[Federal Register Volume 63, Number 48 (Thursday, March 12, 1998)]
[Proposed Rules]
[Pages 12056-12062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6342]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-39724; IC-23059; IA-1704; File No. S7-7-98]
RIN 3235-AH36
Reports To Be Made by Certain Brokers and Dealers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
soliciting comment on temporary rule amendments to Rule 17a-5 under the
Securities Exchange Act of 1934 (``Exchange Act'') that would require
certain broker-dealers to file with the Commission and their designated
examining authority two reports regarding Year 2000 compliance. The
reports would enable the Commission staff to report to Congress in 1998
and 1999 regarding the industry's preparedness; supplement the
Commission's examination module for Year 2000 issues; help the
Commission coordinate self-regulatory organizations on industry-wide
testing, implementation, and contingency planning; and help increase
broker-dealer awareness that they should be taking specific steps now
to prepare for the Year 2000. Additionally, the Commission is issuing
an advisory notice on its books and records rules relating to the Year
2000.
[[Page 12057]]
DATES: The comment period will expire on April 13, 1998.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Comments also may be submitted
electronically at the following E-mail address: rulecomments@sec.gov.
Comment letters should refer to File No. S7-7-98; this file number
should be included on the subject line if E-mail is used. All comments
received will be available for public inspection and copying at the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Electronically submitted comment letters will be posted on
the Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, 202/942-0132; Peter R. Geraghty, Assistant Director, 202/942-
0177; Lester Shapiro, Senior Accountant, 202/942-0757; or Christopher
M. Salter, Staff Attorney, 202/942-0148, Division of Market Regulation,
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop
2-2, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION:
I. Introduction
At midnight on December 31, 1999, unless the proper modifications
have been made, the program logic in the vast majority of the world's
computer systems will start to produce erroneous results because, among
other things, the systems will incorrectly read the date ``01/01/00''
as being the year 1900 or another incorrect date. In addition, systems
may fail to detect that the Year 2000 is a leap year. Problems can also
arise earlier than January 1, 2000 as dates in the next millennium are
entered into non-Year 2000 compliant programs. For example, broker-
dealers operating in the U.S. securities industry could experience,
among other things: (1) Computer programs not accepting settlement
dates in the year 2000; (2) various computational models, such as those
used for risk analysis, hedging, and derivatives pricing and trading,
being inaccurate or unworkable; and (3) difficulty calculating interest
payments and maturity dates for debt instruments that mature after the
Year 2000. Problems also may occur due to certain software programs
recognizing dates in the Year 1999 or thereafter as something other
than the correct date. These problems and other software problems
directly or indirectly related to the next millennium are referred to
in this release as Year 2000 Problems. Year 2000 Problems could have
negative repercussions throughout the world's financial systems because
of the extensive interrelationship and information sharing between U.S.
broker-dealers and foreign financial firms and markets.1
Because accurate output from computer programs is vital to a broker-
dealer's recordkeeping and operations, broker-dealers currently should
be taking steps to avoid Year 2000 Problems.
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\1\ International Organization of Securities Commissions,
Statement of the IOSCO Technical Committee on Year 2000 (1997),
available at http://www.iosco.org.
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Accordingly, the Commission is evaluating the ability of
participants in the U.S. securities industry to manage and prevent Year
2000 Problems. The Commission has identified six stages involved in the
preparation for Year 2000: (1) Awareness of potential Year 2000
Problems; (2) assessment of what steps the broker-dealer must take to
avoid Year 2000 Problems; (3) implementation of the steps needed to
avoid Year 2000 Problems; (4) internal testing of software designed to
avoid Year 2000 Problems; (5) integrated or industry-wide testing of
software designed to avoid Year 2000 Problems (including testing with
other broker-dealers, other financial institutions, and customers); and
(6) implementation of tested software that will avoid Year 2000
Problems. The internal and integrated testing phases are the most
difficult phases and ordinarily will require the most resources. At the
time of the Commission staff's June 1997 ``Year 2000 Report'' to
Congress, most members of the securities industry were engaged in the
assessment and remediation phases of the Year 2000 effort.2
Additionally, beginning in the third quarter of 1996, the Commission's
Office of Compliance Inspections and Examinations has included a Year
2000 examination module in its examinations of broker-dealers that hold
or receive customer funds or securities.
