[Federal Register Volume 64, Number 148 (Tuesday, August 3, 1999)]
[Rules and Regulations]
[Pages 42012-42031]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19824]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-41661; File No. S7-8-99]
RIN 3235-AH61


Year 2000 Operational Capability Requirements for Registered 
Broker-Dealers and Transfer Agents

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting temporary Rules 15b7-3T, 17Ad-21T, and 17a-9T under the 
Securities Exchange Act of 1934 (``Exchange Act''). Rules 15b7-3T and 
17Ad-21T require registered broker-dealers and non-bank transfer agents 
to ensure that their mission-critical computer systems are Year 2000 
compliant by August 31, 1999, or to certify that any material Year 2000 
problems in mission critical systems will be fixed no later than 
November 15, 1999. Rule 17a9-T requires certain broker-dealers to make 
and preserve a separate trade blotter and securities record or ledger 
as of the close of business of the last three business days of 1999. 
Rule 17Ad-21T requires non-bank transfer agents to make and preserve a 
backup copy of all their master securityholder files so that the 
records can be reconstructed if necessary for a possible transfer to 
another Year 2000 compliant transfer agent. These rules are intended to 
reduce the risk to investors and the securities markets posed by 
broker-dealers and non-bank transfer agents that have not adequately 
prepared their computer systems for the millennium transition.

EFFECTIVE DATE: August 30, 1999.

FOR FURTHER INFORMATION CONTACT: Broker-Dealers (Rule 15b7-3T) Sheila 
Slevin, Assistant Director, 202-942-0796, Heidi Pilpel, Special 
Counsel, 202-942-0791, Kevin Ehrlich, Attorney, 202-942-0778, or Robert 
Long, Attorney, 202-942-0097; Transfer Agents (Rule 17Ad-21T) Jerry W. 
Carpenter, Assistant Director, 202-942-4187, or Lori R. Bucci, Special 
Counsel, 202-942-4187; Recordkeeping (Rule 17a-9T) Tom McGowan, 
Assistant Director, 202-942-0177, Division of Market Regulation, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-1002.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Background

    Broker-dealers, transfer agents, and other securities market 
participants will soon face a critical test of their automated systems 
with the upcoming Year 2000. As the next millennium approaches, unless 
proper modifications have been made, the program logic in many computer 
systems will start to produce erroneous results because the systems 
will incorrectly read dates such as ``01/01/00'' as being in 1900 or in 
some other incorrect year.
    The Commission views the Year 2000 problem as an extremely serious 
issue and has taken various steps to address it. For example, we 
adopted Rules 17a-5(e)(5) and 17Ad-18 under the Exchange Act \1\ 
requiring certain broker-

[[Page 42013]]

dealers and non-bank transfer agents to file reports with us and their 
designated examining authority (``DEA'') regarding their Year 2000 
preparedness.\2\ We also provided interpretive guidance for public 
companies, investment advisers, investment companies, and municipal 
securities issuers regarding their disclosure obligations.\3\ Since 
1996, we have monitored the Year 2000 efforts of the exchanges, Nasdaq, 
and the clearing agencies. In addition, since the third quarter of 
1996, we have included a Year 2000 examination module in our 
examinations of regulated entities.\4\ The Commission also worked with 
the Securities Industry Association as the March and April 1999 
industry-wide test for Year 2000 was developed and implemented.\5\ 
Finally, we instituted public administrative and cease-and-desist 
proceedings against broker-dealers and transfer agents that failed to 
file all or part of the required Year 2000 forms in a timely manner.\6\ 
Through these efforts, we have made clear that broker-dealers and non-
bank transfer agents can not use their failure to address the Year 2000 
problem as an excuse for failing to protect investors.
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    \1\ Exchange Act Release No. 40162 (July 2, 1998), 63 FR 37668 
(July 13, 1998); Exchange Act Release No. 40163 (July 2, 1998), 63 
FR 37688 (July 13, 1998).
    \2\ In addition, we later amended Rule 17a-5 and Rule 17Ad-18 to 
require these entities to file a report prepared by an independent 
public accountant regarding their process for preparing for the Year 
2000. Exchange Act Release No. 40608 (Oct. 28, 1998), 63 FR 59208 
(Nov. 3, 1998); Exchange Act Release No. 40587 (Oct. 22, 1998), 63 
FR 58630 (Nov. 2, 1998).
    \3\ Exchange Act Release No. 40277 (July 29, 1998), 63 FR 41394 
(Aug. 4, 1998). We subsequently published guidance in the form of 
Frequently Asked Questions to clarify recurring issues regarding 
Year 2000 disclosure obligations. Exchange Act Release No. 40649 
(Nov. 9, 1998), 63 FR 63758 (Nov. 16, 1998).
    \4\ In addition, in June 1997 and 1998, our staff published 
reports to Congress on the Readiness of the United States Securities 
Industry and Public Companies to Meet the Information Processing 
Challenges of the Year 2000. Both of these reports are available at 
<http://www.sec.gov/news/studies/yr2000.htm> (and yr2000-2.htm). Our 
staff has submitted a similar report to Congress for 1999.
    \5\ In addition, we are actively participating in international 
Year 2000 efforts, including those sponsored by International 
Organization of Securities Commissions (``IOSCO'').
    \6\ See, e.g., Exchange Act Release No. 40573 [Adm. Proc. File 
No. 3-9758] (Oct. 20, 1998) (broker-dealers that failed to file Form 
BD-Y2K); Exchange Act Release No. 40895 [Adm. Proc. No. 3-9801] 
(Jan. 7, 1999) (transfer agents that failed to file Form TA-Y2K). We 
also filed 8 actions against investment advisors that failed to file 
similar Year 2000 reports. See, e.g., Investment Advisors Act 
Release No. 1800 [Adm. Proc. No. 3-9888] (May 4, 1999).
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    Recently, the Commission's efforts have focused on examinations, 
requiring broker-dealers and non-bank transfer agents to disclose their 
Year 2000 readiness, and encouraging point-to-point and industry-wide 
testing.\7\ Based on the experience and information obtained from these 
efforts, the Commission in March determined to propose additional 
safeguards to reduce any adverse effects of non-Year 2000 compliant 
broker-dealers and non-bank transfer agents on investors and the 
securities markets.
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    \7\ We also reminded broker-dealers and non-bank transfer agents 
that failure to adequately prepare for the Year 2000 will not be 
considered a valid excuse for noncompliance with the requirements of 
Exchange Act Rules 17a-3, 17Ad-6, and 17Ad-7 to make and keep 
current books and records. See generally Exchange Act Release Nos. 
40162 (July 2, 1998), 63 FR 37668 (July 13, 1998); 40163 (July 2, 
1998), 63 FR 37688 (July 13, 1998). See also In re Lowell H. 
Listrom, 50 SEC 883, n. 7 (1992) (Commission stating that ``if a 
broker-dealer or its agent develops a computer-communications system 
to facilitate regulatory compliance, failure of that system does not 
excuse the broker-dealer from its obligation to comply with each of 
its regulatory responsibilities.'')
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B. Year 2000 Rules

