[Federal Register Volume 63, Number 212 (Tuesday, November 3, 1998)]
[Rules and Regulations]
[Pages 59208-59213]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29343]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-40608; FR-53; File No. S7-7-98]
RIN 3235-AH36


Reports To Be Made by Certain Brokers and Dealers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'') is 
amending Rule 17a-5 under the Securities Exchange Act of 1934 
(``Exchange Act'') to require certain broker-dealers to file with the 
Commission and their designated examining authorities (``DEA'') a 
report prepared by an independent public accountant regarding the 
broker-dealer's process for preparing for the Year 2000. The report 
will provide valuable information on the existence and sufficiency of a 
broker-dealer's process for addressing Year 2000 Problems; provide an 
independent verification of the accuracy of the information contained 
in the broker-dealer's second Form BD-Y2K; aid the Commission in 
obtaining a more complete understanding of the industry's overall Year 
2000 preparations; and identify firm-specific and industry-wide 
problems. The independent public accountant's report will be available 
to the public.

EFFECTIVE DATE: January 4, 1999.

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

    The Commission views the Year 2000 Problem \1\ as a serious issue 
that if not

[[Page 59209]]

addressed could disrupt the proper functioning of many of the world's 
computer systems. At midnight on December 31, 1999, unless the proper 
modifications have been made, computer systems may start to produce 
erroneous results because, among other things, the systems may 
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. Due to the serious nature of this issue, 
both the broker-dealer industry and the Commission are working hard to 
address the industry's Year 2000 Problems.
---------------------------------------------------------------------------

    \1\ The Commission has defined the term ``Year 2000 Problem'' to 
include any erroneous result caused by any computer software: (1) 
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.
---------------------------------------------------------------------------

    As part of its ongoing efforts relating to the Year 2000, on July 
2, 1998, the Commission amended Rule 17a-5 \2\ to require certain 
broker-dealers to file reports with the Commission and their DEAs 
regarding their efforts to address Year 2000 problems.\3\ The 
amendments to Rule 17a-5 require each broker-dealer 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 with a minimum net capital requirement of $100,000 or 
greater is also required to file Part II of Form BD-Y2K, which requires 
a narrative discussion of its efforts to address Year 2000 Problems. 
Form BD-Y2K is required to be filed no later than August 31, 1998, 
reflecting the broker-dealer's Year 2000 efforts as of July 15, 1998, 
and no later than April 30, 1999, reflecting the broker-dealer's Year 
2000 efforts as of March 15, 1999.
---------------------------------------------------------------------------

    \2\ 17 CFR 240.17a-5.
    \3\ Release No. 34-40162 (July 2, 1998), 63 FR 37668 (July 13, 
1998) (``Adopting Release'').
---------------------------------------------------------------------------

    In the Adopting Release, the Commission deferred consideration of 
its original proposal to require certain assertions by a broker-dealer 
regarding its process for addressing Year 2000 Problems be attested to 
or verified in some manner by an independent public accountant. In a 
Companion Release, also issued on July 2, 1998, the Commission 
solicited additional comments on the appropriate independent public 
accountant review, including comments on the feasibility and 
desirability of an agreed-upon procedures engagement in which an 
independent public accountant would follow certain established 
procedures as an independent check on a broker-dealer's assertions on 
the Form BD-Y2K.\4\
---------------------------------------------------------------------------

    \4\ Release No. 34-40164 (July 2, 1998), 63 FR 37709 (July 13, 
1998) (``Companion Release'').
---------------------------------------------------------------------------

    The Commission received 27 comment letters regarding either the 
appropriate scope of the independent public accountant review or the 
feasibility and desirability of an agreed-upon procedures 
engagement.\5\ Twenty-two of the letters responded to the proposed 
attestation requirement with the majority of the commenters expressing 
concern about the scope and workability of an attestation review.\6\ 
Five letters were received in response to the Commission's second 
solicitation of comments on the appropriate scope of the independent 
public accountant's review. The letters received in response to the 
second solicitation were generally opposed to any additional reporting 
or regulatory requirements. However, a number of the commenters 
indicated that an agreed-upon procedures approach mitigated some of 
their concerns regarding the proposed attestation review requirement. 
After considering the comments received, the Commission is adopting the 
proposed amendments regarding engagement of an independent public 
accountant with the changes discussed below.
---------------------------------------------------------------------------

