[Federal Register Volume 63, Number 48 (Thursday, March 12, 1998)]
[Proposed Rules]
[Pages 12062-12068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6341]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-39726; File No. S7-8-98]
RIN 3235-AH42


Year 2000 Readiness Reports To Be Made by Transfer Agents

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
soliciting comment on proposed temporary Rule 17Ad-18 under the 
Securities Exchange Act of 1934 (``Exchange Act''). The proposed 
temporary rule would require all non-bank registered transfer agents to 
file with the Commission at least one report regarding its Year 2000 
readiness. The initial report would be due no later than 45 days after 
the Commission adopts this rule. The follow-up reports would be due on 
August 31, 1998, and on August 31, 1999. The follow-up reports would 
include an attestation by an independent public accountant that would 
give the Independent Public Accountant's opinion whether there is a 
reasonable basis for the transfer agent's assertions in the reports. 
Additionally, the Commission is issuing an advisory notice on its 
transfer agent record retention and recordkeeping requirements relating 
to the Year 2000.

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: [email protected]. 
Comment letters should refer to File No. S7-8-98 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: Jerry W. Carpenter, Assistant 
Director, 202/942-4187; Thomas C. Etter, Jr., Special Counsel, 202/942-
0178; or Jeffrey S. Mooney, Special Counsel, 202/942-4174, Division of 
Market Regulation, Securities and Exchange Commission,

[[Page 12063]]

450 Fifth Street, N.W., Mail Stop 2-2, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

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 January 1 of the year 1900 or another incorrect date. In 
addition, systems may fail to detect that the Year 2000 is a leap year. 
Problems also can arise earlier than January 1, 2000, as dates in the 
next millennium are entered into non-Year 2000 compliant programs. Year 
2000 Problems could have negative repercussions throughout the world's 
financial systems because of the extensive interrelationship and 
information sharing between U.S. and foreign financial firms and 
markets.1
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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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    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 transfer agent 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 
financial institutions and customers); and (6) implementation of tested 
software that will avoid Year 2000 Problems. The internal and 
integrated testing stages are the most difficult, and likely 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 and transfer agents.
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    \2\ At the request of Congressman Dingell, in June 1997, the 
Commission staff prepared a comprehensive report to Congress 
describing, in part, the extent to which the securities industry is 
preparing to avoid Year 2000 Problems. 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. The Commission staff will prepare similar reports in 
1998 and 1999. 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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    This release focuses on the readiness of registered transfer agents 
to address the Year 2000 date change. Because accurate output from 
computer programs is vital to a transfer agent's operations, every 
transfer agent currently should be taking steps to avoid Year 2000 
Problems. For example, a transfer agent with Year 2000 Problems could 
experience, among other things, computer programs not accepting 
securities transfers, and difficulty calculating dividend payment dates 
for equity securities and interest payment and maturity dates for debt 
securities.
    Transfer agents present special considerations for the Commission 
because, unlike other entities regulated under the Exchange Act, 
transfer agents have no self-regulatory organization (``SRO'') to 
assist them and the Commission in achieving Year 2000 
objectives.3 Therefore, information about progress in 
dealing with Year 2000 Problems must be obtained from the transfer 
agents. All transfer agents for securities registered pursuant to 
Section 12 of the Exchange Act must register with the 
Commission.4 However, the federal banking agencies are the 
``appropriate regulatory agency'' (``ARA'') for registered bank 
transfer agents.5 The Commission is coordinating its Year 
2000 activities with the banking regulators to achieve complete 
coverage of transfer agents, but avoid duplication of efforts.
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    \3\ See Section 3(a)(26) of the Exchange Act, 15 U.S.C. 
78c(a)(26), for the definition of an SRO.
    \4\ See Section 17A(c) of the Exchange Act, 15 U.S.C. 78q-1(c).
    \5\ See Section 3(a)(34)(B) of the Exchange Act, 15 U.S.C. 
78c(a)(34)(B), for the definition of ARA. Transfer agents that also 
are banks have either the Board of Governors of the Federal Reserve 
System, the Office of the Comptroller of the Currency, or the 
Federal Deposit Insurance Corporation as their ARA. Approximately 
1,360 transfer agents are registered with the Commission, and the 
Commission is the ARA for approximately 740 of them.
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II. Proposed Temporary Rules