    On March 5, 1999, the Commission proposed for comment new Rules 
15b7-3T (17 CFR 240.15b7-3T), 17a-9T (17 CFR 240.17a-9T), and 17Ad-21T 
(17 CFR 240.17Ad-21T) under the Exchange Act,\8\ addressing broker-
dealer and non-bank transfer agent operational capability in the 
context of Year 2000.\9\ Proposed Rules 15b7-3T and 17Ad-21T required 
registered broker-dealers and non-bank transfer agents to ensure that 
their mission-critical systems would be Year 2000 compliant by August 
31, 1999, or to certify that any material Year 2000 problems would be 
fixed by October 15, 1999.\10\ Proposed Rule 17a-9T required large 
broker-dealers to make and preserve additional copies of trade blotters 
and securities records or ledgers for each of the last two business 
days of 1999.\11\ Proposed Rule 17Ad-21T required every non-bank 
transfer agent to maintain a segregated copy of its database, file 
layouts, and all relevant files for a rolling five business day period 
beginning August 31, 1999, and ending on March 31, 2000.
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    \8\ 15 U.S.C. 78a et seq.
    \9\ Exchange Act Release No. 41142 (Mar. 5, 1999), 64 FR 12127 
(Mar. 11, 1999) (``Proposing Release''). On March 5, 1999, the 
Commission also proposed Rule 15b7-2 and 17Ad-20 under the Exchange 
Act. These rules would have codified a statutory requirement that 
broker-dealers and non-bank transfer agents have sufficient 
operational capability to conduct a securities business. The 
Commission is deferring action on the general operational capability 
rules at this time.
    \10\ Proposed temporary Rules 15b7-3T and 17Ad-21T.
    \11\ Proposed temporary Rule 17a-9T.
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    The Commission received 42 comment letters on the proposed rules, 
most of which were favorable.\12\ As discussed below, the Commission is 
adopting the proposed rules with several modifications intended to 
address commenters' concerns. These rules should facilitate the use of 
a proactive approach in dealing with broker-dealers and non-bank 
transfer agents that are not ready for Year 2000.
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    \12\ The comment letters are in Public File S7-8-99, which is 
available for inspection in the Commission's Public Reference Room. 
The Commission received comment letters on behalf of the following: 
American Institute of Certified Public Accountants (``AICPA''); 
Associated Financial Services, Inc.; The Bond Market Association; 
Brown & Brown Securities, Inc.; Patrick Calby; Charles Schwab & Co., 
Inc.; DST Systems, Inc.; Federated Investors, Inc.; Goffstown 
Financial Investments; Gramercy Securities; Grodsky Associates, 
Inc.; HBK Finance L.P. and HBK Securities Ltd; H.C. Denison & Co.; 
H.M. Payson & Co.; Paul Henning; Holly Securities, Inc.; Instinet 
Corporation; Intellivest Securities, Inc.; Investment Company 
Institute (``ICI''); Dan Jamieson; L.P.; The Jeffrey Matthews 
Financial Group, LLC; Lam Securities Investments, Inc.; Littlewood & 
Associates, Inc.; M. Hadley Securities, Inc.; Dan McEwan; Monroe 
Securities; Morgan Stanley & Co. Incorporated; National Association 
of Securities Dealers, Inc. (``NASD''); Network 1 Financial 
Securities, Inc.; Pershing Division of Donaldson, Lufkin & Jenrette 
Securities Corporation (``Pershing''); Raymond James Financial, 
Inc.; Registrar and Transfer Company (``RTC''); Howard Spindel; 
Securities Industry Association (``SIA''); The Securities Transfer 
Association (``STA''); Sierra Trading Group LLC; Stock USA, Inc.; 
Treasure Financial Corp.; U.S. Bancorp Piper Jaffray; U.S. 
Participation, Ltd.; Wall Street Capital Company; Dale W. Way.
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II. Discussion of Year 2000 Rules

A. Rule 15b7-3T

    Proposed Rule 15b7-3T prohibited any broker-dealer having a 
material Year 2000 problem on or after August 31, 1999, from conducting 
a securities business unless the broker-dealer certified and could 
demonstrate that it would fix the problem by October 15, 1999.\13\ The 
proposal defined the term ``material Year 2000 problem,'' set forth 
criteria giving rise to a presumption of a material Year 2000 problem, 
and required firms having a material Year 2000 problem to notify the 
Commission and satisfy certain conditions if they wished to continue 
conducting a securities business.\14\
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    \13\ See generally proposed Rule 15b7-3T.
    \14\ See proposed Rule 15b7-3T(c), (d), and (e).
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    Most of the comment letters on proposed Rule 15b7-3T were 
favorable, although two commenters suggested that in lieu of the 
proposed approach, the Commission should instead permit firms with Year 
2000 problems simply to disclose to clients their readiness status and 
the inherent risks of being non-Year 2000 compliant.\15\ As discussed 
in detail below, the majority of commenters recommended specific 
modifications to the proposed rule. The Commission has determined to 
adopt Rule 15b7-3T substantially as proposed, but with certain 
modifications suggested by the commenters.
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    \15\ See letters from Intellivest Securities and Monroe 
Securities.

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1. Scope of the Rule; Definition of Material Year 2000 Problem
    As proposed, Rule 15b7-3T applied generally to all broker-dealers, 
and stated that a broker-dealer has a material Year 2000 problem if: 
(1) Any of its computer systems incorrectly identifies any date in the 
Year 1999, the Year 2000, or in any year thereafter; and (2) the error 
impairs or, if uncorrected, is likely to impair, any of its mission 
critical computer systems.\16\
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    \16\ See proposed Rule 15b7-3T(b)(1).
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    Ten commenters suggested narrowing the scope of the proposed rule. 
For example, several commenters urged the Commission to limit the 
rule's applicability to clearing firms, firms with a large number of 
customer accounts, firms that use computers for recordkeeping, order 
execution or order transmission, or firms with high capital 
requirements.\17\ One commenter recommended that the rule apply only to 
self-clearing firms, firms that clear for other broker-dealers, and 
market-makers.\18\
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    \17\ See letters from Goffstown Financial Investments, Gramercy 
Securities, Grodsky Associates, Holly Securities, HBK Finance, 
Intellivest Securities, Dan Jamieson, Monroe Securities, U.S. 
Participation, and Wall Street Capital Company.
    \18\ See NASD letter.
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    Several commenters suggested narrowing the definition of ``material 
Year 2000 problem.'' One commenter stated generally that the definition 
of ``material Year 2000 problem'' should have more specific 
criteria.\19\ Other commenters stated that the rule should make clear 
that ``a material Year 2000 problem is one in which a `mission 
critical' system is experiencing a `material' problem arising from the 
misreading of dates.'' \20\ In contrast, one commenter suggested 
defining the term material Year 2000 problem more broadly than 
proposed.\21\
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    \19\ See AICPA letter.
    \20\ See letters from Pershing and SIA.
    \21\ See NASD letter. Specifically, the NASD recommended that 
the rule should cover other date related processing errors and 
incorporate references to functionality, data integrity, and 
performance. The Commission believes that these concepts are already 
included in the rule's definition of ``material Year 2000 problem'' 
and that this degree of specificity might cause confusion.
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    In response to commenters' concerns that the scope of the proposed 
rule is too broad, the Commission has modified the language of 
paragraph (a) to clarify that the rule applies only to broker-dealers 
that use computers in the conduct of their business as a broker or 
dealer. Rule 15b7-3T is intended to focus on those broker-dealers whose 
computer systems are necessary for processing securities transactions, 
managing trading accounts, maintaining customer accounts, or delivering 
funds and securities (i.e., broker-dealers for whom computer systems 
are ``mission critical systems''). The rule is not intended to cover, 
for example, a broker-dealer whose reliance on automation is limited to 
the use of off-the-shelf word processing or payroll software. Likewise, 
many smaller broker-dealers still transmit orders via the telephone. 
The rule is not intended to cover these broker-dealers unless they use 
computers in their broker-dealer business functions, the failure of 
which could pose a risk to investors.
    The Commission, however, has decided not to modify the definition 
of ``material Year 2000 problem.'' Thus, as adopted, the rule states 
that a broker-dealer has a material Year 2000 problem if, at any time 
on or after August 31, 1999: (1) Any of its mission critical computer 
systems incorrectly identifies any date in the Year 1999 or the Year 
2000; and (2) the error impairs or, if uncorrected, is likely to 
impair, any of its mission critical systems.\22\ The Commission 
believes that any impairment of a mission critical system is inherently 
material. The definition is not intended to include a broker-dealer 
whose systems have minor technical problems regarding the reading of 
dates if these problems do not adversely affect the broker-dealer's 
core business.
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    \22\ See temporary Rule 15b7-3T(b)(1). The term ``mission 
critical system'' is defined as any system that is necessary, 
depending on the nature of the broker-dealer's business, to assure 
the prompt and accurate processing of securities transactions, 
including order entry, execution, comparison, allocation, clearance 
and settlement of securities transactions, the maintenance of 
customer accounts, and the delivery of funds and securities. 
Temporary Rule 15b7-3T(g)(1). The phrase ``depending on the nature 
of their business'' is intended to tailor the definition of a 
``material Year 2000 problem'' to different broker-dealers' 
businesses and operations. The definition of ``mission critical 
system'' is adopted as proposed.
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    Moreover, the Commission has decided not to exclude from the rule 
broker-dealers based on factors such as size or number of accounts. 
Even small or introducing broker-dealers have the potential to affect 
other market participants by, for example, introducing inaccurate or 
corrupted data into other systems. Where appropriate, the Commission 
believes it should have the ability to act to prevent a patently non-
compliant broker-dealer from continuing to do business before the 
century date change.
2. Presumption of a Material Year 2000 Problem
    The Commission proposed that a broker-dealer would be presumed to 
have a material Year 2000 problem if it: (1) Does not have written 
procedures designed to identify, assess, and remediate any Year 2000 
problems in mission critical systems; (2) has not verified its Year 
2000 remediation efforts through reasonable internal testing of mission 
critical systems; (3) has not verified its Year 2000 remediation 
efforts by satisfying any applicable Year 2000 testing requirements 
imposed by a self-regulatory organization; or (4) has not remediated 
all exceptions contained in any independent public accountant's report 
prepared on behalf of the broker-dealer pursuant to Exchange Act Rule 
17a-(5)(e)(5)(vi).\23\
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    \23\ See proposed Rule 15b7-3T(b)(2).
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    One commenter stated generally that a materiality standard should 
be added to the proposed presumptions.\24\ A few commenters expressed 
concern that, under the rule as proposed, a broker-dealer could be 
presumed to have a material Year 2000 problem if a mission-critical 
system under the control of its service bureau, clearing broker, or 
other third party were not Year 2000 compliant.\25\ These commenters 
argued that it would be unfair to hold a broker-dealer responsible for 
a presumption that it could neither rebut nor cure.
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    \24\ See SIA letter.
    \25\ See letters from Dan Jamieson, Federated, NASD, and SIA.
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    In response to the Commission's request for comment on whether 
independent third party verification of remediation plans should be 
required, two commenters said it should not.\26\ One commenter 
expressed concern that there would be a lack of objective standards by 
which to evaluate Year 2000 remediation plans.\27\ In addition, several 
commenters raised concerns regarding the requirement that all 
exceptions in an independent public accountant's report must be 
remedied to avoid being presumed to be a Year 2000 problem.\28\
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    \26\ See letters from Pershing and SIA.
    \27\ See AICPA letter.
    \28\ See letters from Jeffrey Matthew's Financial Group, 
Pershing, RTC, SIA, and STA.
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    The Commission is adopting the presumption with a few changes. 
Because a broker-dealer cannot reasonably be expected to certify 
regarding the Year 2000 status of a mission critical system that it 
does not control, the Commission has limited the rule so that a broker-
dealer will not be presumed to have a material Year 2000 problem if its 
written procedures or internal testing do not cover mission critical 
systems under the control of