    \5\ All comment letters are available in File No. S7-7-98 at the 
Commission's Public Reference Room, 450 Fifth Street, NW, 
Washington, DC 20549. The comment period closed on April 27, 1998. 
See also Release No. 34-39858 (extending the comment period from 
April 13, 1998 to April 27, 1998) See also Release No. 34-40164 
(reopening the comment period on the appropriate scope of 
independent public accountant review until August 12, 1998).
    \6\ Release Nos. 34-39724; IC-23059; IA-1704 (March 5, 1998), 63 
FR 12056 (March 12, 1998) (``Proposing Relase'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Amendments

    Under the Commission's original proposal, a broker-dealer with a 
minimum net capital requirement of $100,000 or greater would have been 
required to make certain specific assertions as part of its second Year 
2000 report regarding its efforts to address Year 2000 Problems.\7\ In 
addition to making the assertions, the broker-dealer would have been 
required to engage an independent public accountant to attest to 
whether there was a reasonable basis for these assertions.
---------------------------------------------------------------------------

    \7\ Each broker-dealer would have been required to assert: (1) 
Whether it has developed written plans for preparing and testing its 
computer systems for potential Year 2000 Problems; (2) 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' (3) whether 
its Year 2000 remediation plans address all domestic and 
international operations, including the activities of its 
subsidiaries, affiliates, and divisions; (4) whether it has assigned 
existing employees, hired new employees, or engaged third parties to 
execute its Year 2000 remediation plans; and (5) 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 200 problems. Many 
of the issues covered by the assertions were adopted as questions in 
Part II of Form BD-Y2K.
---------------------------------------------------------------------------

III. Discussion of Final Rule Amendments

A. Independent Public Accountant Review

    The American Institute of Certified Public Accountants (``AICPA''), 
among other commenters, stated that the proposed attestation report 
would be difficult for independent public accountants to provide. 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. Currently, there are no uniform, well established criteria 
related to Year 2000 remediation efforts. The lack of established 
criteria would likely result in significant variation in the 
examination procedures performed by independent public accountants and 
thus would reduce the usefulness of the attestation reports. In 
addition, the AICPA expressed concern that the purpose and conclusions 
of the attestation report could be misunderstood. The AICPA was 
primarily concerned that uninformed users of the attestation reports 
would place undue reliance on them. Several other commenters also 
expressed concern that independent public accountants probably do not 
have the expertise required to properly evaluate the broker-dealer's 
Year 2000 efforts and that requiring an attestation engagement would be 
burdensome.
    The Commission believes that requiring a broker-dealer to file a 
report prepared by an independent public accountant will benefit the 
Commission's and the securities industry's efforts to prepare for the 
Year 2000 by improving the accuracy of the broker-dealer's second Year 
2000 report and by encouraging the broker-dealer to proceed 
expeditiously with its efforts to address Year 2000 Problems. The 
information will help the Commission to have a more complete 
understanding of the industry's overall Year 2000 preparations and to 
identify firm-specific and industry-wide problems. Information in the 
reports will also help

[[Page 59210]]

the Commission focus its Year 2000-related efforts for 1999 on 
particular industry segments or firms that appear to pose the greatest 
risk of not being ready for the Year 2000. In sum, the rule amendments 
will enable the Commission to take a more active role in reducing the 
Year 2000 risk to the securities industry.
    However, the Commission has modified the scope of the independent 
public accountant review. The rule adopted today requires each broker-
dealer that is required to file Part II of Form BD-Y2K by April 30, 
1999, to include with that filing a report prepared by an independent 
public accountant regarding the broker-dealer's process for addressing 
Year 2000 Problems. The independent public accountant's report must be 
prepared in accordance with standards that have been reviewed by the 
Commission and that have been issued by a national organization that is 
responsible for promulgating authoritative accounting and auditing 
standards. Such standards do not have to involve an attestation 
engagement, as the Commission originally proposed.
    In conjunction with adopting the independent public accountant 
reporting requirement, the Commission has reviewed the procedures 
included in the Statement of Position 98-8, issued by the Auditing 
Standards Board.\8\ An independent public accountant's report prepared 
in accordance with SOP 98-8 would satisfy the independent public 
accountant reporting requirements adopted by the Commission today.\9\ 
Statement of Position 98-8 is discussed in more detail in part III. B 
below.
---------------------------------------------------------------------------

