[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]
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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.
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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.
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\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.
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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.
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\2\ 17 CFR 240.17a-5.
\3\ Release No. 34-40162 (July 2, 1998), 63 FR 37668 (July 13,
1998) (``Adopting Release'').
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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\
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\4\ Release No. 34-40164 (July 2, 1998), 63 FR 37709 (July 13,
1998) (``Companion Release'').
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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.
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\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'').
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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.
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\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.
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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.
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\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.
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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.
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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.
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\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).
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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.
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\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.
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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.
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\13\ 15 U.S.C. 78w (a)(2).
\14\ 15 U.S.C. 78c.
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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.
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\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.
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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\
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\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.
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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.
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\17\ 44 U.S.C. 3501 et seq.
\18\ The Office of Management and Budget (``OMB'') control
number is 3235/0511.
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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.
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\19\ 44 U.S.C. 3507
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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