[Federal Register Volume 64, Number 26 (Tuesday, February 9, 1999)]
[Notices]
[Pages 6413-6415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3029]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40982; File No. SR-CSE-99-01]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Cincinnati 
Stock Exchange, Inc., Relating to Mandatory Year 2000 Testing

January 26, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on 
January 26, 1999 the Cincinnati Stock Exchange, Incorporated (``CSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the CSE. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and to approve the proposal on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt new Rule 4.5, Mandatory Year 2000 
Testing, that would require member firms to participate in testing of 
computer systems designed to prepare for Year 2000 and to file reports 
regarding the testing with the Exchange.
    The text of the proposed rule change is below. Proposed new 
language is italicized.
* * * * *

CHAPTER IV

Books and Records

Rule 4.5  Mandatory Year 2000 Testing

    This rule will expire automatically on January 1, 2001.
    (a) Point-to-Point Testing. Each member that has an electronic 
interface with the Exchange shall participate in point-to-point testing 
with the Exchange of its computer systems designed to ascertain Year 
2000 compatibility of those computer systems, in a manner and frequency 
as prescribed by the Exchange. A member that has its electronic 
interface through a service provider need not participate in point-to-
point testing if, by a time designated by the Exchange, (i) the service 
provider conducts successful tests with the Exchange on behalf of the 
firms it serves, (ii) the member conducts successful point-on-point 
testing with the service provider, and (iii) the Exchange agrees that 
further testing is not necessary.
    (b) Industry-Wide Testing. The Exchange may require certain of its 
members to participate in industry-wide testing of computer systems for 
Year 2000 compatibility. The Exchange may require any member who will 
participate in industry-wide testing to also participate in any tests 
necessary to ensure preparedness to participate in industry-wide 
testing.
    (c) Reports. Members participating in point-to-point testing 
(whether between the firm and the Exchange, between the firm and its 
service provider, or between the firm's service provider and the 
Exchange) or industry-wide testing shall file reports with the Exchange 
concerning the required tests in the manner and frequency required by 
the Exchange. The Exchange may require reports before the testing is 
begun to ensure that the member or its service provider is prepared to 
participate in the tests.\3\
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    \3\ Technical corrections to the rule language were made during 
a telephone conversation between Robert Ackerman, Vice President 
Regulatory Services, CSE, and Joshua Kans, Attorney, Division of 
Market Regulation, Commission, January 26, 1999.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, CSE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the place specified in Item 
IV below. The CSE has prepared

[[Page 6414]]

summaries, set forth in Sections A, B, and C below, of the most 
significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    On January 1, 2000, the internal date in computers throughout the 
world will change from ``12/31/99'' to ``01/01/00.'' Absent the 
necessary changes to the computers' codes, a number of errors could 
occur in even the most routine processing as the computers may read the 
two digit ``00'' year code as 1900 instead of as 2000. This ``Year 
2000'' problem could have disastrous consequences for a number of 
businesses, including the securities industry, if businesses do not 
make the necessary changes and perform the necessary testing prior to 
the Year 2000. The constituents of the securities industry will need to 
coordinate extensive testing to ensure there are not widespread 
problems.
    The CSE, in cooperation with the SEC and other self regulatory 
organizations (``SROs''), has been working to raise awareness of the 
Year 2000 problem in the industry. The proposed rule, Rule 4.5, would 
require CSE members to participate in testing of computer systems and 
file reports with the Exchange regarding the testing, in a manner and 
frequency prescribed by the Exchange. Other SROs, including NASD 
Regulation, the New York Stock Exchange, the Chicago Board Options 
Exchange and the American Stock Exchange, already have rules to require 
mandatory Year 2000 testing by their members. The Exchange is proposing 
that the rule expire automatically on January 1, 2001.
    Proposed Rule 4.5(a) requires any firm with an electronic interface 
with the Exchange to conduct point-to-point testing with the Exchange. 
Point-to-point testing means testing between two entities, in this case 
between the member with the electronic interface and the Exchange. The 
Rule allows for exemptions if certain conditions are met by the member.
    Additionally, to ensure that the securities industry is adequately 
prepared to meet the ``Year 2000'' problem, the Securities Industry 
Association (``SIA'') has undertaken to coordinate industry wide 
testing. Testing will include, among others, exchanges, registered 
clearing corporations, data processors and broker-dealers. The first 
test is scheduled for March 6, 1999. Proposed Rule 4.5(b) will require 
certain CSE members to participate in these tests. Proposed Rule 4.5(c) 
would also require members to file reports with the CSE concerning the 
required tests in the manner and frequency required by the Exchange.
    A member that is subject to the Rule and fails to participate in 
the tests or fails to file any required reports may be subject to 
disciplinary action pursuant to Chapter VIII of the Exchange's Rules.
(2) Basis
    By helping to ensure the participation of Exchange members in 
important industry testing to prepare for Year 2000, the proposed rule 
change is consistent with Section 6(b) of the Act \4\ in general, and 
in particular will further the objectives of Section 6(b)(5),\5\ which 
requires that the rules of an exchange be designed to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CSE does not believe the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    After careful consideration, the Commission has concluded, for the 
reasons set forth below, that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder. Mandating Year 2000 testing and reporting is consistent 
with Section 6(b)(5) of the Act, which, among other aspects, requires 
that the rules of an exchange promote just and equitable principles of 
trade, foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, and remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system. The Commission believes that the proposed rule change 
will facilitate the CSE's and member firms' efforts to ensure the 
securities markets' continued smooth operation during the period 
leading up to and beyond January 1, 2000.
    The Exchange has requested that the Commission approve the proposed 
rule change prior to the 30th day after the date of publication of 
notice of the filing in the Federal Register because industry-wide 
tests will soon begin, and the Exchange wants to ensure that members 
are able to comply with point-to-point and industry testing schedules 
and file reports with the Exchange concerning the required tests, and 
meet the deadline for correcting Year 2000 problems. The Commission 
finds good cause for approving the proposed rule change prior to the 
30th day after the date of publication of notice of the filing in the 
Federal Register. It is vital that SROs such as the CSE have the 
authority to mandate that their member firms participate in Year 2000 
testing and that they report test results (and other Year 2000 
information) to the SROs. The proposed rule change will help the CSE 
participate in coordinating Year 2000 testing, including industry-wide 
testing, and in remediating any potential Year 2000 problems. This, in 
turn, will help ensure that the industry-wide tests and the CSE's Year 
2000 efforts are successful. The proposed rule change will also help 
the CSE work with its member firms, the SIA, and other SROs to minimize 
any possible disruptions the Year 2000 may cause.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, Washington, D.C. 20549. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the

[[Page 6415]]

provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Section, 450 Fifth Street, 
Washington, D.C. Copies of such filing will also be available for 
inspection and copying at the principal office of CSE. All submissions 
should refer to File No. SR-CSE-99-01 and should be submitted by March 
2, 1999.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\6\ that the proposed rule change (SR-CSE-99-01) is hereby approved on 
an accelerated basis.\7\

    \6\ 15 U.S.C. 78s(b)(2).
    \7\ In approving the proposal, the Commission has considered the 
rule's impact on efficiency, competition and capital formation. 15 
U.S.C. 78c(f).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-3029 Filed 2-8-99; 8:45 am]
BILLING CODE 8010-01-M