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third parties.\29\ As adopted, the presumptions of the rule regarding 
written procedures and internal testing apply only to mission critical 
systems over which the broker-dealer has some control. For example, a 
broker-dealer has control over a mission critical system if it operates 
and maintains the systems.
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    \29\ Broker-dealers will still be expected to diligently inquire 
into the status of their third parties' Year 2000 readiness, and to 
make appropriate alternative arrangements if they are not satisfied. 
Broker-dealers will still be responsible, however, if third party 
failure causes the firm to be in violation of any provision under 
federal securities laws other than Rule 15b7-3T. See supra note 7.
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    In the Proposing Release, we stated that arrangements between 
introducing and clearing brokers do not relieve either broker-dealer of 
its responsibilities under proposed Rule 15b7-3T. The modification to 
Rule 15b7-3T is intended to clarify that firms will not be held 
responsible for failing to certify to the Year 2000 status of mission 
critical systems controlled by third parties.\30\ Introducing broker-
dealers, however, will still be expected to diligently inquire into the 
status of their clearing firm's Year 2000 readiness, and to make 
arrangements with another clearing firm if they are not satisfied with 
their clearing firm's progress or response.
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    \30\ See supra note 7. A broker-dealer will still be responsible 
if a third party failure causes the broker-dealer to be in violation 
of any provision under the federal securities laws other than Rule 
15b7-3T(b).
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    The Commission has decided not to expressly narrow the scope of the 
rule to only ``material'' exceptions in the independent public 
accountant's report. These reports generally do not distinguish between 
material and immaterial exceptions. In fact, it is likely that only 
material problems will be sufficient to cause an exception in the first 
instance.\31\
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    \31\ The Commission notes that it expects to file actions 
against firms for violating this rule in federal district court.
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    Thus, as adopted, Rule 15b7-3T provides that a broker-dealer will 
be presumed to have a material Year 2000 problem if, at any time on or 
after August 31, 1999, it:
     Does not have written procedures reasonably designed to 
identify, assess, and remediate any Year 2000 problems in mission 
critical systems under its control; \32\
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    \32\ The appropriate scope of such procedures would vary 
depending on the nature of a broker-dealer's business and the size 
and complexity of its computer systems. To provide flexibility, we 
are not prescribing specific written procedures. However, broker-
dealers should, at a minimum, use industry standards. For example, 
the NASD has published a High-Level Plan, prepared by the SIA, 
summarizing the standard components of a sample Year 2000 Project 
Plan. NASD Year 2000 Member Information (1998).
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     Has not verified its Year 2000 remediation efforts through 
reasonable internal testing of mission critical systems under its 
control; \33\
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    \33\ The General Accounting Office has recommended a set of 
testing guidelines that we believe is reasonable for broker-dealers 
to follow. It describes five phases of Year 2000 testing activities, 
beginning with establishing an organizational testing 
infrastructure, followed by designing, conducting and reporting on 
software unit testing, software integration testing, system 
acceptance testing, and end-to-end testing. GAO Year 2000 Computing 
Crisis: A Testing Guide (November 1998) (``GAO Guidelines'').
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     Has not verified its Year 2000 remediation efforts by 
satisfying Year 2000 testing requirements imposed by self-regulatory 
organizations to which it is subject; \34\ or
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    \34\ We have approved SRO rule changes that permit the SROs to 
require their members to conduct Year 2000 testing. See Exchange Act 
Release Nos. 40745 (Dec. 3, 1998), 63 FR 68324 (Dec. 10, 1998) 
(NASD); 40836 (Dec. 28, 1998), 64 FR 1037 (Jan. 7, 1999) (American 
Stock Exchange); 40837 (Dec. 28, 1998), 64 FR 1055 (Jan. 7, 1999) 
(NYSE); 40838 (Dec. 28, 1998), 64 FR 1044 (Jan. 7, 1999) (Chicago 
Board Options Exchange); 40839 (Dec. 28, 1998), 64 FR 1046 (Jan. 7, 
1999) (Chicago Stock Exchange); 40870 (Dec. 31, 1998), 64 FR 1263 
(Jan. 8, 1999) (Philadelphia Stock Exchange); 40871 (Dec. 31, 1998), 
64 FR 1838 (Jan. 12, 1999) (Boston Stock Exchange); 40893 (Jan. 7, 
1999) (Pacific Stock Exchange), 64 FR 2932 (Jan. 19, 1999); 40696 
(Nov. 20, 1998), 63 FR 65829 (Nov. 30, 1998) (Depository Trust 
Company); 40889 (Jan. 6, 1999), 64 FR 2691 (Jan. 15, 1999) (MBS 
Clearing Corporation); and 40946 (Jan. 14, 1999), 64 FR 3328 (Jan. 
21, 1999) (National Securities Clearing Corporation).
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     Has not remediated all exceptions relating to its mission 
critical systems contained in any independent public accountant's 
report prepared on behalf of the broker-dealer pursuant to Exchange Act 
Rule 17a-(5)(e)(5)(vi).
    The failure of a broker-dealer to satisfy any of the four 
conditions above will require the broker-dealer to provide notice to 
the Commission. If a broker-dealer that has a material Year 2000 
problem or that is presumed to have a material Year 2000 problem wishes 
to continue operating beyond August 31, 1999, it must submit a 
certificate to the Commission, as described below.
3. Notification to the Commission and DEA
    As proposed, the rule required any broker-dealer that has or is 
presumed to have a material Year 2000 problem at any time on or after 
August 31, 1999, to immediately notify the Commission and its DEA of 
the problem. The Commission received one comment on this provision 
which supported the notice procedure to the Commission and the 
DEAs.\35\
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    \35\ See NASD letter.
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    The Commission, therefore, is adopting this provision as proposed. 
Notice to the Commission must be sent by overnight delivery to the 
Division of Market Regulation, U.S. Securities and Exchange Commission, 
450 Fifth Street, NW, Washington, DC 20549-1002 Attention: Y2K 
Compliance. Notice also must be provided to the firm's DEA. The 
notification requirement is intended to alert the Commission and DEA so 
that we can assess the broker-dealer's condition and decide if its Year 
2000 problems threaten customers or the integrity of the markets.\36\
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    \36\ The Commission is adopting this requirement as proposed 
except that notices will be sent to the Division of Market 
Regulation directly, rather than to the Secretary's Office.
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4. Prohibition on Non-Compliant Broker-Dealers and Certification
a. Deadlines
    The proposal stated that a broker-dealer that is not operationally 
capable because it has a material Year 2000 problem would be 
prohibited, on or after August 31, 1999, from effecting any transaction 
in, or inducing the purchase or sale of, any security, receiving or 
holding customer funds or securities, or carrying customer accounts, 
unless it certifies and can demonstrate that it will fix the problem by 
October 15, 1999.\37\ As proposed, a broker-dealer that is presumed to 
have a material Year 2000 problem would have the burden to prove that 
it did not have a material Year 2000 problem, and would be required to 
come forward before October 15, 1999, with sufficient evidence to rebut 
the presumption.\38\
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    \37\ See proposed temporary Rule 15b7-3T(d).
    \38\ Id.
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    The Commission specifically sought comment on whether the proposed 
August 31, 1999, deadline to notify the Commission of a material Year 
2000 problem, and the proposed October 15, 1999, deadline to achieve 
Year 2000 compliance, were appropriate. Several commenters stated that 
the proposed dates were too early. One commenter stated that the 
proposed deadlines should have been announced months or years ago to 
provide firms adequate notice.\39\ In contrast, one commenter stated 
that the proposed deadlines were too late, given the difficulty 
associated with transferring accounts.\40\
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    \39\ See H.M. Payson letter.
    \40\ See letters from DST and Schwab.
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    Several commenters expressed reservations about requiring a firm to 
cease business if it failed to correct Year 2000 problems by the 
proposed deadline.\41\ Commenters suggested that broker-dealers should 
be permitted to