    \8\ The AICPA's Auditing Standards Board is responsible for the 
promulgation of auditing and attestation standards and procedures to 
be observed by members of the AICPA in accordance with the 
Institute's Bylaws and Code of Professional Conduct.
    \9\ Parties wishing to have the Commission review standards for 
the preparation of the independent public accountant's report should 
submit the standards to the Commission's Secretary at its principal 
office in Washington, DC. In reviewing SOP 98-8, the Commission 
considered whether it required the independent public accountant to 
consider the broker-dealer's plan for addressing Year 2000 problems, 
its efforts to repair affected computer systems, tests of completed 
repairs, and its efforts to monitor the progress of the broker-
dealer's Year 2000 project.
---------------------------------------------------------------------------

B. Statement of Position 98-8

    The AICPA, along with other commenters, suggested that an ``agreed-
upon procedures'' engagement, instead of an attestation engagement, 
would more effectively meet the Commission's objectives. 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 increase the consistency of the reports received by the Commission. 
In addition, other commenters indicated that an agreed-upon procedures 
engagement would be less time-consuming, less costly, and less 
disruptive operationally than the attestation approach.
    SOP 98-8 addresses commenters' concerns regarding an attestation 
engagement by providing independent public accountants a list of 
procedures to follow when preparing its report on the broker-dealer's 
process for addressing Year 2000 Problems. More specifically, these 
procedures require an independent public accountant to consider the 
broker-dealer's plan for addressing Year 2000 Problems, its efforts to 
repair its affected computer systems, its tests of completed repairs, 
and its efforts to monitor the progress of the Year 2000 project. In 
addition, through SOP 98-8 the independent public accountant is 
provided a reporting format to use when reporting the results of 
executing the specified procedures. Finally, SOP 98-8 provides the 
independent public accountant with guidance on how to execute the 
procedures and how to report any exceptions identified.
    The Commission believes that the procedures and reporting format 
contained in SOP 98-8 and the execution of the procedures by an 
independent public accountant (i) will provide valuable information on 
the existence and sufficiency of a broker-dealer's process for 
addressing Year 2000 Problems; (ii) will provide an independent 
verification of the accuracy of the information contained in the 
broker-dealer's second Form BD-Y2K; (iii) will aid the Commission in 
obtaining a more complete understanding of the industry's overall Year 
2000 preparations; and (iv) will identify firm-specific and industry-
wide problems.

C. Public Availability

    The proposed rules would have made the independent public 
accountant's attestation report available to the public. The AICPA, in 
addition to other commenters, expressed concerns that some users of 
these reports could place undue reliance on the reports and that the 
technical nature of the reports could confuse investors. However, the 
Commission believes that the public's interest is best served by 
requiring full and open disclosure. Allowing the public, particularly 
other broker-dealers and counterparties, to have access to the 
independent public accountant's report will assist interested persons 
in determining whether a broker-dealer has a process for addressing 
Year 2000 Problems. For example, after reviewing an accountant's report 
regarding a counterparty, another broker-dealer might request 
additional information or assurances if the counterparty does not 
appear to be taking the steps necessary to be Year 2000 compliant. In 
the absence of such assurances, the other broker-dealer could determine 
whether it wishes to continue its dealings with that counterparty.
    The rule amendments adopted by the Commission today provide that 
the public will have access to the independent public accountant's 
report.\10\ In addition, the Commission or its staff, after reviewing 
Forms BD-Y2K, accompanying accountant's reports, and other pertinent 
information, may make findings or conclusions or compile information 
from filings by individual firms and make firm-specific, aggregate, or 
derivative information available to the public, Congress, or other 
members of the securities industry. The Commission notes, however, that 
the accountant's report has a specific regulatory purpose and is not 
intended to express an opinion or finding regarding whether a broker-
dealer is Y2K compliant. The following excerpts from the sample 
``Independent Accountant's Report on Applying Agreed-Upon Procedures'' 
attached to the AICPA's SOP makes clear the limitations of the 
accountant's role and report:

    \10\ An agreed-upon procedures engagement conducted in 
accordance with SOP 98-8 must also comply with SSAE No. 4, Agreed-
Upon Procedures Engagements. See AICPA, Professional Standards, Vol. 
1, AT Sec. 600. SSAE No. 4 states, among other things, that a report 
on the performance of agreed-upon procedures should restrict the use 
of the report to parties specifically identified as users within the 
report. However, SSAE No. 4 does not limit who may have access to 
the report.
---------------------------------------------------------------------------