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\2\ At the request of Congressman Dingell, in June 1997, the
Commission staff prepared a comprehensive report describing, in
part, the extent to which the securities industry is preparing to
avoid Year 2000 Problems. The Commission staff will prepare similar
reports in 1998 and 1999. See Report to the Congress on the
Readiness of the United States Securities Industry and Public
Companies to Meet the Information Processing Challenges of the Year
2000 (June 1997), available at http://www.sec.gov/news/studies/
yr2000.htm. See also Testimony of Arthur Levitt, Chairman, U.S.
Securities and Exchange Commission, Concerning the Readiness of the
United States Securities Industry and Public Companies to Meet the
Information Processing Challenges of the Year 2000 Before the
Subcomm. on Financial Services and Technology of the Senate Comm. on
Banking, Housing, and Urban Affairs (July 30, 1997).
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II. Proposed Changes
Rule 17a-5 under the Exchange Act, among other things, sets forth
the reports that a registered broker-dealer is required to prepare and
file with the Commission.3 To monitor the steps broker-
dealers are taking to manage and avoid Year 2000 Problems, the
Commission is proposing temporary amendments to Rule 17a-5. The
amendments would require certain registered broker-dealers to file with
the Commission and their designated examining authority (``DEA'') two
reports regarding the broker-dealer's readiness for the Year 2000. The
reports will also (1) enable the Commission staff to report to Congress
in 1998 and 1999 regarding the industry's preparedness, (2) supplement
the Commission's examination module for Year 2000 issues, (3) help the
Commission coordinate self-regulatory organizations on industry-wide
testing, implementation, and contingency planning, and (4) help
increase broker-dealer awareness that they should be taking specific
steps now to prepare for the Year 2000.
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\3\ 17 CFR 240.17a-5.
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A. Broker-Dealer's First Report
A temporary paragraph (5) would be added to subparagraph (e) of
Rule 17a-5 that would require each registered broker-dealer with a
minimum net capital requirement of $100,000 or more 4 as of
December 31, 1997 to file with the Commission and its DEA a report
describing the broker-dealer's preparation for the Year 2000 and the
steps the broker-dealer is taking to avoid Year 2000 Problems (``First
Report''). This report would evaluate the broker-dealer's actions
regarding the Year 2000 as of December 31, 1997. The Commission is
establishing a $100,000 minimum net capital threshold because broker-
dealers subject to this minimum net capital level likely have
substantial financial exposure to the market and to customers. The
$100,000 minimum net capital threshold will require all market makers,
dealers, and clearing firms to file a First Report. The Commission also
is establishing a $100,000 minimum net capital threshold because
broker-dealers below this level likely rely on broker-dealers with
minimum capital levels above $100,000 to facilitate their
[[Page 12058]]
business operations (i.e., clearing functions).
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\4\ The Commission estimates that approximately 2,200 of the
approximately 7,800 registered broker-dealers would be required to
file First and Second Reports because their net capital requirement
is $100,000 or greater.
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The First Report would be required to be filed no later than 45
days after the Commission adopts the rule amendment. This report would
review the broker-dealer's plans and preparations for the Year 2000,
including, but not limited to, the areas discussed in paragraph II.C.
below.
B. Broker-Dealer's Second Report
Temporary paragraph (e)(5) of Rule 17a-5 also would require each
registered broker-dealer with a minimum net capital requirement of
$100,000 or more as of its fiscal year-end 1998 to file with the
Commission and its DEA a report, as of the date of the broker-dealer's
1998 fiscal year-end financial statements, describing the broker-
dealer's progress in addressing Year 2000 Problems (``Second Report'').
In addition, each broker-dealer required to file the First Report would
be required to file the Second Report regardless of its minimum net
capital requirement as of its 1998 fiscal year-end. This is to ensure
that the Commission can continue to monitor the progress of broker-
dealers who filed the First Report but whose minimum capital
requirement may have changed since December 31, 1997. As previously
mentioned, the Commission is establishing a $100,000 minimum net
capital threshold because broker-dealers subject to this minimum net
capital level likely have substantial financial exposure to the market
and to customers. The $100,000 minimum net capital threshold will
require all market makers, dealers, and clearing firms to file a Second
Report.