[[Page 42016]]

fix problems after the October 15, 1999, deadline without transferring 
accounts.\42\ Another commenter, however, argued that, given the unique 
nature of the Year 2000 problem, shutting down a firm with a material 
Year 2000 problem was appropriate.\43\
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    \41\ See letters from DST, Grodsky Associates, L.P. Littlewood 
and Associates, NASD, Pershing, STA, and Stock USA.
    \42\ See letters from NASD and Pershing.
    \43\ See Schwab letter.
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    Upon consideration of commenters' views, the Commission has 
determined to push back the date to November 15, 1999, by which a 
broker-dealer must certify that its material Year 2000 problems will be 
remedied. Any broker-dealer that continues to have a material Year 2000 
problem on or after November 15, 1999, will be required to cease 
operations by December 1, 1999. The Commission expects that the broker-
dealer will use the period between November 15, 1999, and December 1, 
1999, to unwind its business in an orderly fashion. Moving the deadline 
to November 15, 1999, will provide broker-dealers with as much time as 
possible to address Year 2000 problems, while permitting the Commission 
to take proactive steps in the event a broker-dealer is not Year 2000 
compliant by that date.
    Several commenters expressed concern that the proposed October 15, 
1999, deadline was too late given the difficulties associated with the 
transfer of accounts. The Commission acknowledges that in the ordinary 
course of business the transfer of funds and accounts might take 
several months. However, in light of the Year 2000 problem, accounts 
may need to be transferred on an expedited basis.\44\ The Commission 
notes that the rule, both as proposed and adopted, permits the 
Commission or a court of competent jurisdiction to order a broker-
dealer to comply with Rule 15b7-3T(d) (i.e., to cease its securities 
business and transfer accounts) at any time after August 31, 1999, if 
to do so would be in the public interest or for the protection of 
investors. We expect to reserve this authority for situations in which 
it is patently unrealistic that a broker-dealer will be able to conduct 
sufficient remediation to achieve Year 2000 compliance by November 15, 
1999.
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    \44\ The Commission appreciates the difficulties associated with 
an expedited transfer of accounts. See infra Section II. B. 5 for a 
further discussion of this issue.
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b. Certification
    Four comment letters addressed the certification requirement. One 
commenter suggested that firms that file certificates be allowed to 
operate beyond the October 15, 1999, deadline.\45\ Another commenter 
asserted that requiring the firm's CEO to sign the document is 
unnecessary. In addition, this commenter expressed concern that CEOs of 
small firms would be the targets of enforcement actions as a 
consequence of the rule.\46\ Another commenter expressed concern that 
the certification requirement puts CEOs in the position of either 
telling the truth and shutting down or lying in order to continue 
operations.\47\ This commenter concluded that some CEOs would 
inevitably lie, which would only provide false comfort and jeopardize 
the credibility of the Commission and the securities markets.\48\ In 
addition, this commenter stated that if enough CEOs told the truth, 
i.e., that their firms had material Year 2000 problems, it would cause 
panic.\49\ On the other hand, one commenter agreed that a firm's CEO is 
the appropriate party to sign the certification.\50\
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    \45\ See SIA letter.
    \46\ See Dan Jamieson letter.
    \47\ See Dale W. Way letter.
    \48\ Id.
    \49\ Id.
    \50\ See NASD letter.
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    As adopted, Rule 15b7-3T provides that a broker-dealer with (or 
that is presumed to have) a material Year 2000 problem on or after 
August 31, 1999, will be permitted to continue to operate until 
December 1, 1999, if, in addition to providing the Commission and its 
DEA with the notice required by paragraph (c) of the rule, it submits 
to the Commission and its DEA a certificate signed by its chief 
executive officer (or an individual with similar authority) stating:
     The broker-dealer is in the process of remediating its 
material Year 2000 problem;
     The broker-dealer has scheduled testing of its affected 
mission critical systems to verify that the material Year 2000 problem 
has been remediated, and specifies the testing dates;
     The date (which cannot be later than November 15, 1999) by 
which the broker-dealer anticipates completing remediation of the 
material Year 2000 problem in its mission critical systems, and will 
therefore be operationally capable; and
     Based on inquiries and to the best of its chief executive 
officer's knowledge, the broker-dealer does not anticipate that the 
existence of the material Year 2000 problem in its mission critical 
systems will impair its ability, depending on the nature of its 
business, to ensure prompt and accurate processing of securities 
transactions, including order entry, execution, comparison, allocation, 
clearance and settlement of securities transactions, the maintenance of 
customer accounts, or the delivery of funds and securities; and the 
broker-dealer anticipates that the enumerated remediation steps will 
result in remedying the material Year 2000 problem on or before 
November 15, 1999.
    In response to the comments, we made four changes to the 
certification provision. First, as stated above, the date by which the 
broker-dealer must expect to have remediated the material Year 2000 
problem is now November 15, 1999 (rather than October 15, 1999). 
Second, the Commission has added language to paragraph (e)(1)(i)(D) to 
require that the certification include a statement that the chief 
executive officer believes that the steps referred to in paragraphs (A) 
through (C) will result in remedying the material Year 2000 problem no 
later than November 15, 1999. In the rule as proposed, there was no 
affirmative statement that the chief executive officer believed that 
the described remediation steps would address the firm's problems 
before a specified date.
    Third, Rule 15b7-3T(d)(2) provides that a broker-dealer that has or 
is presumed to have a material Year 2000 problem on or after August 31, 
1999, will be permitted to operate until November 15, 1999, if it files 
a certificate signed by its chief executive officer that contains the 
representations specified in paragraph (e)(1)(i) of the rule. The 
Commission is also adding paragraph (e)(1)(ii) to permit broker-dealers 
to include additional information to show that their mission critical 
systems are free of material Year 2000 problems.
    Fourth, the rule as adopted requires broker-dealers that have 
submitted a certificate pursuant to paragraph (e)(1)(i) to submit a 
second certificate signed by the chief executive officer (or an 
individual with similar authority) on or before November 15, 1999, 
stating that, based on inquiries and to the best of the chief 
executive's knowledge, the firm has remediated its Year 2000 problem or 
that it intends to cease operations. The second certification is 
designed to give firms the opportunity to certify to the Commission, 
the public, and their customers that they have, in fact, remediated 
their Year 2000 problem.\51\ In addition, the second certification will 
provide information to the Commission regarding the firms that have 
fixed their

[[Page 42017]]

Year 2000 problems and the firms that have not.
---------------------------------------------------------------------------

    \51\ The NASD recommended that a firm be permitted to file an 
additional notice in the event the firm believes that it no longer 
has a material Year 2000 problem. See NASD letter.
---------------------------------------------------------------------------

    The Commission notes that the rule requires a broker-dealer to 
notify the Commission of material Year 2000 problems it experiences on 
or after August 31, 1999. Therefore, a broker-dealer filing a 
certificate on August 31, 1999, must update it if the information 
contained in the original certificate becomes materially inaccurate in 
any respect. If a broker-dealer finds a new material Year 2000 problem 
subsequent to August 31, 1999, it must promptly notify its DEA and the 
Commission and submit a certificate in accordance with the rule.
5. Confidentiality of Notices and Certifications
    In the Proposing Release, we indicated that the August 31, 1999, 
notices and certifications would be made public so that customers and 
counterparties of these broker-dealers could assess the potential 
impact on them and take any appropriate action. One commenter stated 
that making the notices public could result in a ``death sentence'' for 
the affected firms because customers would take their business to 
compliant firms, i.e., firms that did not file notices.\52\ This 
commenter also believed that making the notices public would discourage 
firms from reporting their problem[s] for fear of negative press.\53\ 
Another commenter, however, recognized that it is important to give 
investors and market participants notice of Year 2000 problems.\54\ The 
NASD did not object to making the notices public, but suggested that 
Rule 15b7-3T permit firms to file a follow-up notice when the firm has 
remediated its Year 2000 problem.\55\
---------------------------------------------------------------------------

    \52\ See Pershing letter.
    \53\Id.
    \54\ See Schwab letter.
    \55\ See NASD letter.
---------------------------------------------------------------------------

