[Federal Register Volume 64, Number 7 (Tuesday, January 12, 1999)]
[Rules and Regulations]
[Pages 1735-1757]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-654]


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DEPARTMENT OF THE TREASURY

17 CFR Part 405

RIN 1505-AA74


Office of the Assistant Secretary for Financial Markets; 
Government Securities Act Regulations: Reports and Audit

AGENCY: Office of the Assistant Secretary for Financial Markets, 
Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (``Department'' or 
``Treasury'') is publishing an amendment to the reporting requirements 
in Sec. 405.2 of the regulations issued under the Government Securities 
Act of 1986 (``GSA''), as amended.\1\ 17 CFR 405.2 of the GSA 
regulations requires entities registered with the Securities and 
Exchange Commission (``SEC'') as specialized government securities 
brokers and dealers (``registered government securities brokers and 
dealers'') under section 15C(a)(2) of the Securities Exchange Act of 
1934 (the ``Exchange Act'') \2\ to comply with the requirements of 
section 240.17a-5 of the Exchange Act (SEC Rule 17a-5). On July 13, 
1998, the SEC issued an amendment to SEC Rule 17a-5 that requires 
general purpose broker-dealers to file two reports regarding their year 
2000 (``Y2K'') readiness. The Department then published proposed Y2K 
reporting rules on October 5, 1998, that essentially parallel the SEC's 
Y2K reporting rules.\3\

    \1\ 15 U.S.C. 78o-55
    \2\ 15 U.S.C. 78o-5(a)(2).
    \3\ 63 FR 53326 (October 5, 1998).
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EFFECTIVE DATE: February 11, 1999.

ADDRESSES: This final rule is available for downloading from the Bureau 
of the Public Debt's Internet site at the following address: 
www.publicdebt.treas.gov. It is also available for public inspection 
and copying at the Treasury Department Library, FOIA Collection, Room 
5030, Main Treasury Building, 1500 Pennsylvania Avenue, NW, Washington, 
DC 20220. To visit the library, call (202) 622-0990 for an appointment.

FOR FURTHER INFORMATION CONTACT: Kerry Lanham (Acting Director) or 
Chuck Andreatta (Senior Financial Advisor), (202) 219-3632, Government 
Securities Regulations Staff, Bureau of the Public Debt, 999 E Street, 
NW, Room 315, Washington, DC 20239-0001.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 13, 1998, the SEC issued an amendment to SEC Rule 17a-5 \4\ 
that requires general purpose broker-dealers to file two reports 
regarding their year 2000 (``Y2K'') readiness.\5\ Each report is to be 
filed with the SEC and the appropriate designated examining authority.
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    \4\ 17 CFR 240.17a-5.
    \5\ Securities Exchange Act Release No. 34-40162, (July 2, 
1998), 63 FR 37668 (July 13, 1998).
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    In developing its amendment, the SEC identified six stages involved 
in preparing for the year 2000: (1) awareness of potential Y2K 
problems; (2) assessment of what steps the broker-dealer must take to 
avoid Y2K problems; (3) implementation of the steps needed to avoid Y2K 
problems; (4) internal testing of software designed to avoid Y2K 
problems; (5) integrated or industry-wide testing of software designed 
to avoid Y2K problems (including testing with other broker-dealers, 
other financial institutions, and customers); and (6) implementation of 
tested software that will avoid Y2K problems.\6\ The reports require 
broker-dealers to address these six stages of preparation.
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    \6\ Securities Exchange Act Release No. 34-39724 (March 5, 1998) 
63 FR 12057 (March 12, 1998).
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    For purposes of its amendment, the SEC identified ``year 2000 
problems'' basically as problems arising from: (1) computer software 
incorrectly reading the date ``01/01/00'' as being the year 1900 or 
another incorrect year; (2) computer software incorrectly identifying a 
date in the year 1999 or any year thereafter; (3) computer software 
failing to detect that the year 2000 is a leap year; or (4) any other 
computer software error that is directly or indirectly caused by (1), 
(2), or (3). A failure by the securities industry to prevent or 
minimize these types of errors could endanger the nation's capital 
markets and place at risk the assets of millions of investors.
    The reports will enable the SEC to monitor the steps broker-dealers 
are taking to manage and avoid Y2K problems. The reports will also: (1) 
enable the SEC staff to report to Congress in 1998 and 1999 regarding 
the industry's preparedness; (2) supplement the SEC's examination 
module for year 2000 issues; (3) help the SEC 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 
2000.7
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    \7\ Id.
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    Treasury's final Y2K rules incorporate the SEC's final rules at 
Sec. 240.17a-5(e)(5), with minor modifications. The same report (Form 
BD-Y2K, Parts I and II) required under the SEC's rules is also required 
under Treasury's rules. This report is required to be submitted to the 
SEC and to the broker-dealer's designated examining authority. In 
addition, the Department requests that a copy of the report be provided 
directly to the Government Securities Regulations Staff.