A broker-dealer would file the Second Report with the Commission
and its DEA within 90 days after the date of the broker-dealer's 1998
fiscal year-end financial statements. The Second Report would include,
but not be limited to, the areas discussed in paragraph II.C. below.
C. Areas Addressed in First and Second Reports
The First and Second Reports would be required to discuss the
following areas:
(1) Whether the board of directors (or similar body) of the broker-
dealer has approved and funded plans for preparing and testing the
broker-dealer's computer systems for potential computer problems caused
by Year 2000 Problems;
(2) Whether the broker-dealer's plans exist in writing and address
all of a broker-dealer's major computer systems wherever located
throughout the world;
(3) Whether the broker-dealer has assigned existing employees,
hired new employees, or engaged third parties to provide assistance in
avoiding Year 2000 Problems; and if so, the work that these individuals
have performed as of the date of each report;
(4) What is the broker-dealer's current progress on each stage of
preparation for potential computer problems caused by Year 2000
Problems. These stages are: (i) awareness of potential Year 2000
Problems; (ii) assessment of what steps the broker-dealer must take to
avoid Year 2000 Problems; 5 (iii) implementation of the
steps needed to avoid Year 2000 Problems; 6 (iv) internal
testing of software designed to avoid Year 2000 Problems, including the
number and the nature of the exceptions resulting from such testing;
(v) integrated or industry-wide testing of software designed to avoid
Year 2000 Problems (including testing with other broker-dealers, other
financial institutions, customers, and vendors), including the number
and the nature of the exceptions resulting from such testing; and (vi)
implementation of tested software that will avoid Year 2000 Problems;
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\5\ In addition to assessing what steps it should take to make
its computer systems Year 2000 compliant, the broker-dealer must
communicate with its vendors and significant customers about their
Year 2000 readiness.
\6\ Broker-dealers should have plans to have all their hardware
and software changes in place by December 1998 so that they can
conduct testing, including industry-wide testing, during 1999.
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(5) Whether the broker-dealer has written contingency plans in the
event that, after December 31, 1999, it has computer problems caused by
Year 2000 Problems; 7 and
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\7\ Contingency planning should provide for adequate protections
to ensure the success of critical systems if interfaces fail or
unexpected problems are experienced with operating systems and
infrastructure software. In addition, the broker-dealer's
contingency plan should provide for the failure of external systems
that interact with the broker-dealer's computer systems. For
example, the broker-dealer's plan should anticipate the failure of a
vendor that services mission critical applications and should
provide for the potential that a significant customer experiences
difficulty due to Year 2000.
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(6) Identify what levels of the broker-dealer's management are
responsible for addressing potential computer problems caused by Year
2000 Problems, including a description of these individuals'
responsibilities regarding the Year 2000 and an estimate of the
percentage of time that each individual has spent on Year 2000 issues
during the preceding twelve month period; in each report, the broker-
dealer shall identify a contact person regarding Year 2000 matters.
The list above is the minimum criteria that should be addressed in
the First Report. The Second Report should address the above criteria
as well as make certain specific assertions described in paragraph
II.D. below. A broker-dealer should include any additional material
information concerning its management of Year 2000 Problems that will
help the Commission and DEAs assess the broker-dealer's readiness for
the Year 2000.
D. Independent Public Accountant's Attestation To Be Attached to the
Second Report
Broker-dealers would have to file with the Second Report an
attestation from an independent public accountant (``Attestation'').
The Attestation would take the form of a letter that would give the
independent public accountant's opinion whether there is a reasonable
basis for the broker-dealer's assertions in the Second Report regarding
the areas specified in proposed Rule 17a-5(e)(5)(v)(A) through (G).
Specifically, the Second Report would have to include assertions by the
broker-dealer responding to the following and the independent public
accountant would have to attest to the following: 8
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\8\ The Commission notes that some of the areas that the broker-
dealer would be required to respond to in subsection (v) of the
proposed rule overlap with the areas set forth in subsection (iv).