    We have performed the procedures enumerated below as specified 
in the American Institute of Certified Public Accountants' (AICPA's) 
Statement of Position 98-8, which were agreed to by ABC Broker-
Dealer (hereinafter referred to as the entity) to assist the users 
in evaluating the entity's assertions in Parts I and II of Form BD-
Y2K (Form BD-Y2K) as of March 15, 1999, prepared and filed pursuant 
to the requirements of SEC rule 17a-5. Pursuant to Securities and 
Exchange Commission (SEC) Release No. 34-40608 these agreed-upon 
procedures will satisfy the SEC's regulatory requirements. This 
report is issued solely for these regulatory purposes.

[[Page 59211]]

    This agreed-upon procedures engagement was performed in 
accordance with standards established by the AICPA. The sufficiency 
of these procedures is solely the responsibility of the specified 
users of the report. Consequently, we make no representation 
regarding the sufficiency of the procedures described below either 
for the purpose for which this report has been requested or for any 
other purpose.
    We were not engaged to, and did not, perform an examination, the 
objective of which would be the expression of an opinion on the 
entity's assertions included in Form BD-Y2K referred to in the 
introductory paragraph of this report. Accordingly, we do not 
express such an opinion. Had we performed additional procedures, 
other matters might have come to our attention that would have been 
reported to you. Our procedures also do not provide assurance that 
the entity is or will be year 2000 ready, that its year 2000 project 
plans will be successful in whole or in part, or that parties with 
which the entity does business will be year 2000 ready.
    This report is intended solely for the information and use of 
the Board of Directors and Management of ABC Broker-Dealer, the 
Securities and Exchange Commission, and ABC Broker-Dealer's 
designated self-regulatory organization and is not intended to be 
and should not be used by anyone other than these specified parties.

D. Timing

    The amendments to Rule 17a-5 adopted by the Commission in July 1998 
require a broker-dealer to file its second Year 2000 report with the 
Commission and the broker-dealer's DEA by April 30, 1999, without 
regard to when its fiscal year ended.\11\ The rule adopted today also 
requires the broker-dealer to file the report prepared by the 
independent public accountant by April 30, 1999, reflecting the broker-
dealer's Year 2000 efforts as of March 15, 1999.
---------------------------------------------------------------------------

    \11\ The second Year 2000 report is required to reflect a 
broker-dealer's Year 2000 efforts as of March 15, 1999. See Adopting 
Release, 63 FR 37709 (July 13, 1998).
---------------------------------------------------------------------------

IV. Costs and Benefits

    In the Proposing Release, the Commission requested that commenters 
provide analysis and data supporting the costs and benefits of the 
proposed amendments. In a second release soliciting additional comments 
on the appropriate scope of the independent public accountant's review, 
the Commission solicited comments on the desirability and feasibility 
of an agreed-upon procedures approach. Several commenters indicated 
that the Commission's cost estimates with regard to the attestation 
report were too low. However, no commenters provided detailed 
information or data as to the costs of the proposed amendments.
    As discussed more fully in part III.A. above, the Commission is 
adopting a requirement that certain broker-dealers file with their 
second Form BD-Y2K a report prepared by an independent public 
accountant regarding the broker-dealer's process for addressing Year 
2000 Problems. In addition, the Commission has determined that an 
independent public accountant's report prepared in accordance with SOP 
98-8 will meet its regulatory objectives. It is important to note that 
the independent public accountant review adopted by the Commission 
today is significantly less in scope than the proposed attestation 
review. As a result, the aggregate cost of complying with the rule 
should be less.
    In the Proposing Release, the Commission estimated that on average 
a broker-dealer would spend 20 hours working with its independent 
public accountant and that the cost of the attestation report could 
range from $5,000 to $200,000 with the average cost likely to be 
$25,000. Without providing cost figures or analysis, commenters 
indicated that these estimated costs were too low. Consequently, 
Commission staff contacted a number of accounting firms and the AICPA 
to obtain detailed data on the costs to broker-dealers of the 
independent public accountant's report. However, the parties contacted 
would not formally submit cost data.
    Therefore, despite the reduced scope of the independent public 
accountant review adopted by the Commission today and based on the 
comments received and the efforts of its staff, the Commission is 
retaining its original cost estimates. The Commission estimates that 
the total cost to the industry of broker-dealers obtaining and filing 
the independent public accountant's reports is $66,150,000. This is 
based on 2,450 respondents spending on average 20 hours at $100 per 
hour working with their accountants and spending on average $25,000 in 
additional accounting fees. It is important to note that this is a 
total cost estimate and not an annual cost. Broker-dealers will only be 
required to file one independent public accountant's report. The 
Commission further notes that by limiting the requirement to those 
broker-dealers who pose the greatest risk to customers and the market 
if they are not Year 2000 compliant, the Commission has not imposed 
this burden on approximately 88% of small broker-dealers. For more 
information on the amendments effect on small broker-dealers see part 
VI below.
    No commenters specifically addressed the potential benefits of the 
amendments, and the Commission has not been able to quantify those 
benefits.\12\ The Commission is aware of the significant effort the 
securities industry has put forth and the progress it has made but 
believes that significant progress still needs to be made by the 
securities industry to be ready for the Year 2000.
---------------------------------------------------------------------------