    To monitor the steps that transfer agents are taking to manage and 
avoid Year 2000 Problems, the Commission is proposing temporary 
Exchange Act Rule 17Ad-18.6 The proposed temporary rule 
would require registered non-bank transfer agents that do not qualify 
for an exemption under Rule 17Ad-13 to file with the Commission three 
reports regarding its Year 2000 readiness. These reports will: (1) 
Assist 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 with SROs on Year 2000 industry-wide testing, 
implementation, and contingency planning; and (4) increase transfer 
agent awareness that they should be taking specific steps now to 
prepare for the Year 2000.
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    \6\ Proposed 17 CFR 240.17Ad-18.
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A. Initial Report

    Proposed paragraph (a) of temporary Rule 17Ad-18 will require each 
registered non-bank transfer agent to file with the Commission a report 
describing the transfer agent's preparations for the Year 2000 and the 
steps the transfer agent is taking to avoid Year 2000 Problems 
(``Initial Report''). In this report the transfer agent would evaluate 
its actions regarding the Year 2000 as of December 31, 1997. This 
report also would describe the transfer agent's future plans and 
preparations for the Year 2000, including the areas discussed in 
paragraph II.C. below. The Initial Report would be required to be filed 
no later than 45 days after the Commission adopts this rule.

B. Transfer Agent's Follow-Up Reports

    Proposed paragraph (b) of temporary Rule 17Ad-18 would require 
registered transfer agents that do not qualify for an exemption under 
existing Rule 17Ad-13(d) to file reports with the Commission describing 
their progress in addressing Year 2000 Problems (``Follow-Up 
Reports'').7 Generally, Rule 17Ad-13(d) exempts the 
following transfer agents from the rule's annual reporting 
requirements: issuer transfer agents; small transfer agents exempt 
under Rule 17Ad-4(b); and bank transfer agents. Therefore, bank 
transfer agents would not be required to submit either the Initial 
Report or the Follow-Up Reports. The Follow-Up Reports would be due on 
or before August 31, 1998, and on or before August 31, 1999, as of June 
30, 1998, and June 30, 1999, respectively. The Follow-Up Reports would 
include, but not be limited to, the

[[Page 12064]]

areas discussed in paragraph II.C. below.
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    \7\ 17 CFR 240.17Ad-13(d).
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    Because transfer agents that qualify for the exemption under Rule 
17Ad-13(d) are typically small transfer agents or are bank transfer 
agents subject to the primary supervision of one of the federal banking 
agencies, the Commission believes that it would be too burdensome to 
subject these transfer agents to both reporting requirements. The 
Commission cautions, however, that all transfer agents must take 
necessary and appropriate actions to address Year 2000 Problems.

C. Areas Addressed in Initial and Follow-Up Reports

    Both the Initial Report and the Follow-Up Reports would be required 
to discuss the following areas:
    (1) Whether the board of directors (or similar body) of the 
transfer agent has approved and funded plans for preparing and testing 
the transfer agent's computer systems for potential computer problems 
caused by Year 2000 Problems; 8
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    \8\ Transfer agents should have all their hardware and software 
changes in place by December 1998, if not before, so that they can 
conduct testing, including industry-wide testing, during 1999.
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    (2) Whether the transfer agent's plans exist in writing and address 
all of the transfer agent's computer systems wherever located 
throughout the world;
    (3) Whether the transfer agent 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 transfer agent'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 transfer agent must take to 
avoid Year 2000 Problems; 9 (iii) implementation of the 
steps needed to avoid Year 2000 Problems; (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 transfer agents, 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; 
10
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    \9\ In addition to assessing what steps it should make to its 
computer systems Year 2000 compliant, the transfer agent must 
communicate with its vendors and significant customers about their 
Year 2000 readiness.
    \10\ In addition, the transfer agent's contingency plan should 
provide for the failure of external systems that interact with the 
transfer agent's computer systems. For example, the transfer agent'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 
Problems.
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    (5) Whether the transfer agent has written contingency plans in the 
event that, after December 31, 1999, it has computer problems caused by 
Year 2000 Problems; 11 and
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    \11\ 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.
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    (6) Identify what levels of the transfer agent'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 transfer 
agent shall identify a contact person regarding Year 2000 matters.
    The list above is the minimum criteria that should be addressed in 
the Initial Report. The Follow-Up Reports should also address the above 
criteria as well as make certain specific assertions described in 
paragraph II.D. below. A transfer agent should include any additional 
material information concerning its management of Year 2000 Problems 
that will help the Commission assess the transfer agent's readiness for 
the Year 2000.