The areas addressed in subsection (iv) ask for additional
information from the broker-dealer for which the Commission is not
seeking an independent public accountant's attestation. The overlap
exists because the Commission wants to narrowly tailor the specific
assertions on which the independent public accountant must report in
the attestation attached to the Second Report.
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(1) Whether the broker-dealer has developed written plans for
preparing and testing the broker-dealer's computer systems for
potential Year 2000 Problems;
(2) Whether the board of directors (or similar body) of the broker-
dealer has approved the plans described in (1) above;
(3) Whether a member of the broker-dealer's board of directors (or
similar body) is responsible for the execution of the plans described
in (1) above:
(4) Whether the broker-dealer's plans described in (1) above
address the broker-dealer's domestic and international operations,
including the activities of each of the firm's subsidiaries,
affiliates, and divisions. (These provisions do not apply to
subsidiaries, affiliates, and divisions of the broker-dealer that are
regulated by U.S. or foreign regulators other than the Commission);
(5) Whether the broker-dealer has assigned existing employees,
hired new
[[Page 12059]]
employees, or engaged third parties to implement the broker-dealer's
plans described in (1) above;
(6) Whether the broker-dealer or third party has conducted internal
testing, whether such testing is on schedule in accordance with the
plan described in paragraph (1) above, and whether the broker-dealer
has determined as a result of the internal testing that the firm has
modified its software to correct Year 2000 Problems; and
(7) Whether the broker-dealer has conducted external or industry-
wide testing, whether such testing is on schedule in accordance with
the plan described in paragraph (1) above, and whether the broker-
dealer has determined as a result of the external or industry-wide
testing that the firm has modified its software to correct Year 2000
Problems.
The Attestation only pertains to the areas discussed above. The
Commission does not expect the Attestation to address assertions in the
First and Second Report that are not pertinent to proposed Rule 17a-
5(e)(5)(v)(A) through (G). The Attestation would be required to be
filed with the Second Report.
III. Notice Regarding Current Books and Records Requirements
Rule 17a-3 under the Exchange Act, among other things, requires
registered broker-dealers to make and keep current certain books and
records relating to the broker-dealer's business. 9 Current
books and records are an integral part of the Commission's regulatory
program. Among other things, these records help the Commission to
assess the financial stability of a broker-dealer and to protect
investors. Any broker-dealer whose computer systems have not been
modified to address Year 2000 Problems may have records that are
inaccurate or not current.
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\9\ 17 CFR 240.17a-3.
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Consequently, the Commission advises broker-dealers that a broker-
dealer with computer systems that have Year 2000 Problems may be deemed
not to have accurate and current records and be in violation of Rule
17a-3. Accurate and current books and records are essential for a
broker-dealer to operate in a safe manner. The Commission also reminds
broker-dealers that Rule 17a-11 under the Exchange Act requires every
broker-dealer to promptly notify the Commission of its failure to make
and keep current books and records. 10
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\10\ 17 CFR 240.17a-11(d).
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IV. Request for Comments
The Commission solicits commenters' views on any aspect of the
proposed temporary amendments to Rule 17a-5. Initially, the Commission
seeks comment on whether the term ``Year 2000 Problems'' should be
modified to account for any other specific potential computer problems
that may occur directly or indirectly due to the Year 2000. The
Commission also seeks comment on the $100,000 net capital threshold,
and whether that amount is the appropriate threshold to meet the
Commission's objectives as stated in this release. The Commission also
seeks comments on the areas that will be addressed in the two reports.
For example, should the reports include any additional material
information specific to an individual broker-dealer's management of
Year 2000 Problems? What additional material information could be
included? For example, should broker-dealers report whether their Year
2000 plans are on schedule and, if not, the reasons for the delay? With
regard to broker-dealers having to report the number and the nature of
the exceptions resulting from internal and integrated or industry-wide
testing, should the Commission establish a materiality threshold for
determining whether an exception needs to be reported? If so, how
should the Commission determine such a threshold? Regarding management
responsibility for Year 2000 plans, should a particular officer of the
broker-dealer be required to sign the reports?