    \12\ One commenter expressed concern that the cost of obtaining 
the independent public accountant's report would outweigh its 
benefits. However, the commenter did not provide any specific 
information or analysis.
---------------------------------------------------------------------------

    As previously discussed in part III. A above, the Commission 
believes that a regulatory requirement to file an independent public 
accountant's report will improve the accuracy of the broker-dealer's 
second Year 2000 report and should encourage the broker-dealer to 
proceed expeditiously with its efforts to prepare for the Year 2000. 
The Commission will use the reported information to obtain a more 
complete understanding of the industry's overall Year 2000 preparations 
and to identify firm-specific and industry-wide problems. Information 
in the reports will help the Commission focus its Year 2000-related 
efforts for 1999 on particular industry segments or firms that appear 
to pose the greatest risk of non-compliance and will enable the 
Commission to take a more active role in reducing the Year 2000 risk to 
the securities industry. In light of the seriousness and pervasiveness 
of the Year 2000 Problem and in light of the systemic risk it presents 
to the securities industry and investors, the Commission believes the 
significant benefits that will result from the independent public 
accountant's report justify the costs.

V. Efficiency, Competition, and Capital Formation

    Section 23(a) of the Exchange Act \13\ requires the Commission, in 
adopting rules under the Exchange Act, to consider the impact any such 
rule would have on competition and to not adopt a rule that would 
impose a burden on competition not necessary or appropriate in 
furthering the purposes of the Exchange Act. Furthermore, section 3(f) 
of the Exchange Act \14\ provides that whenever the Commission is 
engaged in rulemaking and is required to consider or determine whether 
an action is necessary or appropriate in the public interest, the 
Commission also shall consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, and 
capital formation. The Commission has

[[Page 59212]]

considered the amendments to Rule 17a-5 in light of the standards cited 
in sections 3 and 23 (a)(2) of the Exchange Act. In addition, the 
Commission sought comments on the proposed amendments' effect on 
competition, efficiency, and capital formation. No commenters 
specifically addressed the issue of whether the proposed accountant's 
review would affect competition and no comments were received regarding 
the proposed amendment's effect on efficiency and capital formation.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78w (a)(2).
    \14\ 15 U.S.C. 78c.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that the proposed 
amendments should not unduly burden competition. The Commission has 
drafted the rule amendments so as to minimize their impact on 
competition. The Commission has, in adopting the independent public 
accountant's reporting requirement, differentiated between broker-
dealers based upon their size, type of business, and relative risk they 
pose to customers and the market if they are not Year 2000 compliant. 
Broker-dealers that do not meet the $100,000 minimum net capital 
reporting threshold are not required to file the accountant's 
report.\15\ The Commission believes that the proposed amendments do not 
impose any burden on competition not necessary or appropriate in 
furtherance of the Exchange Act.
---------------------------------------------------------------------------

    \15\ Generally, the type of business conducted by a broker-
dealer who is required to maintain minimum net capital of $100,000 
or greater poses a greater risk to customers and the markets if the 
broker-dealer is not Year 2000 compliant than a broker-dealer 
conducting a more limited securities business.
---------------------------------------------------------------------------

    The Commission believes that the amendments should increase the 
efficiency and effectiveness of the Commission's efforts to prepare for 
the Year 2000 by enabling the Commission to obtain a more complete 
understanding of the industry's overall Year 2000 preparations and to 
identify firm-specific and industry-wide problems. Information in the 
reports will also help the Commission focus its Year 2000-related 
efforts for 1999 on particular industry segments or firms that appear 
to pose the greatest risk of non-compliance. In addition, the 
Commission believes that the amendments do not adversely affect capital 
formation. However, failure on the part of the Commission and the 
securities industry to adequately prepare for the Year 2000 could 
adversely affect capital formation at the beginning of the next 
millennium.

