ad-21T(c)
and (e) will not be considered confidential and will be made available
to the public so that customers of those non-bank transfer agents can
assess the potential impact on them and take any appropriate action.
D. Rule 17Ad-21T(f)
Proposed Rule 17Ad-21T(f) would require registered non-bank
transfer agents to maintain a separate copy of their database, file
layouts and all relevant files in an easily accessible off-site
location beginning August 31, 1999,
[[Page 12137]]
and ending March 31, 2000. The proposed rule would require that such
records are copied at the end of every business day and stored for five
days on a rolling basis in a manner that will allow for the possible
transfer and conversion to a transfer agent that is Year 2000
compliant.
The Commission staff estimates that there are approximately 600
non-bank transfer agents. Because these records will already exist and
the proposed rule only requires non-bank transfer agents to make
separate copies, the Commission staff estimates that non-bank transfer
agents will incur a burden of 0.25 hours per business day to comply
with the proposed recordkeeping requirement. 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 would 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 proposed rule would
be approximately 22,800 hours (600 transfer agents at 38 hours per
transfer agent).
The recordkeeping requirement would be mandatory for all non-bank
transfer agents. The records required to be preserved would be
considered confidential and would not be available to the public. The
required records would be preserved for five business days after they
are made.
E. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
(i) Evaluate whether the proposed collections of information are
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
(ii) Evaluate the accuracy of the agency's estimate of the burden
of the proposed collections of information;
(iii) Enhance the quality, utility, and clarity of the information
to be collected; and
(iv) Minimize the burden of the collections of information on those
who are to respond, including through the use of automated collection
techniques or other forms of information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
D.C. 20503, and should also send a copy of their comments to Jonathan
G. Katz, Secretary, Mail Stop 0609, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549-0609 with reference to
File No. S7-8-99. OMB is required to make a decision concerning the
collections of information between 30 and 60 days after publication, so
a comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication.
VIII. Statutory Basis
Pursuant to the Securities 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 proposes to adopt
240.15b7-2, 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
Securities 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 proposes to adopt 240.17Ad-20 and 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.
Text of Proposed Amendment
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be 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. 240.15b7-2 to read as follows:
Sec. 240.15b7-2 Operational capability requirement.
(a) This section applies to every broker or dealer registered
pursuant to Section 15 of the Act, (15 U.S.C. 78o). If you do not have
the operational capability, taking into consideration the nature of
your business, to assure the prompt and accurate order entry,
execution, comparison, allocation, clearance and settlement of
securities transactions, the maintenance of customer accounts, and the
delivery of funds and securities, you may not:
(1) Effect any transaction in securities;
(2) Induce the purchase or sale of securities;
(3) Receive or hold customer funds or securities; or
(4) Carry customer accounts.
(b) For the purposes of this section, the term customer includes a
broker or dealer.
3. 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). If you have a
material Year 2000 problem, then you do not have operational capability
within the meaning of Sec. 240.15b7-2.
(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 computer systems incorrectly identifies any date in
the Year 1999, the Year 2000, or in any year thereafter; and
(ii) The error impairs or, if uncorrected, is likely to impair, any
of your mission critical computer systems.
(2) You will be presumed to have a material Year 2000 problem (and
will therefore be presumed to not be operationally capable) if, at any
time on or after August 31, 1999, you:
(i) Do not have written procedures designed to identify, assess,
and remediate any Year 2000 problems in your mission critical systems;
(ii) Have not verified your Year 2000 remediation efforts through
reasonable internal testing of your mission critical systems;
(iii) Have not verified your Year 2000 remediation efforts by
satisfying any applicable Year 2000 testing requirements imposed by a
self-regulatory organization; or
(iv) Have not remediated all exceptions contained in any public
independent accountant's report prepared on your behalf pursuant to
Sec. 240.17a-5(e)(5)(vi).
(c) If you experience, detect, or continue to have, or are presumed
to have, a material Year 2000 problem at any time on or after August
31, 1999, 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 Secretary, Mail
Stop 0609, U.S.
[[Page 12138]]
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
DC 20549-0609.
(d) If you are a broker or dealer that is not operationally capable
because you have a material Year 2000 problem, then you may not, on or
after August 31, 1999:
(1) Effect any transaction in, or induce the purchase or sale of,
any security; or
(2) Receive or hold customer funds or securities, or carry customer
accounts.
(e)(1) If you are a broker or dealer that is not operationally
capable because you 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 a certificate signed by
your chief executive officer (or an individual with similar authority)
stating:
(i) You are in the process of remediating your material Year 2000
problem;
(ii) 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;
(iii) The date (which cannot be later than October 15, 1999) by
which you anticipate completing remediation of the Year 2000 problem
and will therefore be operationally capable; and
(iv) 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 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.