D. Independent Public Accountant's Attestation to be Attached to the 
Follow-Up Reports

    Transfer Agents would have to file with the Follow-Up Reports 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 certain of the transfer agent's assertions in the Follow-Up 
Reports regarding the areas specified in proposed Rule 17Ad-18(d)(1) 
through (7). Specifically, the Follow-Up Reports will have to include 
assertions responding to the following and the Independent Public 
Accountant will have to attest to the following: 12
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    \12\ The Commission notes that some of the areas that the 
transfer agent would be required to respond to in subsection (d) of 
the proposed rule overlap with the areas set forth in subsection 
(c). The areas addressed in subsection (d) ask for additional 
information from the transfer agent 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 that the Independent Public Accountant must account for 
in the Attestations attached to the Follow-Up Reports.
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    (1) Whether the transfer agent has developed written plans for 
preparing and testing the transfer agent computer systems for potential 
Year 2000 Problems;
    (2) Whether the board of directors (or similar body) of the 
transfer agent has approved the plans described in (1) above;
    (3) Whether a member of the transfer agent's board of directors (or 
similar body) is responsible for the execution of the plans described 
in (1) above;
    (4) Whether the transfer agent's plans described in (1) above 
address the transfer agent'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);
    (5) Whether the transfer agent has assigned existing employees, 
hired new employees, or engaged third parties to implement the transfer 
agent's plans described in (1) above;
    (6) Whether the transfer agent 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 
transfer agent has determined as a result of the internal testing that 
the transfer agent has modified its software to correct Year 2000 
Problems; and
    (7) Whether the transfer agent 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 transfer 
agent has determined as a result of the external or industry-wide 
testing that the transfer agent 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 
Follow-Up Reports that are not pertinent to proposed Rule 17Ad-18(d)(1) 
through (7). The Attestation would be required to be filed with the 
Follow-Up Reports.

III. Notice Regarding Recordkeeping and Record Retention 
Requirements

    Rule 17Ad-6 under the Exchange Act requires every registered 
transfer agent to make and keep current certain information regarding 
its operations.13

[[Page 12065]]

Exchange Act Rule 17Ad-7 sets forth the time periods for which a 
transfer agent must retain the records required by Rule 17Ad-
6.14 The required records facilitate the delivery of 
transfer agent services to issuers and security holders, and are an 
integral part of the Commission's regulatory program. Among other 
things, these records help the Commission to assess whether a transfer 
agent is operating properly. A transfer agent whose computer systems 
have not been modified to address Year 2000 Problems may have records 
that as of January 1, 2000, will be inaccurate or not current, and 
therefore in violation of Rules 17Ad-6 and 17Ad-7. Because a transfer 
agent essentially is a system of records, a failure to have accurate 
records could threaten the transfer agent's viability and have serious 
consequences for issuers and security holders. The Commission advises 
transfer agents that a failure to adequately prepare for the Year 2000 
will not be considered a valid excuse for noncompliance with the 
requirements of Rules 17Ad-6 and 17Ad-7.15
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    \13\ 17 CFR 240.17Ad-6.
    \14\ 17 CFR 240.17Ad-7.
    \15\ Cf. Lowell H. Listrom, 50 SEC 883, 887, n.7 (1992).
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IV. Request for Comments