The Commission believes that the Attestation could be rendered in
accordance with the accounting profession's Statements on Standards for
Attestation Engagements.11 The Commission seeks commenters'
views on that issue, and on any alternative means that would provide
the Commission with an independent assessment of the status and
adequacy of a broker-dealer's preparation for possible Year 2000
Problems. Specifically, the Commission seeks commenters' views on
whether the Commission's desire to receive an independent public
accountant's attestation of a broker-dealer's preparation for possible
Year 2000 Problems can be combined with, or would already be part of,
independent public accountants' responsibilities, in accordance with
Generally Accepted Accounting Principles, to opine on whether a broker-
dealer can continue as a going concern.
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\11\ AICPA Professional Standards, Vol. 1, 2491-2800.
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The Commission also seeks comment on whether the Attestation should
be prepared by the same independent public accountant who prepares the
annual audit of the broker-dealer's 1998 fiscal year-end financial
statements. As proposed, the First and Second Reports would be publicly
available. The Commission seeks comment on whether certain sections of
these reports, or the entire reports, should not be publicly available.
Further, the Commission is seeking comment as to whether broker-dealers
should be required to file an additional report in 1999 regarding the
results of its participation in integrated or industry-wide testing for
Year 2000 Problems. Finally, do the concerns discussed in this release
apply to other financial institutions over which the Commission has
regulatory responsibilities? Should the Commission, for example,
require registered investment advisers and investment companies to file
reports to the Commission regarding Year 2000 compliance?
V. Costs and Benefits of the Proposed Amendment and Its Effect on
Competition
The Commission requests that commenters provide analyses and data
relating to costs and benefits associated with the proposal herein.
This information will assist the Commission in its evaluation of the
costs and benefits that may result from the proposed temporary rule
amendment. The Commission understands that the two reports regarding
the broker-dealer's readiness for the Year 2000 would impose some costs
on broker-dealers.12 The Commission, however, believes that
these costs are necessary and justified in light of the Commission's
responsibilities under the federal securities laws. Year 2000 Problems
could harm investors. The required reports will inform the Commission
of the preparations broker-dealers subject to the temporary rule are
taking to avoid Year 2000 Problems. The reporting requirements also may
help broker-dealers understand that they should be taking steps now to
avoid Year 2000 Problems.
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\12\ See infra Section VII for the Commission's estimate of the
costs that the proposed temporary amendment to Rule 17a-5 will
impose on affected broker-dealers.
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In addition, Section 23(a)(2) of the Exchange Act requires the
Commission, in amending rules under the Exchange Act, to consider the
anti-competitive effects of such amendments, if any.13 The
Commission has considered the proposed temporary amendment in light
[[Page 12060]]
of the standards cited in Section 23(a)(2), and believes preliminarily
that, if adopted, they would not likely impose any significant burden
on competition not necessary or appropriate in furtherance of the
Exchange Act. Indeed, the Commission believes that the proposed
temporary rule amendment is necessary to enable the Commission to
monitor the steps broker-dealers are taking to manage and avoid Year
2000 Problems. The Commission solicits commenters' views regarding the
effects of the proposed temporary rule amendment on competition,
efficiency, and capital formation. The Commission also seeks comments
on the proposed temporary rule amendment's impact on the economy on an
annual basis, including any empirical data.
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\13\ See 15 U.S.C. 78w(a)(2).
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VI. Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA''), in accordance with the provisions of the
Regulatory Flexibility Act,14 regarding the rules contained
in the proposed temporary amendment to Rule 17a-5 under the Exchange
Act. As discussed more fully in the analysis, some of the broker-
dealers that the proposed temporary amendment would affect are small
entities, as defined by the Commission's rules. The IRFA states that
the purpose of the proposed temporary rule is for the Commission to
ascertain what steps broker-dealers are taking to avoid Year 2000
Problems.
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\14\ 5 U.S.C. 603.