[[Page 1736]]

II. Comments Received in Response to Proposed Rules

    The Department received one comment letter in response to its 
proposed amendments, from The Bond Market Association 
(``Association'').8 The Association supports the 
Department's proposals. The Association, however, asked for 
clarification regarding the proposed exemption provided to a 
specialized government securities broker-dealer (``15C firm,'' i.e., 
registered with the SEC under Section 15C of the Exchange Act) that has 
an affiliated registered broker-dealer that files reports under the 
SEC's Y2K reporting rules. The proposed rule said that such 15C firms 
would be exempt from the Department's Y2K rules if the affiliate's 
reports encompass Y2K issues that include the 15C firm's transactions 
in, and holdings of, government securities. Specifically, the 
Association was concerned about how the SEC and Treasury would know if 
a 15C firm was relying on the exemption. The Association therefore 
recommended that Treasury consider requiring 15C firms relying on the 
exemption to write a letter to the SEC, Treasury and their designated 
examining authority stating their reliance on the exemption, the name 
of the affiliate that filed the report encompassing the information on 
government securities transactions, and the date the report was filed. 
This final rule basically adopts this recommendation.
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    \8\ Letter from Paula H. Simpkins, Vice President and Assistant 
General Counsel, The Bond Market Association, to Kerry Lanham, 
Acting Director, Government Securities Regulations Staff, dated 
November 4, 1998. The letter can be downloaded from the Bureau of 
the Public Debt's website at www.publicdebt.treas.gov. It is also 
available for inspection and copying at the Treasury Department 
Library at the address provided earlier in the rule.
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    The Association also asked for further clarification on which firms 
would qualify for this exemption. Specifically, the Association said 
that firms are concerned whether the reports already filed in August 
1998 under the SEC's Y2K reporting rules would be deemed sufficient to 
satisfy the conditions of the exemption. Such reports would be deemed 
sufficient by the Department. If the affiliated firm filed a Form BD-
Y2K prior to the August 31, 1998 SEC deadline (either Part I or both 
Parts I and II) and the report encompassed the 15C firm's government 
securities transactions and holdings, that 15C firm is exempt from the 
Department's Y2K reporting rules and will only be required to submit a 
letter as discussed above. If the 15C firm does not have such an 
affiliate that has already filed a Y2K report with the SEC, then the 
15C firm must complete Form BD-Y2K under the Department's Y2K reporting 
rules.
    In a footnote to its comment letter, The Bond Market Association 
informed the Department of its understanding that some 15C firms have 
already completed and filed their Y2K readiness reports even though 
they were not required to do so under the SEC's Y2K reporting rules. 
Any such 15C firms will be viewed by the Department as having filed 
their reports and will not have to file again. However, such firms 
should submit a letter to the SEC and their designated examining 
authority stating the date that the reports were submitted.
    Finally, the Association recommended that Treasury consider 
finalizing and publishing its final rule in the Federal Register before 
November 15, 1998. The principal concern was that it would be difficult 
to report ``as of'' a date that was prior to the publication date in 
the Federal Register. To avoid this problem, the Department is 
requiring the reports to be filed by February 28, 1999, to reflect the 
status of a firm's Y2K readiness as of January 15, 1999.

III. Additional Analysis

    At the same time that the SEC published its final Y2K reporting 
rules for general-purpose broker-dealers, it also issued a companion 
release to solicit comments on the feasibility of having an independent 
public accountant perform an ``agreed-upon procedures engagement.'' The 
proposed engagement would follow certain established procedures as an 
independent check on a broker-dealer's assertions in its second filing 
of Form BD-Y2K, which is due April 30, 1999.9 The SEC 
subsequently adopted the proposed amendment for engagement of an 
independent public accountant, with some modifications.10
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    \9\ Securities Exchange Act Release No. 34-40164, (July 2, 1998) 
63 FR 37709 (July 13, 1998).
    \10\ Securities Exchange Act Release No. 34-40608, (October 28, 
1998) 63 FR 59208 (November 3, 1998).
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    Although the Department reserves the right to require that Y2K 
reports be submitted again sometime during 1999, at this time the 
reports will be required to be filed only once, by the February 28, 
1999 deadline, with no independent accountant involvement. The 
Department would expect, however, that an independent public 
accountant's required ``material inadequacies'' letter would include a 
discussion of Y2K issues if any potential problems in this regard were 
to be found.
    Copies of Form BD-Y2K are available in the SEC's Public Reference 
Room at 450 Fifth Street, NW, Washington, DC 20549, or copies can be 
obtained from the SEC's Internet website at the following address: 
www.sec.gov.