    Consistent with the Commission's previous policy in making Year 
2000 disclosures such as the Form BD-Y2K public, the Commission will 
make the notices and certificates available to the public. The 
Commission believes that the public and other market participants need 
this information in order to make alternative arrangements, if 
appropriate. In response to one commenter's suggestion, the Commission 
has adopted a second certificate provision which gives firms the 
opportunity to inform the Commission and the public that they have 
remediated their Year 2000 problem. After December 1, 1999, the 
Commission will also make public any actions taken against firms that 
are not Year 2000 compliant under the rule.
6. Transfer of Accounts
    In the event that a broker-dealer has a material Year 2000 problem 
in a mission critical system that it cannot remediate by November 15, 
1999, steps will have to be taken by December 1, 1999, to transfer 
customer accounts to other broker-dealers that are Year 2000 compliant. 
The Commission understands that broker-dealers may be reluctant to take 
over customer accounts from a non-compliant firm. The Commission 
intends to exercise a great degree of flexibility in accommodating 
broker-dealers that accept customer accounts before or after December 
1, 1999, from impaired firms. By moving the deadline for Year 2000 
compliance from October 15, 1999, to November 15, 1999, the Commission 
anticipates that fewer broker-dealers will be required to transfer 
accounts due to a material Year 2000 problem.
    The Commission has the ability to take action before December 1, 
1999, to limit a firm's business in order to protect investors. After 
August 31, 1999, the Commission will be reviewing notices and 
certificates, and making follow-up inquiries regarding broker-dealers' 
Year 2000 readiness. We can take action against a firm at any time 
after August 31, 1999, regardless of whether a firm has filed a 
certificate. Although the Commission expects that the vast majority of 
firms will be ready for Year 2000, Rule 15b7-3T(f) makes clear that the 
Commission will act proactively to address the isolated firms that will 
clearly not be ready for the Year 2000.

B. Rule 17Ad-21T

    Rule 17Ad-21T, applicable to non-bank transfer agents, is similar 
to temporary Rule 15b7-3T, applicable to broker-dealers.\56\ 
Specifically, proposed Rule 17Ad-21T prohibited any registered non-bank 
transfer agent from conducting transfer agent business unless the non-
bank transfer agent certified and could demonstrate that it would fix 
the problem by October 15, 1999.\57\ The proposal defined the term 
``material Year 2000 problem;'' set forth criteria giving rise to a 
presumption of a Year 2000 problem; and required firms having a 
material Year 2000 problem to notify the Commission and satisfy certain 
conditions if they wished to continue conducting their transfer agent 
business. The Commission is adopting temporary Rule 17Ad-21T with 
several changes to respond to commenters' concerns.
---------------------------------------------------------------------------

    \56\ The term ``non-bank transfer agent'' means a transfer agent 
whose appropriate regulatory agency (``ARA'') is the Commission and 
not the Office of the Comptroller of the Currency, the Board of 
Governors of the Federal Reserve System, or the Federal Deposit 
Insurance Corporation. The term ARA is defined in Exchange Act 
Section 3(a)(34), 15 U.S.C. 78c(a)(34).
    \57\ See generally proposed Rule 17Ad-21T.
---------------------------------------------------------------------------

1. Scope of the Rule; Definition of Material Year 2000 Problem
    As proposed, Rule 17Ad-21T applied to all non-bank transfer agents, 
and stated that a non-bank transfer agent has a material Year 2000 
problem if: (1) Any of its computer systems incorrectly identifies any 
date in the Year 1999, the Year 2000, or in any year thereafter; and 
(2) the error impairs or, if uncorrected, is likely to impair, any of 
its mission critical computer systems.\58\
---------------------------------------------------------------------------

    \58\See proposed Rule 17Ad-21T(b)(1).
---------------------------------------------------------------------------

    Much like the broker-dealer rule, commenters generally requested 
that the Commission limit the application of Rule 17Ad-21T.\59\ For 
instance, one commenter suggested that the definition of material Year 
2000 problem be narrowed to exclude situations that do not result from 
an error in the transfer agent's system for securityholder 
recordkeeping and accounting.\60\ In addition, this commenter 
recommended that the definition be further limited to exclude isolated 
date identification failures.\61\ Another commenter, commenting on both 
the broker-dealer rule and transfer agent rule, stated that the rule 
should include a more thorough definition with specific criteria.\62\
---------------------------------------------------------------------------

    \59\ See letters from DST, Federated, RTC, and STA.
    \60\ See DST letter.
    \61\ Id.
    \62\ See AICPA letter.
---------------------------------------------------------------------------

    Responding to comments that the scope of the proposed rule is too 
broad, temporary Rule 17Ad-21T is being revised to apply only to non-
bank transfer agents that use computers in the course of their business 
as transfer agents. The Commission also recognizes that some non-bank 
transfer agents that use computers could conduct their business 
manually without disrupting service. Therefore, the rule is not 
intended to cover any non-bank transfer agent whose computer system is 
not a mission critical system. This rule is intended to cover those 
non-bank transfer agents that rely on computers and that cannot resort 
to manual processing without causing disruption to service or without 
posing a risk to their customers.
    Similar to Rule 15b7-3T, the Commission has decided not to modify 
Rule 17Ad-21T's definition of material Year 2000 problem.\63\ The 
Commission

[[Page 42018]]

believes that any impairment of a mission critical system is inherently 
material. The definition is not intended to include a non-bank transfer 
agent whose system has a minor technical problem reading dates if such 
problem does not adversely affect the transfer agent's core business. 
The rules therefore do not apply to systems that have no bearing on the 
core transfer agent functions and are less likely to have a negative 
impact on the transfer agent's ability to conduct business for its 
customers.
---------------------------------------------------------------------------

    \63\ As adopted, temporary Rule 17Ad-21(b)(1) states that a non-
bank transfer agent has a material Year 2000 problem if, at any time 
on or after August 31, 1999: (1) Any of its mission critical 
computer systems incorrectly identifies any date in the Year 1999 or 
the Year 2000; and (2) the error impairs or, if uncorrected, is 
likely to impair, any of its mission critical systems. The term 
``mission critical system'' is defined as any system that is 
necessary, depending on the nature of the transfer agent's business, 
to assure the prompt and accurate transfer and processing of 
securities, the maintenance of master securityholder files, and the 
production and retention of required records as described in 
paragraph (d) of the rule.
---------------------------------------------------------------------------

2. Presumption of a Material Year 2000 Problem
    The Commission proposed that a non-bank transfer agent would be 
presumed to have a material Year 2000 problem if it: (1) Does not have 
written procedures designed to identify, assess, and remediate any Year 
2000 problems in mission critical systems; (2) has not verified its 
Year 2000 remediation efforts through reasonable internal testing of 
mission critical systems and reasonable testing of external links; or 
(3) has not remediated all exceptions contained in any independent 
public accountant's report prepared on behalf of the non-bank transfer 
agent pursuant to Exchange Act Rule 17Ad-18(f).\64\
---------------------------------------------------------------------------

    \64\ See proposed Rule 17Ad-21T(b)(2).
---------------------------------------------------------------------------

    The Commission received one comment on the responsibility of non-
bank transfer agents for third-party systems. The commenter stated that 
the rule should not require a firm to ``ensure'' that the third-party 
provider is free from material Year 2000 problems.\65\ Rather, the 
commenter suggested that the firm should be required to take 
``reasonable steps'' to verify that third parties are Year 2000 
compliant.\66\
---------------------------------------------------------------------------

    \65\  See Federated letter.
    \66\ Id.
---------------------------------------------------------------------------

    Similar to the broker-dealer rule, the Commission is modifying the 
presumption language so that a non-bank transfer agent will not be 
presumed to have a material Year 2000 problem if its written procedures 
or testing do not cover mission critical systems under the control of 
third parties.\67\ As adopted, the rule is limited in scope to cover 
only those written procedures and testing of mission critical systems 
over which the non-bank transfer agent has some element of control.\68\ 
Non-bank transfer agents will still be expected to diligently inquire 
into the status of their third parties' Year 2000 readiness, and to 
make appropriate alternative arrangements if they are not satisfied. A 
non-bank transfer agent will still be responsible, however, if third 
party failure causes the non-bank transfer agent to be in violation of 
any provision under federal securities laws other than Rule 17Ad-21T.
---------------------------------------------------------------------------

    \67\ In the Proposing Release, we stated that arrangements 
between registered non-bank transfer agent and other registered 
transfer agents (variously referred to as the recordkeeping transfer 
agent, co-transfer agent, or service company) do not relieve the 
registered non-bank transfer agent of its responsibilities under 
proposed Rule 17Ad-21T. The modification to Rule 17Ad-21T is 
intended to clarify that firms will not be held responsible for 
failing to certify to the Year 2000 status of mission critical 
systems controlled by third parties.
    \68\ For example, a non-bank transfer agent has control over a 
mission critical system if it operates and maintains the system.
---------------------------------------------------------------------------