    The Commission solicits commenters' views on any aspect of the 
proposed temporary Rule 17Ad-18. In particular, the Commission seeks 
comment on whether the Attestation should be prepared by the same 
Independent Public Accountant who prepares the annual audit of the 
transfer agent's 1998 fiscal year-end financial statements. As 
proposed, the Initial Report and the Follow-Up 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. The Commission also 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. Additionally, the Commission seeks 
comment on the areas that will be addressed in the three reports (i.e., 
the Initial Report and the two Follow-Up Reports). For example, should 
the reports include any additional material information specific to an 
individual transfer agent's management of Year 2000 Problems? If so, 
what additional material information should be included? For example, 
should transfer agents report whether their Year 2000 plans are on 
schedule and, if not, the reasons for the delay? Should the Commission 
establish a materiality threshold for determining whether the number 
and the nature of the exceptions resulting from internal and integrated 
or industry-wide testing 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 
transfer agent be required to sign the reports on behalf of the 
transfer agent?
    The Commission believes that the Attestation could be rendered in 
accordance with the accounting profession's Statements on Standards for 
Attestation Engagements.16 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 transfer agent'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 transfer agent's preparation for possible Year 2000 
Problems can be combined with, or would already be part of, the 
Independent Public Accountants' responsibilities, in accordance with 
Generally Accepted Accounting Principles, to opine on whether a 
transfer agent can continue as a going concern.
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    \16\ American Institute of Certified Public Accountants 
Professional Standards, Vol. 1, pp. 2491-2800.
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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. 
The Commission understands that the reports regarding the transfer 
agent's readiness for the Year 2000 would impose some costs on transfer 
agents.17 Transfer agents are not required to engage 
additional employees or consultants to prepare the Initial Report. 
Although transfer agents must engage an accountant to prepare the 
Attestation to accompany the Follow-Up Reports, the Commission believes 
that these costs will be significantly outweighed by the benefits the 
Commission will gain from learning about the preparations transfer 
agents are taking to avoid Year 2000 Problems. The Commission also 
believes that reporting requirements will help Transfer agents 
understand that they should be taking specific steps now to prepare for 
Year 2000.
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    \17\ See infra Section VII for the Commission's estimate of the 
costs that proposed temporary Rule 17Ad-18 will impose on affected 
transfer agents.
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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 rules, if any.18 The 
Commission has considered the proposed temporary rule in light of the 
standards cited in Section 23(a)(2), and believes 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 will enable 
the Commission to monitor the steps transfer agents are taking to 
manage and avoid Year 2000 Problems. The Commission solicits 
commenters' views regarding the effects of the proposed temporary rule 
on competition, efficiency, and capital formation. The Commission also 
seeks comments on the proposed rule's potential impact on the economy 
on an annual basis, including any empirical data.
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    \18\ See 15 U.S.C. Sec. 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,19 regarding the rules contained 
in the proposed temporary Rule 17Ad-18 under the Exchange Act. As 
discussed more fully in the analysis, some of the transfer agents that 
the proposed temporary rule would affect are small entities, as defined 
by the Commission's rules.
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    \19\ 5 U.S.C. 603.
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    The IRFA states that the purpose of the proposed temporary rule is 
for the Commission to monitor that transfer agents are taking proper 
steps to manage and avoid 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. and foreign financial firms and markets.20 For 
example, a transfer agent with Year 2000 Problems could experience, 
among other things, computer programs not accepting securities 
transfers, and

[[Page 12066]]

