[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: [email protected]. 
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