    The rule as adopted provides that a non-bank transfer agent would 
be presumed to have a material Year 2000 problem if, at any time on or 
after August 31, 1999, it:
     Does not have written procedures reasonably designed to 
identify, assess, and remediate any Year 2000 problems in its mission 
critical systems under its control; \69\
---------------------------------------------------------------------------

    \69\ The appropriate scope of such procedures would vary 
depending on the nature of a non-bank transfer agent's business and 
size and complexity of its computer systems.
---------------------------------------------------------------------------

     Has not verified its Year 2000 remediation efforts through 
reasonable internal testing of its mission critical systems under its 
control and reasonable testing of external links under its control; 
\70\ or
---------------------------------------------------------------------------

    \70\ Unlike broker-dealers, transfer agents do not belong to any 
SROs, therefore unlike broker-dealers, non-bank transfer agents do 
not have specific testing mandates. However, this rule contemplates 
that transfer agents will conduct effective testing of internal 
mission critical systems and external links under the control of the 
non-bank transfer agent. We believe that it is reasonable for 
transfer agents to rely on testing guidelines established by SROs.
---------------------------------------------------------------------------

     Has not remediated all exceptions related to its mission 
critical systems contained in any independent public accountant's 
report prepared on behalf of the transfer agent pursuant to Exchange 
Act Rule 17Ad-18(f).\71\
---------------------------------------------------------------------------

    \71\ Similar to Rule 15b7-3T, the Commission has decided not to 
expressly narrow the scope of the rule to ``material'' exceptions in 
the independent public accountant's report. The Commission notes 
that it expects to file actions against non-bank transfer agents for 
violating this rule in a federal district court.
---------------------------------------------------------------------------

    The failure of a non-bank transfer agent to satisfy any of the 
three conditions above by August 31, 1999, will require the non-bank 
transfer agent to provide notice to the Commission.
3. Notification to the Commission and Issuer
    As proposed, the rule required any registered non-bank transfer 
agent that has or is presumed to have a material Year 2000 problem at 
any time on or after August 31, 1999, to immediately notify the 
Commission of the problem. In the proposing release the Commission also 
specifically asked for comment on whether non-compliant transfer agents 
should notify their ``customers,'' which was defined in the proposed 
rule to include issuers. The Commission received no comment on this 
provision.
    The Commission is adopting the notice provision as proposed with 
two changes. First, because it is important for an issuer to know the 
status of its transfer agent's preparation for Year 2000, any non-bank 
transfer agent that has or is presumed to have a material Year 2000 
problem must notify not only the Commission but also must notify its 
issuers. Second, notices to the Commission must be sent to the Division 
of Market Regulation instead of to the Secretary.\72\
---------------------------------------------------------------------------

    \72\ Notice to the Commission must be sent by overnight delivery 
to the Division of Market Regulation, U.S. Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 20549-1002 
Attention: Y2K Compliance. Notice also must be provided to the non-
bank transfer agent's issuer.
---------------------------------------------------------------------------

4. Prohibition on Non-Compliant Non-bank Transfer Agents and 
Certification
a. Deadlines
    As proposed, a non-bank transfer agent that has or is presumed to 
have a material Year 2000 problem will not be permitted, on or after 
August 31, 1999, to engage in any transfer agent function, including: 
(i) Countersigning securities upon issuance; (ii) monitoring the 
issuance of securities with a view to preventing unauthorized issuance; 
(iii) registering the transfer of securities; (iv) exchanging or 
converting securities; or (v) transferring record ownership of 
securities by book-keeping entry without physical issuance of 
securities certificates, unless it certifies and can demonstrate that 
it will fix the problem by October 15, 1999.\73\ As proposed, a non-
bank transfer agent that is presumed to have a material Year 2000 
problem would have the burden to prove that it did not have a material 
Year 2000 problem, and would be required to come forward before October

[[Page 42019]]

15, 1999, with sufficient evidence to rebut the presumption.\74\
---------------------------------------------------------------------------

    \73\ Proposed Temporary Rule 17Ad-21T.
    \74\ Id.
---------------------------------------------------------------------------

    The Commission specifically sought comment on whether the proposed 
August 31, 1999, deadline to notify the Commission of an existing Year 
2000 problem, and the October 15, 1999, deadline to achieve Year 2000 
compliance, were appropriate. Two commenters stated that the August 31, 
1999, and October 15, 1999, deadlines were too early because they will 
not allow adequate time for testing with external vendors.\75\ One 
commenter suggested that the August 31, 1999, deadline should be moved 
to the end of September 1999.\76\ In order to facilitate the orderly 
transfer of customer accounts, another commenter suggested that 
transfer agents be permitted to temporarily operate beyond the August 
31, 1999, cutoff date, during which time customer accounts could be 
transferred.\77\
---------------------------------------------------------------------------

    \75\ See letters from RTC and STA.
    \76\ See STA letter.
    \77\ See Federated letter.
---------------------------------------------------------------------------

    Two commenters expressed reservations about forcing a transfer 
agent to cease operations for not remediating Year 2000 problems.\78\ 
One of these commenters noted that requiring non-bank transfer agents 
to cease processing, pursuant to Rule 17Ad-21T, would eliminate their 
ability to use manual procedures while problems are being 
corrected.\79\ The commenter stated that it would be more prudent to 
prohibit the non-bank transfer agents from taking on new accounts or 
relationships.\80\
---------------------------------------------------------------------------

    \78\ See letters from RTC and STA.
    \79\ See STA letter.
    \80\ Id.
---------------------------------------------------------------------------

    According to one commenter, transferring accounts from non-
compliant firms would be difficult.\81\ The commenter opined that it 
would not be able to convert any issuer from any transfer agent 
experiencing a material Year 2000 problem or a failure of operational 
capability within the four-month period remaining between September 1, 
1999, and December 31, 1999, because there is insufficient time to 
adequately plan and test the conversion. This commenter went on to 
suggest that it would be more appropriate and practicable to require 
firms experiencing a Year 2000 problem to identify themselves, cease 
accepting new business, accept financial responsibility for losses 
incurred by their failure to become Year 2000 compliant, and use their 
best efforts to become compliant or minimize the effects of their non-
compliance.
---------------------------------------------------------------------------

    \81\ See DST letter.
---------------------------------------------------------------------------

    The Commission has determined to push back to November 15, 1999, 
the date by which a non-bank transfer agent must certify that its 
material Year 2000 problems will be remedied. Any non-bank transfer 
agent that has a material Year 2000 problem on or after November 15, 
1999, will be required to start winding down its business and cease 
operations by December 1, 1999. The Commission expects that the non-
bank transfer agent will use the period between November 15, 1999, and 
December 1, 1999, to unwind its business in an orderly fashion. Moving 
the deadline to November 15, 1999, will provide non-bank transfer 
agents with as much time as possible to address Year 2000 problems, 
while permitting the Commission to take proactive steps in the event a 
non-bank transfer agent is not Year 2000 compliant.
    The Commission acknowledges that in the ordinary course of business 
the transfer of accounts might take several months. However, given the 
nature of the Year 2000 problem, accounts may need to be transferred on 
an expedited basis.\82\ The Commission notes that the rule, both as 
proposed and as adopted, permits the Commission or a court of competent 
jurisdiction to order a non-bank transfer agent to comply with Rule 
17Ad-21T(d) (i.e., cease its transfer agent business and transfer 
accounts) at any time after August 31, 1999, if to do so would be in 
the public interest or for the protection of investors.\83\
---------------------------------------------------------------------------