difficulty calculating dividend payment dates for equity securities and 
interest payment and maturity dates for debt securities.
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    \20\ 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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    Transfer agents present special consideration for the Commission. 
This is because transfer agents, unlike other entities regulated under 
the Exchange Act, have no self-regulatory organization to assist them 
and the Commission in achieving Year 2000 objectives.21 
Therefore, information about progress in dealing with Year 2000 
problems must be obtained from the transfer agents.
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    \21\ See Section 3(a)(26) of the Exchange Act, 15 U.S.C. 
Sec. 78c(a)(26), for the definition of an SRO.
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    The proposed temporary rule would require non-bank registered 
transfer agents to file with the Commission at least one report 
regarding its Year 2000 readiness. The initial report would be due no 
later than 45 days after the Commission adopts this rule. The follow-up 
reports would be due on August 31, 1998, and on August 31, 1999. The 
follow-up reports would include an attestation by an Independent Public 
Accountant that would give the independent public accountant's opinion 
whether there is a reasonable basis for the transfer agent's assertions 
in the reports. These reports will: (1) Assist 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 with SROs on Year 
2000 industry-wide testing, implementation, and contingency planning; 
and (4) increase transfer agent awareness that they should be taking 
specific steps now to prepare for the Year 2000.
    The IRFA sets forth the statutory authority for the proposed 
temporary rule. The IRFA also discusses the effect of the proposed rule 
on transfer agents that are small entities pursuant to Rule 0-10 under 
the Exchange Act.22 For purposes of the proposed temporary 
rule, a small entity is a 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) 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 (3) is not affiliated with any person 
(other than a natural person) that is not a small business or small 
organization under Rule 0-10. Approximately 413 registered transfer 
agents qualify as ``small entities'' for purposes of the RFA and would 
be subject to the requirements of proposed Rule 17Ad-18.23
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    \22\ 17 CFR 240.0-10.
    \23\ See infra Section VII, the Commission estimates that, on 
average, small transfer agents will incur 50 hours of employee time 
to complete the initial report.
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    The IRFA states that the proposed temporary rule would impose new 
reporting requirements because certain transfer agents would have to 
file three reports regarding the transfer agents' readiness for the 
Year 2000 with the Commission. 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 no rules 
duplicate, overlap, or conflict with the proposed temporary rule.
    The analysis discusses the various alternatives which were 
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.
    Under the proposal, taking into account the burden that would be 
imposed on small transfer agents, the Commission is proposing that non-
bank transfer agents that meet the definition of a small entity be 
required to submit only the Initial Report, which does not require an 
Attestation from an Independent Public Accountant. Bank transfer 
agents, regardless of size, would not be required to submit any 
reports. Therefore, small entities would be subject to a minimal amount 
of compliance cost under the proposal. Accordingly, 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 
Exchange Act to exempt small entities from the proposed temporary rule 
any further or to use performance standards to specify different 
requirements for small entities.
    The Commission encourages the submission of written comments with 
respect to any aspect of the IRFA. Those comments should 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 Jeffrey S. 
Mooney, 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) 942-4174.

VII. Paperwork Reduction Act

    Proposed temporary Rule 17Ad-18 contains ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995,24 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 Rule 17Ad-18.''
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    \24\ 44 U.S.C. Sec. 3501 et seq.
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    The proposed temporary rule would require information collection 
because non-bank transfer agents would have to file either one or three 
reports with the Commission, depending primarily on their size. The 
initial report would need to be filed no later than 45 days after the 
Commission adopts this rule. Transfer agents that do not qualify for an 
exemption under existing Rule 17Ad-13(d) would file follow-up reports 
with an Independent Public Accountant's attestation and subsequent 
accountant's reports on or before August 31, 1998, and August 31, 1999, 
as of June 30, 1998, and June 30, 1999, respectively. Generally, Rule 
17Ad-13(d) exempts small transfer agents, issuer transfer agents, and 
bank transfer agents. Therefore, bank transfer agents would not be 
required to submit the initial report or the follow-up reports. These 
reports are necessary for the Commission to monitor the steps transfer 
agents are taking to manage and avoid Year 2000 Problems. While the 
amount of time needed to comply with the temporary rule will vary from 
a minimum of 8 hours to a maximum of 150 hours, the Commission 
estimates that, on average, each respondent will devote approximately 
50 employee hours of preparation time to each report and 30 employees 
hours of discussion time with the Independent Public Accountant who 
prepares the Attestation. Additionally, a transfer agent would have to 
pay additional fees for preparation of the Attestation. While the 
Commission estimates that the amount of additional accounting fees to 
comply with the rule amendment would

[[Page 12067]]

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 each Attestation. Although, there are 
approximately 1,360 transfer agents registered with the Commission, the 
Commission is the ARA for approximately 740 of them. All of these non-
bank transfer agents would be required to file the initial report 
described in the proposed temporary rule. However, only non-bank 
transfer agents that are not (1) Small transfer agents or (2) issuer 
transfer agents would be required to file the follow-up reports. 
Therefore, the Commission estimates that approximately 330 transfer 
agents would be required to submit the follow-up reports.
    As proposed, all reports filed under the temporary rule 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.
    Pursuant to 44 U.S.C. Sec. 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. S7-8-
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), 17A(d), and 23(a) thereof, 15 U.S.C. 78q(a), 78q-1(d) 
and 78w(a), the Commission proposes to adopt Sec. 240.17Ad-18 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 general authority citation for Part 240 is revised to read 
in part as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 78k-1, 
78l, 78m, 78n, 78o, 78p, 78q, 78s, 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. 240.17Ad-18 to read as follows:


Sec. 240.17Ad-18  Year 2000 Reports to be made by certain transfer 
agents.