IV. Notice Regarding Current Books and Records Requirements

    Section 404.2 of the GSA regulations requires registered government 
securities broker-dealers, with certain modifications, to comply with 
SEC Rule 17a-3. This SEC rule requires registered broker-dealers to 
make and keep current certain books and records relating to the broker-
dealer's business.11 In the preambles to its proposed and 
final rules, the SEC warned that a broker-dealer with computer systems 
that have Y2K problems may be deemed not to have accurate and current 
records and in violation of Rule 17a-3.12 The Department 
reiterates this advisory. The SEC also reminded broker-dealers that its 
Rule 17a-11 13 requires every broker-dealer to promptly 
notify the SEC of its failure to make and keep current books and 
records.14 The Department reminds registered government 
securities broker-dealers that they have this same requirement under 
Sec. 405.3 of the GSA regulations.
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    \11\ 17 CFR 240.17a-33.
    \12\ 63 FR 12056, 12059 (March 12, 1998) and 63 FR 37668 (July 
13, 1998).
    \13\ 17 CFR 240.17a-11.
    \14\ See supra note 8.
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V. Special Analyses

    This rule does not meet the criteria for a ``significant regulatory 
action'' under Executive Order 12866.
    In the preamble to the proposed rules, regarding the requirement 
under the Regulatory Flexibility Act (5 U.S.C. 601, et seq.), the 
Department certified that this amendment would not have a significant 
economic impact on a substantial number of small entities. Accordingly, 
a regulatory flexibility analysis was not prepared.
    The collection of information under this final amendment consists 
of the completion of Form BD-Y2K. This collection of information has 
been reviewed and approved by OMB and assigned control number 3235-
0511.

List of Subjects in 17 CFR Part 405

    Brokers, Government securities, Reporting and recordkeeping 
requirements.

    For the reasons set out in the preamble, 17 CFR Part 405 is amended 
as follows:

PART 405--REPORTS AND AUDIT

    1. The authority citation for Part 405 continues to read as 
follows:


[[Page 1737]]


    Authority: 15 U.S.C. 78o-5(b)(1)(B), (b)(1)(C), (b)(2), (b)(4).

    2. Section 405.2 is amended by redesignating paragraphs (a)(11) and 
(a)(12) as paragraphs (a)(15) and (a)(16), respectively, and adding new 
paragraphs (a)(11) through (a)(14) to read as follows:


Sec. 405.2  Reports to be made by registered government securities 
brokers and dealers.

    (a) * * *
    (11) Section 240.17a-5(e)(5)(ii) is modified to read as follows:
    ``(ii) No later than February 28, 1999, every registered government 
securities broker or dealer shall file Part I of Form BD-Y2K 
(Sec. 249.618 of this title) prepared as of January 15, 1999.''.
    (12) Section 240.17a-5(e)(5)(iii) is modified to read as follows:
    ``(iii)(A) No later than February 28, 1999, every registered 
government securities broker or dealer required to maintain minimum 
liquid capital pursuant to Sec. 402.2(b)(1) or (b)(2) of this title as 
of January 15, 1999, shall file Part II of Form BD-Y2K (Sec. 249.618 of 
this title). Part II of Form BD-Y2K shall address each topic in 
Sec. 240.17a-5(e)(5)(iv) as of January 15, 1999.
    ``(B) No later than April 30, 1999, every registered government 
securities broker or dealer that was not required to file Part II of 
Form BD-Y2K under paragraph (e)(12)(iii)(A) of this section but was 
required to maintain minimum liquid capital pursuant to 
Sec. 402.2(b)(1) or (b)(2) of this title at any time between January 
16, 1999, and March 15, 1999, shall file Part II of Form BD-Y2K. Part 
II of Form BD-Y2K shall address each topic in Sec. 240.17a-5(e)(5)(iv) 
as of March 15, 1999.
    ``(C) Any registered government securities broker or dealer that 
has an affiliated registered broker or dealer that files Form BD-Y2K 
subject to 17 CFR 240.17a-5(e)(5) will be exempted from paragraphs 
(e)(11) and (12) of this section, provided the affiliate's report 
encompasses the registered government securities broker's or dealer's 
transactions in, and holdings of, government securities. Any such 
registered government securities broker or dealer shall submit a letter 
stating its reliance on the exemption, the name of the affiliated 
registered broker or dealer that filed the report encompassing its 
government securities transactions and holdings, and the date the 
report was filed. The letter shall be filed with the SEC's principal 
office in Washington, D.C. and with the broker's or dealer's designated 
examining authority.''.
    (13) The report by an independent public accountant described in 
Sec. 240.17a-5(e)(5)(vi) of this title, concerning a broker's or 
dealer's process for addressing year 2000 problems, is not required.
    (14) References to Form BD-Y2K mean Form BD-Y2K in Sec. 249.618 of 
this title.
* * * * *
    Dated: December 28, 1998.
Gary Gensler,
Assistant Secretary for Financial Markets.

    Note: Form BD-Y2K does not appear in the Code of Federal 
Regulations. Form BD-Y2K is attached as Appendix A to this document 
as follows:

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[FR Doc. 99-654 Filed 1-11-99; 8:45 am]
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