VI. Summary of Final Regulatory Flexibility Analysis

    A final Regulatory Flexibility Analysis (``FRFA'') concerning the 
amendments to Rule 17a-5 has been prepared in accordance with the 
provisions of the Regulatory Flexibility Act (``RFA''), as amended by 
Public Law No. 104-121, 110 Stat. 847, 864 (1996), 5 U.S.C. 604. The 
FRFA notes that the amendments to Rule 17a-5 will require broker-
dealers to file with their second Form BD-Y2K a report prepared by an 
independent public accountant regarding the broker-dealer's process for 
addressing Year 2000 Problems.
    The Commission received no comments on the Initial Regulatory 
Flexibility Analysis (``IRFA'') prepared in connection with the 
Proposing Release, and no comment letters specifically addressed the 
IRFA. However, certain commenters expressed concern about the estimated 
costs associated with obtaining the independent public accountant's 
attestation.
    As discussed more fully in the FRFA, the rule will affect small 
entities. When used with reference to a broker or dealer, the 
Commission has defined the term ``small entity'' to mean a broker or 
dealer (``small broker-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 less than $500,000 on the last 
business day of the preceding fiscal year (or in the time that it has 
been in business, if shorter); and (2) is not affiliated with any 
person (other than a natural person) that is not a small business or 
small organization as defined in this release.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 240.0-10(c). The Commission recently amended its 
small business definition for broker-dealers. See 63 FR 35508 (June 
30, 1998). Because the IRFA for this proposal relied on the old 
definition (which is broader), the FRFA also relies on the old 
definition.
---------------------------------------------------------------------------

    The Commission has drafted the rule amendments so as to minimize 
their impact on small broker-dealers while enhancing investor 
protection and minimizing any impact on competition by excluding those 
broker-dealers who do not pose the greatest risk to customers and the 
market. The rule amendments require broker-dealers with a minimum net 
capital requirement of $100,000 or greater to file a report prepared by 
an independent public accountant regarding the broker-dealer's process 
for addressing Year 2000 Problems. The type of business conducted by a 
broker-dealer who is required to maintain minimum net capital of 
$100,000 or greater generally poses a greater risk to customers and the 
markets if the broker-dealer is not Year 2000 compliant than a broker-
dealer conducting a more limited securities business.
    Based on FOCUS data for the fourth quarter of 1997, the latest 
information available, the Commission estimates that there are 
approximately 5,200 small broker-dealers. Of these 5,200 small broker-
dealers, approximately 600 are affected by the amendments to Rule 17a-
5. As noted in the cost-benefit section above, the Commission estimates 
that each of the affected broker-dealers will spend approximately 20 
hours providing information to and assisting their independent public 
accountant review the broker-dealers process for addressing Year 2000 
Problems. In addition, each affected small broker-dealer will incur 
$25,000 in additional accounting fees.
    Thus, by limiting the requirement to file an independent public 
accountant's report to those broker-dealers who have a minimum net 
capital requirement of $100,000 or greater, the Commission has imposed 
no burden on approximately 4,600 (88%) small broker-dealers.
    The FRFA notes that it would be difficult to further simplify, 
consolidate, or adjust compliance standards for small broker-dealers 
and be able to effectively monitor the securities industry's efforts to 
prepare for the Year 2000. The Commission believes that exempting those 
broker-dealers who do not pose the greatest risk to customers and the 
markets if they are not Year 2000 compliant strikes the appropriate 
balance between the need to protect investors and the need to minimize 
the impact on small broker-dealers. The Commission also considered the 
use of performance rather than design standards. However, the 
Commission concluded that it would be inconsistent with the purpose of 
the rule to use performance standards to specify different requirements 
for small entities.
    A copy of the FRFA may be obtained by contacting Christopher M. 
Salter, Staff Attorney, U.S. Securities and Exchange Commission, Mail 
Stop 10-1, 450 Fifth Street, NW., Washington, DC 20549.