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The IRFA sets forth the statutory authority for the proposed
temporary rule. The IRFA also discusses the effect of the proposed rule
on broker-dealers that are small entities pursuant to Rule 240.0-10
under the Exchange Act. For purposes of the proposed temporary rule, a
small entity is a 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 section 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 $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. 15 Based on FOCUS reports filed for the fourth
quarter of 1996, there are approximately 7,800 registered broker-
dealers, of which approximately 5,300 are small entities. Based on
FOCUS data for the fourth quarter of 1996, only about 600 broker-
dealers that are small entities would be required to file the two
reports on Year 2000 compliance. Thus, by limiting the coverage of the
temporary rule amendment to firms with minimum net capital requirements
of $100,000 or more, the Commission is exempting over 88% of small
entities potentially subject to the temporary rule amendment.
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\15\ 17 CFR 240.0-10(c)(1-2).
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The IRFA states that the proposed temporary rule would impose new
reporting requirements because certain broker-dealers would have to
file with the Commission and their DEA two reports regarding the
broker-dealer's readiness for the Year 2000. The Commission estimates
that, on average, a respondent would devote approximately 50 employee
hours of preparation time to each report and 20 employee hours of
discussion time with the independent public accountant who prepares the
Attestation. Additionally, the Commission estimates that, on average, a
respondent would pay approximately $25,000 to the independent public
accountant for the preparation of the Attestation. The IRFA also states
that the proposed temporary rule would not impose any other reporting,
recordkeeping, or compliance requirements, and that the Commission
believes that there are no rules that duplicate, overlap, or conflict
with the proposed temporary rule.
The analysis discusses the various alternatives considered by the
Commission in connection with the proposed temporary rule that might
minimize the effect on small entities, including: (a) The establishment
of differing compliance or reporting requirements or timetables that
take into account the resources of small entities; (b) the
clarification, consolidation, or simplification of compliance and
reporting requirements under the proposed temporary rule for small
entities; (c) the use of performance rather than design standards; and
(d) an exemption from coverage of the rule or any part thereof, for
small entities. As noted above, the Commission proposes to exempt over
88% of small entities subject to the temporary rule amendment. The
Commission has determined that it is not feasible to further clarify,
consolidate, or simplify the proposed temporary rule for small
entities. The Commission also believes that it would be inconsistent
with the purpose of the rule proposal to exempt additional small
entities from the proposed temporary rule or to use performance
standards to specify different requirements for small entities. As
discussed in the IRFA, small broker-dealers with a minimum net capital
requirement of $100,000 or more would be required to file the two
reports because they likely are market makers, dealers, or clearing
firms with substantial financial exposure to the market and customers.
In the IRFA, the Commission encourages the submission of written
comments with respect to any aspect of the IRFA. In particular, the
Commission is interested in comments that specify costs of compliance
with the proposed temporary rule, and suggest alternatives that would
accomplish the objective of proposed temporary rule. A copy of the IRFA
may be obtained by contacting Christopher M. Salter, The Office of Risk
Management and Control, Division of Market Regulation, Securities and
Exchange Commission, 450 Fifth Street, N.W., Mail Stop 5-1, Washington,
D.C. 20549, (202) 942-0772.
VII. Paperwork Reduction Act
The proposed temporary amendment to Rule 17a-5 contains
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995,16 and the Commission has
submitted them to the Office of Management and Budget for review in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the
collection of information is: ``Proposed Temporary Amendment to Rule
17a-5.''
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\16\ 44 U.S.C. 3501 et seq.
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The proposed temporary amendment would require information
collection because certain broker-dealers would have to file two
reports with the Commission and their DEA. The first report would need
to be filed no later than 45 days after the Commission adopts the rule
amendments and the second report would need to be filed within 90 days
after the date of the broker-dealer's 1998 fiscal year-end financial
statements. These reports are necessary for the Commission to monitor
the steps broker-dealers are taking to manage and avoid Year 2000
Problems. Based on FOCUS reports filed for the fourth quarter of 1996,
there are approximately 7,800 registered broker-dealers, of which
approximately 2,200 would be subject to the proposed temporary
amendment. The Commission believes that for business reasons prudent
broker-dealers should already have developed plans for potential
computer problems caused by Year 2000 Problems. Therefore, the
Commission believes that broker-dealers subject to the proposed
temporary
[[Page 12061]]
amendment would incur only those costs necessary to prepare the two
reports required by the temporary amendment. While the amount of time
needed to comply with the temporary rule amendment would vary from a
minimum of 8 hours to a maximum of 100 hours, the Commission estimates
that, on average, a respondent would devote approximately 50 employee
hours of preparation time to each report and 20 employee hours of
discussion time with the independent public accountant who prepares the
Attestation. Additionally, a broker-dealer would have to pay additional
fees, above the fees it will have to pay for its annual audit, to an
independent public accountant for preparation of the Attestation. While
the Commission estimates that the amount of additional accounting fees
to comply with the temporary rule amendment would vary from a minimum
of $5,000 to a maximum of $200,000, the Commission estimates that, on
average, a respondent would spend approximately $25,000 for the
preparation of the Attestation. It is important to note that these
costs would only be incurred once. The temporary rule amendment would
not impose a continuing requirement.