    \82\ The Commission appreciates the difficulties associated with 
an expedited transfer of accounts. See infra Section II. B. 6 for a 
further discussion of this issue.
    \83\ This action would be appropriate where it is patently 
unrealistic that a non-bank transfer agent will be able to conduct 
sufficient remediation to achieve Year 2000 compliance by November 
15, 1999.
---------------------------------------------------------------------------

b. Certification
    As adopted, Rule 17Ad-21T provides that a non-bank transfer agent 
with (or presumed to have) a material Year 2000 problem on or after 
August 31, 1999, will be permitted to continue to operate until 
December 1, 1999, if in addition to providing the Commission with the 
notice required by paragraph (c) of the rule, it provides the 
Commission and its issuers a certificate signed by its chief executive 
officer (or an individual with similar authority) stating:
     The non-bank transfer agent is in the process of 
remediating its material Year 2000 problem;
     The non-bank transfer agent has scheduled testing of its 
affected mission critical systems to verify that the material Year 2000 
problem has been remediated, and specifies the testing dates;
     The date (which cannot be later than November 15, 1999) by 
which the non-bank transfer agent anticipates completing remediation of 
the material Year 2000 problem in its mission critical systems; and
     Based on inquiries and to the best of its chief executive 
officer's knowledge, the non-bank transfer agent does not anticipate 
that the existence of the material Year 2000 problem in its mission 
critical systems will impair its ability, depending on the nature of 
its business, to assure the prompt and accurate transfer and processing 
of securities, the maintenance of master securityholder files, or the 
production and retention of required records; and the non-bank transfer 
agent anticipates that the enumerated remediation steps will result in 
remedying the material Year 2000 problem on or before November 15, 
1999.
    The Commission has made four changes to the certification 
provision. First, as stated above, the date by which the non-bank 
transfer agent must expect to have remediated the material Year 2000 
problem is now November 15, 1999 (rather than October 15, 1999). 
Second, the Commission has added language to paragraph (e)(1)(i)(D) to 
require that the certification include a statement that the chief 
executive officer believes that the steps referred to in paragraphs (A) 
through (C) will result in remedying the material Year 2000 problem no 
later than November 15, 1999. In the rule as proposed, there was no 
affirmative statement that the chief executive officer believed that 
the described remediation steps would address the firm's problems 
before a specified date.
    Third, Rule 17Ad-21T(d)(2) provides that a non-bank transfer agent 
that has or is presumed to have a material Year 2000 problem on or 
after August 31, 1999, will be permitted to operate until November 15, 
1999, if it files a certificate signed by its chief executive officer 
that contains the representations specified in paragraph (e)(1)(i) of 
the rule. The Commission is also adding paragraph (e)(1)(ii) to permit 
non-bank transfer agents to include additional information to show that 
their mission critical systems are free of material Year 2000 problems.
    Fourth, the rule as adopted requires non-bank transfer agents that 
have submitted a certificate pursuant to paragraph (e)(1)(i) to submit 
a second certificate signed by the chief executive officer (or an 
individual with similar authority) on or before November 15,

[[Page 42020]]

1999, stating that, based on inquiries and to the best of the chief 
executive's knowledge, the non-bank transfer agent has remediated its 
Year 2000 problem or that it intends to cease operations. The second 
certification is designed to give non-bank transfer agents the 
opportunity to certify to the Commission, the public, and their 
customers that they have, in fact, remediated their Year 2000 problem. 
In addition, the second certification will provide information to the 
Commission regarding the non-bank transfer agents that have fixed their 
Year 2000 problems and those non-bank transfer agents that have not.
    The Commission notes that the rule requires a non-bank transfer 
agent to notify the Commission of material Year 2000 problems it 
experiences on or after August 31, 1999. Therefore, a non-bank transfer 
agent filing a certificate on August 31, 1999, must update it if the 
information contained in the original certificate becomes materially 
inaccurate in any respect. If a non-bank transfer agent finds a new 
material Year 2000 problem subsequent to August 31, 1999, it must 
promptly notify its issuers and the Commission and submit a certificate 
in accordance with the rule.
5. Confidentiality of Notices and Certifications
    In the Proposing Release, we indicated that the August 31, 1999, 
notices and certifications would be made public so that customers of 
these transfer agents could assess the potential impact on them and 
take any appropriate action. Consistent with the Commission's previous 
policy in making Year 2000 disclosures public, the Commission will make 
the notices and certificates available to the public.\84\ After 
December 1, 1999, the Commission will also make public any actions 
taken against firms that are not Year 2000 compliant under the rule.
---------------------------------------------------------------------------

    \84\ By requiring a second certificate, we are giving non-bank 
transfer agents the opportunity to inform the Commission and the 
public that they have remediated their Year 2000 problems.
---------------------------------------------------------------------------

6. Transfer of Accounts
    In the event that a non-bank transfer agent has a material Year 
2000 problem in a mission critical system that it cannot remediate by 
November 15, 1999, it will have to take steps by December 1, 1999, to 
transfer customer accounts to other Year 2000 compliant transfer 
agents. The Commission understands that transfer agents may be 
reluctant to take over customer accounts from a non-compliant firm. The 
Commission intends to exercise a great degree of flexibility in 
accommodating transfer agents that accept accounts before or after 
December 1, 1999, from impaired transfer agents.\85\
---------------------------------------------------------------------------

    \85\ 85 By moving the deadline for Year 2000 compliance from 
October 15, 1999 to November 15, 1999, the Commission anticipates 
that fewer transfer agents will be required to transfer accounts due 
to a material Year 2000 problem.
---------------------------------------------------------------------------

    The Commission can take action before December 1, 1999, to protect 
investors. After August 31, 1999, the Commission will be reviewing 
notices and certificates, and making follow-up inquiries regarding 
transfer agents' Year 2000 readiness. Rule 17Ad-21T(f) makes clear that 
the Commission can take action to protect investors regardless of 
whether a firm has filed a certificate, to proactively address the few 
firms that will clearly not be ready for the Year 2000.
    In addition, the Commission encourages each firm that files a 
notice and accompanying certificate by August 31, 1999, to begin 
negotiations for a standby agreement with another transfer agent that 
does not have a Year 2000 problem in case it becomes necessary to 
transfer business. The Commission believes that having a standby 
agreement to transfer business is prudent in light of the Year 2000 
problem and the logistics involved in transferring accounts.\86\
---------------------------------------------------------------------------

    \86\ The Commission is aware that the process of a shareholder 
record conversion and transfer to another transfer agent can be a 
time consuming process and requires the issuer to appoint or agree 
to a successor transfer agent. In addition, over-printing of the 
transfer agent and registrar signature panel on certificates will be 
necessary.
---------------------------------------------------------------------------

III. Recordkeeping Requirements

A. Transfer Agents

    Proposed Rule 17Ad-21T contained a recordkeeping requirement for 
non-bank transfer agents. As proposed, the rule required that, 
beginning August 31, 1999, and ending March 31, 2000, every non-bank 
transfer agent to make a daily backup copy of its database and file 
layouts.\87\ The proposal specified that such backup records were to be 
made at the end of each business day and preserved for a rolling five 
business day period in a manner that allowed for the possible transfer 
and conversion to a successor transfer agent.\88\ In the event of a 
transfer agent failure, it may be impossible to retrieve files unless 
the transfer agent has previously stored a separate set of backup 
records. Thus, this requirement was intended to facilitate the transfer 
to and conversion of records by another registered transfer agent if 
necessary.
---------------------------------------------------------------------------

    \87\ File layouts was defined in proposed Rule 17Ad-21T(g)(4) as 
the description and location of informatioin contained in the 
database.
    \88\ We understand that most transfer agents already make and 
preserve a separate copy of their record as a good business 
practice.
---------------------------------------------------------------------------

    The comments received regarding the recordkeeping requirement were 
favorable. For example, two commenters opined that maintenance of 
multiple day backup records is a conservative, inexpensive, and 
responsible approach designed to enhance recovery capabilities.\89\ 
Three commenters stated that because a backup of daily work is 
necessary, a recordkeeping requirement set forth in the proposed rule 
should become a general, not a temporary rule.\90\ One commenter 
suggested a more extensive recordkeeping program with a backup of three 
generations of files,\91\ namely, copying the entire database at the 
end of the week with a daily backup of changed files and transactions, 
and storing these records for three weeks.
---------------------------------------------------------------------------

    \89\ See letters from STA and RTC.
    \90\ See letters from STA, RTC, and DST.
    \91\ See STA letter.
---------------------------------------------------------------------------

    Another commenter, however, pointed out that while most larger 
transfer agents already maintain the required records for longer than 
five days, the proposed format for record retention appeared likely to 
be onerous.\92\ This commenter explained that the proposed rule 
employed the term ``database,'' and therefore would include 
significantly more records than those required for a successful 
conversion. It was suggested that the records required to be backed up 
should be limited to computerized securityholder records that are 
necessary for a conversion of the securityholder records to a successor 
transfer agent.
---------------------------------------------------------------------------

    \92\ See DST letter.
---------------------------------------------------------------------------

    Responding to the commenters' concerns, we have made several 
changes. First, the Commission acknowledges that the requirement to 
backup the entire database and file layouts on a daily basis might be 
burdensome. Thus, the rule as adopted requires that backup records must 
be made and preserved for all master securityholder files.\93\ As 
adopted, the rule still requires that backup records be maintained for 
a rolling five business

[[Page 42021]]

day period.\94\ In case the most recent backup records have been 
corrupted, this five day preservation requirement gives the transfer 
agent four more opportunities to obtain uncorrupted backup records from 
which to reconstruct its critical computer files. In addition, the 
Commission has also added language which provides for two additional 
safeguards in case the records need to be reconstructed. First, if a 
non-bank transfer agent has a material Year 2000 problem, it must 
preserve for at least one year the five days of backup records 
immediately preceding the day the problem was discovered. In addition, 
the non-bank transfer agent must make and preserve for one year backup 
records for the five business days prior to January 1, 2000.\95\
---------------------------------------------------------------------------