(2) Notwithstanding paragraph (d) of this section, if you have
submitted a certificate to the Commission in compliance with paragraph
(e)(1) of this section, you may do the following, but only until the
date specified in your certificate and in no event later than October
15, 1999:
(i) Continue to effect transactions in securities;
(ii) Induce the purchase or sale of securities;
(iii) Continue to receive or hold customer funds or securities, and
(iv) Carry customer accounts.
(3) Notwithstanding paragraph (e)(2) of this section, you must
comply with the requirements of paragraph (d) of this section if you
have been so ordered by the Commission or by a court as being in the
public interest or for the protection of investors.
(f) 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.
4. 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 30 and December 31, 1999, minimum net capital
of $250,000 pursuant to Sec. 240.15c3-1(a)(2)(i).
(a) You must make and preserve, as of the close of business
December 30 and December 31, 1999, a separate trade blotter pursuant to
Sec. 240.17a-3(a)(1) and a separate stock record pursuant to
Sec. 240.17a-3(a)(5). If the stock record reflects both trade date and
settlement date positions, then you do not have to make and preserve a
separate trade blotter.
(b) You must preserve these records in an easily accessible place
for at least one year.
(c) You may preserve these records on any micrographic or
electronic storage media that meets the requirements Sec. 240.17a-4(f),
but you must be able to immediately produce or reproduce them.
(d) You must furnish promptly to a representative of the Commission
such legible, true and complete copies of those records, as may be
requested.
5. By adding Sec. 240.17Ad-20 to read as follows:
Sec. 240.17Ad-20 Operational capability requirement.
This section applies to every registered transfer agent. If you do
not have the operational capability, taking into consideration 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, you may
not engage in any transfer agent function, including:
(a) Countersigning such securities upon issuance;
(b) Monitoring the issuance of such securities with a view to
preventing unauthorized issuance;
(c) Registering the transfer of such securities;
(d) Exchanging or converting such securities; or
(e) Transferring record ownership of securities by book-keeping
entry without physical issuance of securities certificates.
6. 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. If you have a material Year 2000 problem, then you do not have
operational capability within the meaning of Sec.
240.17Ad-20.
(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 computer systems incorrectly identifies any date in
the Year 1999, the Year 2000, or in any year thereafter; and
(ii) The error impairs or, if uncorrected, is likely to impair, any
of your mission critical computer systems.
(2) You will be presumed to have a material Year 2000 problem (and
will therefore be presumed to not be operationally capable) if, at any
time on or after August 31, 1999, you:
(i) Do not have written procedures designed to identify, assess,
and remediate any Year 2000 problems in your mission critical systems;
(ii) Have not verified your Year 2000 remediation efforts through
reasonable internal testing of your mission critical systems and
reasonable testing of your external links; or
(iii) Have not remediated all exceptions contained in any public
independent accountant's report prepared on your behalf pursuant to
Sec. 240.17Ad-18(f).
(c) If you experience, detect, or continue to have, or are presumed
to have, a material Year 2000 problem at any time on or after August
31, 1999, you must immediately notify the Commission of the problem.
You must send this notice to the Commission by overnight delivery to
the Secretary, Mail Stop 0609, U.S. Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, DC 20549-0609.
(d) If you are a registered non-bank transfer agent that is not
operationally capable because you have a material Year 2000 problem,
then you may not, on or after August 31, 1999, engage in any transfer
agent function, including:
(1) Countersigning such securities upon issuance;
[[Page 12139]]
(2) Monitoring the issuance of such securities with a view to
preventing unauthorized issuance;
(3) Registering the transfer of such securities;
(4) Exchanging or converting such securities; or
(5) Transferring record ownership of securities by book-keeping
entry without physical issuance of securities certificates.
(e)(1) If you are a registered non-bank transfer agent that is not
operationally capable because you 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 a certificate
signed by your chief executive officer (or an individual with similar
authority) stating:
(i) You are in the process of remediating your material Year 2000
problem;
(ii) 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;
(iii) The date (which cannot be later than October 15, 1999) by
which you anticipate completing remediation of the Year 2000 problem
and will therefore be operationally capable; and
(iv) 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 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.
(2) Notwithstanding paragraph (d) of this section, you may continue
to engage in transfer agent functions, if you have submitted a
certificate to the Commission in compliance with paragraph (e)(1) of
this section but only until the date specified in your certificate and
in no event later than October 15, 1999. However, you must comply with
the requirements of paragraph (d) of this section if you have been so
ordered by the Commission or by a court as being in the public interest
or for the protection of investors.
(f) You must maintain a back-up copy of your database and file
layouts for each business day, and you must store these records for
five business days in a place easily accessible to Commission examiners
beginning August 31, 1999, and ending March 31, 2000. This back-up copy
of the database and file layouts must not be located with or held in
the same computer system as the primary records. You may store these
records on any electronic storage media.
(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 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 file layout means the description and location of
information contained in the database.
Dated: March 5, 1999.
By the Commission.
Margaret H.McFarland,
Deputy Secretary.
[FR Doc. 99-6043 Filed 3-10-99; 8:45 am]
BILLING CODE 8010-01-U