A broker-dealer with a minimum net capital requirement of $100,000
or greater as of December 31, 1997 and the date of its 1998 fiscal
year-end financial statements would be required to file the reports
described in the proposed temporary amendment.17 As
proposed, all reports received by the Commission pursuant to the
proposed temporary amendment would not be kept confidential. An agency
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless it displays a currently valid
control number.
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\17\ Due to a change in its business, it is possible that a
broker-dealer would only have to file one of the reports required by
the temporary rule amendment. For example, a firm that has a minimum
net capital requirement of $5,000 as of December 31, 1997 and
$100,000 as of the date of its 1998 fiscal year financial statements
would not have to file the First Report, but it would have to file
the Second Report.
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Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
(i) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility;
(ii) Evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information;
(iii) Enhance the quality, utility, and clarity of the information
to be collected; and
(iv) Minimize the burden of collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms for information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the following persons:
Desk Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, Office of Management and Budget,
Room 3208, New Executive Office Building, Washington, D.C. 20503; and
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and refer to File No. S7-7-
98. OMB is required to make a decision concerning the collection of
information between 30 and 60 days after publication of this release in
the Federal Register, so a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days of this publication.
VIII. Statutory Basis
Pursuant to the Securities Exchange Act of 1934 and particularly
Sections 17(a) and 23(a) thereof, 15 U.S.C. 78o(c)(3) and 78w, the
Commission proposes to amend Sec. 240.17a-5 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 Rule 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 general authority citation for Part 240 is revised 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 amending Sec. 240.17a-5 by adding paragraph (e)(5) to read as
follows:
Sec. 240.17a-5 Reports to be made by certain brokers and dealers.
* * * * *
(e) Nature and form of reports. * * *
(5)(i) For purposes of this section, the term Year 2000 Problem
shall include any erroneous result caused by:
(A) Computer software incorrectly reading the date ``01/01/00'' as
being the year 1900 or another incorrect year;
(B) Computer software incorrectly identifying a date in the Year
1999 or any year thereafter;
(C) Computer software failing to detect that the Year 2000 is a
leap year; or
(D) Any other computer software error that is directly or
indirectly caused by paragraph (e)(5)(i)(A), (B), or (C) of this
section.
(ii) A broker or dealer with a minimum net capital requirement of
$100,000 or greater as of December 31, 1997 shall file a report on the
broker-dealer's preparation for Year 2000 Problems. The report shall
address each topic in paragraph (e)(5)(iv) of this section. The report
shall be filed no later than 45 days after the Commission adopts the
rule amendments.
(iii) A broker or dealer with a minimum net capital requirement of
$100,000 or greater as of the date of its 1998 fiscal year-end
financial statements shall file a report on the broker-dealer's
preparation for Year 2000 Problems. In addition, each broker or dealer
subject to paragraph (e)(5)(ii) of this section shall file a report
pursuant to this paragraph (iii) regardless of its minimum net capital
requirement as of the date of its 1998 fiscal year-end financial
statements. The report shall address each topic in paragraphs
(e)(5)(iv) and (v) of this section. The report shall be filed within 90
days after the date of the broker or dealer's 1998 fiscal year-end
financial statements.