VII. Paperwork Reduction Act

    The amendments to Rule 17a-5 adopted by the Commission today also 
amended the following collection of information within the meaning of 
the Paperwork Reduction Act of 1995

[[Page 59213]]

(``PRA''): \17\ Reports to be Made by Certain Brokers and Dealers; Rule 
17a-5(e)(5)--Year 2000 Problem.\18\ Accordingly, the amendment to the 
collection of information requirement regarding the accountant's report 
was submitted to the Office of Management and Budget (``OMB'') for 
review and was approved by OMB which assigned the following control 
number 3235-0511.
---------------------------------------------------------------------------

    \17\ 44 U.S.C. 3501 et seq.
    \18\ The Office of Management and Budget (``OMB'') control 
number is 3235/0511.
---------------------------------------------------------------------------

    The Proposing Release solicited comments on the proposed collection 
of information. No comments were received that specifically addressed 
the PRA submission. However, as discussed in sections III. and IV. 
above, the Commission received suggestions that would improve the 
reporting requirement. Based upon these suggestions, the collection of 
information has been adjusted as described in section III. above and is 
in accordance with Section 3507 of the PRA.\19\ These adjustments 
include reducing the scope of accountant's review to increase the 
consistency, accuracy and comparability of the information collected. 
In addition, the adjustments will reduce the time required to 
summarize, track, analyze, and report the information received.
---------------------------------------------------------------------------

    \19\ 44 U.S.C. 3507
---------------------------------------------------------------------------

    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the agency displays a 
valid OMB control number. Broker-dealers are required to comply with 
the collection of information pursuant to the amendments to Rule 17a-5 
and the information is necessary to provide the Commission with a 
better understanding of the security industry's readiness for the Year 
2000. The information collected pursuant to the amendments to Rule 17a-
5 will be public.
    As previously discussed, the Commission has reduced the scope of 
the independent public accountant's review. However, after carefully 
considering the comments received, the Commission is retaining its 
original estimate of the burden hours associated with obtaining the 
independent public accountant's report. Thus, the Commission estimates 
that under the final amendments, a broker-dealer will, on average, 
spend 20 hours obtaining the independent public accountant's report. 
This is in addition to the two hours a broker-dealer will spend 
preparing Part I of Form BD-Y2K and for those broker-dealers with a 
minimum net capital requirement of $100,000 or greater, the 35 hours 
they will spend preparing Part II of Form BD-Y2K.
    The total annualized burden to the securities industry is estimated 
to be 146,750 hours. This is based on approximately 6,000 respondents 
spending on average two hours completing Part I of Form BD-Y2K; 
approximately 2,450 respondents spending on average 35 hours preparing 
Part II of Form BD-Y2K and an additional 20 hours working with their 
independent public accountant on the independent public accountant's 
report.

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 is adopting amendments to Sec. 240.17a-5 of Title 17 of the 
Code of Federal Regulations in the manner set forth below.

List of Subjects in 17 CFR Part 240 and 249

    Broker-dealers, Reporting and recordkeeping requirements, 
Securities.

Text of Final Rule

    In accordance with the foregoing, Title 17, chapter II, part 240 of 
the Code of Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 
80b-11, unless otherwise noted.
* * * * *
    2. By amending Sec. 240.17a-5 by adding paragraph (e)(5)(vi) to 
read as follows:


Sec. 240.17a-5  Reports to be made by certain brokers and dealers.

* * * * *
    (e) Nature and form of reports. * * *
    (5) * * *
    (vi) No later than April 30, 1999, every broker or dealer required 
to file Part II of Form BD-Y2K (Sec. 249.618 of this chapter) pursuant 
to paragraph (e)(5)(iii)(B) of this section and required to file 
audited financial statements pursuant to paragraph (d) of this section 
shall file with its Form BD-Y2K an original and two copies of a report 
prepared by an independent public accountant regarding the broker's or 
dealer's process, as of March 15, 1999, for addressing Year 2000 
Problems with the Commission's principal office in Washington, DC and 
one copy of the accountant's report with the designated examining 
authority of the broker or dealer. The independent public accountant's 
report shall be prepared in accordance with standards that have been 
reviewed by the Commission and that have been issued by a national 
organization that is responsible for promulgating authoritative 
accounting and auditing standards.
* * * * *
    Dated: October 28, 1998.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29343 Filed 11-2-98; 8:45 am]
BILLING CODE 8010-01-U