    (a) Each registered transfer agent, except for those transfer 
agents whose appropriate regulatory agency is the Comptroller of the 
Currency, the Board of Governors of the Federal Reserve System, or the 
Federal Deposit Insurance Corporation, must file a report with the 
Commission describing the transfer agent's preparation for Year 2000 
Problems. The report shall address each topic in paragraph (c) of this 
section. The report shall be filed no later than 45 days after the 
Commission adopts this section.
    (b) Each registered transfer agent, except for those transfer 
agents exempt under paragraph (d) of Sec. 240.17Ad-13, must file with 
the Commission follow-up reports on the transfer agent's preparations 
for Year 2000. The reports must be filed on or before August 31, 1998, 
and August 31, 1999, as of June 30, 1998, and June 30, 1999, 
respectively.
    (c) The reports prepared pursuant to paragraphs (a) and (b) of this 
section shall include a discussion of the following: A transfer agent 
should include any additional material information in both reports 
concerning its management of Year 2000 Problems that will help the 
Commission assess the transfer agent's readiness for the Year 2000.
    (1) Whether the board of directors (or similar body) of the 
transfer agent has approved and funded plans for preparing and testing 
the transfer agent's computer systems for potential computer problems 
caused by Year 2000 Problems;
    (2) Whether the transfer agent's plans exist in writing and address 
all of the transfer agent's major computer systems wherever located 
throughout the world;
    (3) Whether the transfer agent 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 transfer agent'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 transfer agent must take to avoid 
Year 2000 Problems;
    (iii) Implementation of the steps needed to avoid Year 2000 
Problems;
    (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 transfer agents, 
other financial institutions, and customers), 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;
    (5) Whether the transfer agent has written contingency plans in the 
event that, after December 31, 1999, it has computer problems caused by 
Year 2000 Problems; and
    (6) Identify what levels of the transfer agent'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 transfer 
agent shall identify a contact person regarding Year 2000 matters.
    (d) Each report prepared pursuant to paragraph (b) of this section 
shall also

[[Page 12068]]

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 transfer agent's assertions in response to the 
following:
    (1) Whether the transfer agent has developed written plans for 
preparing and testing the transfer agent computer systems for potential 
Year 2000 Problems;
    (2) Whether the board of directors (or similar body) of the 
transfer agent has approved the plans described in paragraph (d)(1) of 
this section;
    (3) Whether a member of the transfer agent's board of directors (or 
similar body) is responsible for the execution of the plans described 
in paragraph (d)(1) of this section;
    (4) Whether the transfer agent's plans described in paragraph 
(d)(1) of this section address the transfer agent'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.)
    (5) Whether the transfer agent has assigned existing employees, 
hired new employees, or engaged third parties to implement the transfer 
agent's plans described in paragraph (d)(1) of this section;
    (6) Whether the transfer agent or third party has conducted 
internal testing, whether such testing is on schedule in accordance 
with the plan described in paragraph (d)(1) of this section, and 
whether the transfer agent has determined as a result of the internal 
testing that the transfer agent has modified its software to correct 
Year 2000 Problems; and
    (7) Whether the transfer agent has conducted external or industry-
wide testing, whether such testing is on schedule in accordance with 
the plan described in paragraph (d)(1) of this section, and whether the 
transfer agent has determined as a result of the external or industry-
wide testing that the transfer agent has modified its software to 
correct Year 2000 Problems.
    (e) The transfer agent shall file two copies of each report 
prepared pursuant to paragraphs (a) and (b) of this section with the 
Commission's principal office in Washington, D.C. The reports required 
by paragraphs (a) and (b) will be publicly available.
    (f) For purposes of this section, the term Year 2000 Problem shall 
include any erroneous result caused by:
    (1) Computer software incorrectly reading the date ``01/01/00'' as 
being the year 1900 or another incorrect year;
    (2) Computer software incorrectly identifying a date in the Year 
1999 or any year thereafter;
    (3) Computer software failing to detect that the Year 2000 is a 
leap year; or
    (4) Any other computer software error that is directly or 
indirectly caused by paragraph (f)(1), (2), or (3) of this section.

    Dated: March 5, 1998.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-6341 Filed 3-11-98; 8:45 am]
BILLING CODE 8010-01-P