(iv) The reports prepared pursuant to paragraphs (e)(5)(ii) and
(iii) of this section shall include a discussion of the following: A
broker-dealer should include any additional material information in
both reports concerning its management of Year 2000 Problems that will
help the Commission and the designated examining authorities assess the
broker-dealer's readiness for the Year 2000:
(A) Whether the board of directors (or similar body) of the broker-
dealer has approved and funded plans for preparing and testing the
broker-dealer's computer systems for potential computer problems caused
by Year 2000 Problems;
(B) Whether the broker-dealer's plans exist in writing and address
all of a broker-dealer's major computer systems wherever located
throughout the world;
(C) Whether the broker-dealer has assigned existing employees,
hired new
[[Page 12062]]
employees, or engaged third parties to provide assistance in avoiding
Year 2000 Problems; and if so, describe the work that these individuals
have performed as of the date of each report;
(D) What is the broker-dealer's current progress on each stage of
preparation for potential computer problems caused by Year 2000
Problems. These stages are:
(1) Awareness of potential Year 2000 Problems;
(2) Assessment of what steps the broker-dealer must take to avoid
Year 2000 Problems;
(3) Implementation of the steps needed to avoid Year 2000 Problems;
(4) Internal testing of software designed to avoid Year 2000
Problems, including the number and the nature of the exceptions
resulting from such testing;
(5) Integrated or industry-wide testing of software designed to
avoid Year 2000 Problems (including testing with other broker-dealers,
other financial institutions, and customers), including the number and
the nature of the exceptions resulting from such testing; and
(6) Implementation of tested software that will avoid Year 2000
Problems;
(E) Whether the broker-dealer has written contingency plans in the
event, that after December 31, 1999, it has computer problems caused by
Year 2000 Problems; and
(F) Identify what levels of the broker-dealer's management are
responsible for addressing potential computer problems caused by Year
2000 Problems, including a description of these individual's
responsibilities regarding the Year 2000 and an estimate of the
percentage of time that each individual has spent on Year 2000 issues
during the preceding twelve month period; in each report, the broker-
dealer shall identify a contact person regarding Year 2000 matters.
(v) The report prepared pursuant to paragraph (e)(5)(iii) of this
section shall also include assertions in response to the following and
an opinion by an independent public accountant attesting to whether
there is a reasonable basis for the broker or dealer's assertions in
response to the following:
(A) Whether the broker-dealer has developed written plans for
preparing and testing the broker-dealer's computer systems for
potential Year 2000 Problems;
(B) Whether the board of directors (or similar body) of the broker-
dealer has approved the plans described in paragraph (e)(5)(v)(A) of
this section;
(C) Whether a member of the broker-dealer's board of directors (or
similar body) is responsible for the execution of the plans described
in paragraph (e)(5)(v)(A) of this section;
(D) Whether the broker-dealer's plans described in paragraph
(e)(5)(v)(A) of this section address the broker-dealer's domestic and
international operations, including the activities of each of the
firm's subsidiaries, affiliates, and divisions. (Subsidiaries,
affiliates, and divisions that are regulated by U.S. or foreign
regulators other than the Commission are exempted from these
provisions;)
(E) Whether the broker-dealer has assigned existing employees,
hired new employees, or engaged third parties to implement the broker-
dealer's plans described in paragraph (e)(5)(v)(A) of this section;
(F) Whether the broker-dealer or third party has conducted internal
testing, whether such testing is on schedule in accordance with the
broker-dealers' plan described in paragraph (e)(5)(v)(A) of this
section, and whether the broker-dealer has determined as a result of
the internal testing that the firm has modified its software to correct
Year 2000 Problems; and
(G) Whether the broker-dealer has conducted external or industry-
wide testing, whether such testing is on schedule in accordance with
the broker-dealers' plan described in paragraph (e)(5)(v)(A) of this
section, and whether the broker-dealer has determined as a result of
the external or industry-wide testing that the firm has modified its
software to correct Year 2000 Problems.
(vi) The broker or dealer shall file two copies of each report
prepared pursuant to paragraphs (e)(5)(ii) and (e)(5)(iii) of this
section with the Commission's principal office in Washington, D.C. and
one copy of each report with the broker-dealer's designated examining
authority. The reports required by paragraphs (e)(5)(ii) and
(e)(5)(iii) of this section will be publicly available.
Dated: March 5, 1998.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-6342 Filed 3-12-98; 8:45 am]
BILLING CODE 8010-01-P
