[Federal Register Volume 63, Number 133 (Monday, July 13, 1998)]
[Proposed Rules]
[Pages 37709-37710]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18294]



  Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / 
Proposed Rules  

[[Page 37709]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-40164; 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; request for additional comments.

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SUMMARY: The Securities and Exchange Commission (''Commission'') is 
reopening the comment period with respect to its proposal that would 
have required broker-dealers to engage an independent public accountant 
to attest to specific assertions included in the broker-dealer's report 
on Year 2000 compliance. The attestation by independent public 
accountants was one amendment to Rule 17a-5 under the Securities 
Exchange Act of 1934 proposed by the Commission in Release No. 34-39724 
which was published in the Federal Register on March 12, 1998 (63 FR 
12056).

DATES: Comments should be received on or before August 12, 1998.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission (``Commission''), 
450 Fifth Street, NW, Washington, DC 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, NW, Washington, DC 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, 202/942-0131; Thomas K. McGowan, Assistant Director, 202/942-
4886; 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, NW, Mail Stop 10-
1, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    At midnight on December 31, 1999, unless the proper modifications 
have been made, the program logic in many 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.
    The Commission views the Year 2000 problem as an extremely serious 
issue. A failure to assess properly the extent of the problem, 
remediate systems that are not Year 2000 compliant, and then test those 
systems could endanger the nation's capital markets and place at risk 
the assets of millions of investors. In light of this, both the broker-
dealer industry and the Commission are working hard to address the 
industry's Year 2000 Problems.\1\
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    \1\ The Proposing Release defined the term ``Year 2000 Problem'' 
to include any erroneous result caused by any computer software (i) 
incorrectly reading the date ``01/01/00'' or any year thereafter; 
(ii) incorrectly identifying a date in the year 1999 or any year 
thereafter; (iii) failing to detect that the Year 2000 is a leap 
year, and (iv) any other computer error that is directly or 
indirectly related to (i), (ii), or (iii) above.
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    In a companion release also issued today, the Commission is 
adopting amendments to Rule 17a-5 \2\ under the Securities Exchange Act 
\3\ that require certain broker-dealers to file reports with the 
Commission and their Designated Examining Authority (``DEA'') regarding 
Year 2000 compliance.\4\
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    \2\ 17 CFR 240.17a-5.
    \3\ 15 U.S.C 78a et seq.
    \4\ Release No. 34-40162, (July 2, 1998) (``Adopting Release'').
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II. Year 2000 Reporting Requirements

    The amendments to Rule 17a-5 included in the Adopting Release 
require broker-dealers with a minimum net capital requirement of $5,000 
or greater to file the new Form BD-Y2K. Part I of Form BD-Y2K is a 
check-the-box Year 2000 questionnaire. Each broker-dealer that is 
required to maintain net capital of $100,000 or greater will also be 
required to file Part II of Form BD-Y2K, which requires a narrative 
discussion of its efforts to address Year 2000 Problems.
    Generally, Form BD-Y2K requires each broker-dealer to discuss the 
steps it has taken to address Year 2000 Problems. Each broker-dealer, 
among other things, is required to (i) indicate whether its board of 
directors, or similar body, has approved and funded written Year 2000 
remediation plans that address all mission critical computer systems; 
(ii) describe its Year 2000 staffing efforts; (iii) discuss its 
progress on each stage of preparation for the Year 2000; \5\ (iv) 
indicate if it has written contingency plans to deal with Year 2000 
problems that may occur; and (v) identify what levels of management are 
responsible for Year 2000 remediation efforts.\6\
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    \5\ These stages are: (i) Awareness of potential Year 2000 
Problems; (ii) assessment of what steps must be taken 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; (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); and (vi) implementation of tested software that will 
avoid Year 2000 Problems.
    \6\ The Commission refers members of the public to the Adopting 
Release for more detailed information about the reporting 
requirements and Form BD-Y2K.
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III. Independent Public Accountant Review

    The Commission originally proposed amendments to Rule 17a-5 \7\ 
that would have required each broker-dealer to have an independent 
public accountant attest to several specific assertions included in its 
second Year 2000 report, now Part II of Form BD-Y2K.\8\ In response to 
the Proposing Release, the American Institute of Certified Public 
Accountants (''AICPA'') commented that the required attestation report 
would be difficult for independent public accountants to provide.\9\ 
The AICPA said that some of the required broker-dealer assertions are 
not appropriate for accountant attestation because the assertions are 
not capable of reasonably consistent measurement against reasonable 
criteria. The AICPA stated that currently, there are no established 
criteria related to Year 2000 remediation efforts, and that the lack of

[[Page 37710]]

established criteria would likely result in significant variation in 
the examination procedures performed by independent public accountants 
and thus reduce the usefulness of the attestation reports. In addition, 
the AICPA expressed concern that the purpose and conclusions of the 
attestation report could be easily misunderstood. The AICPA was 
primarily concerned that uninformed users of the attestation reports 
would place undue reliance on them.
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    \7\ Release Nos. 34-39724; IC-23059; IA-1704, (March 5, 1998), 
63 FR 12056 (March 12, 1998) (``Proposing Release'').
    \8\ As proposed, each broker-dealer would have been required to 
assert (i) whether it has developed written plans for preparing and 
testing its computer systems for potential Year 2000 Problems; (ii) 
whether the board of directors, or similar body, has approved these 
plans, and whether a member of the broker-dealer's board of 
directors, or similar body, is responsible for executing the plans; 
(iii) whether its Year 2000 remediation plans address all domestic 
and international operations, including the activities of its 
subsidiaries, affiliates, and divisions; (iv) whether it has 
assigned existing employees, hired new employees, or engaged third 
parties to execute its Year 2000 remediation plans; and (v) whether 
it has conducted internal and external testing of its Year 2000 
solutions and whether the results of those tests indicate that the 
broker-dealer has modified its software to correct Year 2000 
Problems.
    \9\ This point was echoed by a number of other comment letters.
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    The AICPA suggested that an ``agreed-upon procedures'' engagement, 
instead of an attestation engagement, would more effectively meet the 
Commission's goals. Pursuant to such an engagement, a broker-dealer 
would engage an independent public accountant to perform and report on 
specific procedures designed to meet the Commission's objectives. This 
would eliminate the variability of examination procedures performed by 
independent public accountants and thus increase the consistency of the 
reports received by the Commission. The AICPA's letter outlined 
elements of an agreed-upon procedures report and offered to follow-up 
with the Commission staff regarding the development of specific 
procedures for a Year 2000 engagement.
    In light of the above, the Commission has deferred consideration of 
the appropriate accountant's review of Part II of the second Form BD-
Y2K that broker-dealers with a minimum net capital requirement of 
$100,000 or greater will be required to file by April 30, 1999, 
reflecting the status of the broker-dealer's Year 2000 efforts as of 
March 15, 999. Accordingly, the Commission is reopening the comment 
period to obtain additional views, including commentary on the 
feasibility and desirability of an agreed-upon procedures engagement. 
The public file (No. S7-7-98) contains the AICPA's comment letter 
received in the original comment period, the Commission's Initial 
Regulatory Flexibility Analysis, and will contain any subsequent 
letters submitted for the Commission's consideration.

    Dated: July 2, 1998.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18294 Filed 7-10-98; 8:45 am]
BILLING CODE 8010-01-P