    \93\ The Commission recently proposed for comment amendments to 
Rule 17Ad-7 (17 CFR 240.17Ad-7) that would allow registered transfer 
agents to use electronic storage media for recordkeeping purposes. 
Should the Commission adopt the proposed amendments, transfer agents 
would be able to maintain their backup records in any format that is 
allowed by Rule 17Ad-7, as amended, provided that all the conditions 
imposed by the rule are met, that would allow for a successful 
conversion and transfer to a Year 2000 compliant transfer agent. 
Exchange Act Release No. 41442 (May 25, 1999), 64 FR 29608 (June 2, 
1999).
    \94\ As noted in the STA letter, some transfer agents currently 
copy their entire database at the end of the business week with 
daily backup copies of just the changed files and transactions, and 
store these records for at least two weeks. We would consider this 
procedure to comply with the backup requirement.
    \95\ This rule requires that non-bank transfer agents make and 
preserve a separate copy of an existing record. It does not require 
non-bank transfer agents to create any new records.
---------------------------------------------------------------------------

    In summary, Rule 17Ad-21T provides that beginning August 31, 1999, 
and ending March 31, 2000, a non-bank transfer agent must maintain 
backup records for all master securityholder files.\96\ Such backup 
records must be made at the close of each business day and must be 
preserved for a rolling five business day period in a manner that will 
allow for the transfer and conversion to a successor transfer agent. If 
a non-bank transfer agent discovers a Year 2000 problem, it must 
preserve for at least one year the five day backup records immediately 
preceding the day the problem was discovered. In addition, the non-bank 
transfer agent must make, at the close of business on December 27 
through 31, 1999, a backup copy for all master securityholder files and 
preserve these records for at least one year. Such backup records must 
permit the timely restoration of such systems to their condition 
existing prior to experiencing the material Year 2000 problem. Copies 
of the backup records must be kept in an easily accessible place but 
must not be located with or held in the same computer system as the 
primary records. In addition, they must be able to be immediately 
produced or reproduced. A non-bank transfer agent must furnish promptly 
to a representative of the Commission such legible, true, and complete 
copies of those records, as may be requested.
---------------------------------------------------------------------------

    \96\ Because transfer agents maintain the only inclusive records 
of the owners of issuers' outstanding securities and are necessary 
for the continuous trading and transfer of ownership of those 
securities, the Commission believes that it is prudent to require 
transfer agents to begin maintaining backup records at the end of 
August 1999. Furthermore, because there are potential Year 2000 
problems that may arise because 2000 is a leap year, the 
recordkeeping period will extend through March 31, 2000.
---------------------------------------------------------------------------

B. Broker-Dealers

    Proposed Rule 17a-9T would have required certain broker-dealers to 
make a separate copy of their blotters and their securities record or 
ledger (``securities record'') for the last two business days of 
1999.\97\ Specifically, the proposed rule would have obligated broker-
dealers that, as of December 30 and 31, 1999, are required under Rule 
15c3-1(a)(2) to maintain minimum net capital of $250,000 \98\ to make 
and to preserve a separate copy of their blotters and securities record 
as of the close of business on December 30 and 31, 1999. Under the 
proposed rule, broker-dealers could have kept the records on paper or 
on any micrographic or electronic storage media acceptable under Rule 
17a-4(f). Proposed Rule 17a-9T would only have required broker-dealers 
to make and preserve a separate copy of an existing record and to 
ensure that the record was created at the close of business on December 
30 and December 31, 1999. It would not have required a broker-dealer to 
create any new record.\99\ This rule was intended to assist broker-
dealers, the Commission, the DEAs, and the Securities Investor 
Protection Corporation in identifying all securities positions carried 
by the broker-dealer and the location of the securities in the event a 
broker-dealer experiences Year 2000 problems.
---------------------------------------------------------------------------

    \97\ Rule 17a-3(a)(1) requires every broker-dealer to make and 
keep current a blotter containing an itemized daily record of all 
purchases and sales of securities, all receipts and deliveries of 
securities (including certificate numbers), all receipts and 
disbursements of cash and all other debits and credits. The blotter 
is required to show the account for which each transaction was 
effected, the name and amount of securities, the unit and aggregate 
purchase or sale price (if any), the trade date, and the name or 
other designation of the person from whom purchased or received or 
to whom sold or delivered. 17 CFR 240.17a-3(a)(1). Rule 17a-3(a)(5) 
requires every broker-dealer to make and keep current a securities 
record or ledger reflecting separately for each security all long or 
short positions (including securities in safekeeping and securities 
that are the subject of repurchase or reverse repurchase agreements) 
carried by the broker-dealer for its account or for the account of 
its customers, including the name or designation of the account in 
which each position is carried. The securities record is also 
required to show the location of all securities long and the 
offsetting position to all securities short, including long security 
count differences and short security count differences classified by 
the date the differences were discovered. 17 CFR 240.17a-3(a)(5).
    \98\ See 17 CFR 240.15c3-1(a)(2).
    \99\ We understand that most broker-dealers already make and 
preserve a separate copy of these records as a good business 
practice. However, because of the time-sensitive nature of the 
securities markets, this temporary rule requires that broker-dealers 
keep a copy of these records separate from other records required 
under Rules 17a-3 and 17a-4.
---------------------------------------------------------------------------

    Several commenters expressed concerns about the proposed 
recordkeeping rule. One commenter, for example, argued that the 
recordkeeping rule should apply only to those broker-dealers that 
failed to file a Form BD-Y2K, those that have failed industry testing, 
and those that report Year 2000 problems after August 31, 1999.\100\ 
Another commenter thought that the recordkeeping requirement should 
apply only to large firms.\101\ One commenter opposed the recordkeeping 
requirement on the grounds that such records would be difficult to make 
and the additional requirements would be time consuming and 
expensive.\102\ In addition, this commenter argued that the rule as 
proposed did not allow sufficient flexibility in recordkeeping methods. 
Specifically, this commenter argued that such records should not be 
kept on non-rewritable and non-erasable storage media, but rather that 
broker-dealers be permitted to use temporary storage means.\103\
---------------------------------------------------------------------------

    \100\ See Pershing letter.
    \101\ See Monroe Securities letter.
    \102\ See Schwab letter.
    \103\ Id.
---------------------------------------------------------------------------

    Other commenters agreed that records should be kept, but had 
concerns regarding how and when to make and keep those records. In its 
comment letter, the NASD stated that the proposed recordkeeping 
requirements should be extended to cover the last three business days 
of 1999, in order to assist in identifying securities trades that may 
not have settled as of year end.\104\ In addition, the NASD suggested 
that broker-dealers should maintain month-end records for November 
1999.\105\
---------------------------------------------------------------------------

    \104\ See NASD letter.
    \105\ Id.
---------------------------------------------------------------------------

    The Commission believes that the recordkeeping rule provides a 
safeguard against unforeseen Year 2000 problems. Should a Year 2000 
problem disrupt a broker-dealer, its account positions and transactions 
must be reconstructed. It is therefore crucial to assure that broker-
dealers maintain all the necessary records to permit reconstruction.
    The Commission is adopting Rule 17a-9T with several changes to 
respond to commenters' concerns and to clarify the rule language. The 
Commission agrees with the commenters that broker-dealers should keep 
records for the length of the three day settlement cycle to assure that 
sufficient records exist in the event of a problem. Thus, the rule

[[Page 42022]]

as adopted requires broker-dealers to keep records for December 29, 
December 30, and December 31, 1999. The Commission is also adding 
language to clarify that such records must be made before January 1, 
2000 to assure that separate records are made before the date change 
and the possibility of data corruption. The rule requires that broker-
dealers make separate blotters for each of the final three business 
days of the year. In addition, the Commission deleted the proposed 
language that would have allowed a broker-dealer to avoid preserving 
separate blotters if its securities record reflected both trade date 
and settlement date positions. The Commission deleted this language 
because the information contained in blotters, which is different from 
the information contained in securities records, may be important in 
reconstructing account positions and transactions.
    The Commission is adding paragraph (d) to Rule 17a-9T to clarify 
that the records may be maintained in any format that is now acceptable 
under Rules 17a-3 and 17a-4, so long as broker-dealers comply with all 
the conditions in those rules. In addition, the Commission is 
clarifying that broker-dealers that retain the records using 
micrographic or electronic storage media must comply with all the 
conditions set forth in paragraph (f) of Exchange Act Rule 17a-4.\106\
---------------------------------------------------------------------------

    \106\ 17 CFR 240.17a-4. We note that one of the conditions set 
forth in paragraph (f) of the rule requires that records be made 
immediately available.
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons discussed above, the Commission believes that 
adopting new temporary Rules 15b7-3T, 17Ad-21T, and 17a-9T under the 
Exchange Act will help the Commission and market participants identify 
broker-dealers and non-bank transfer agents that will not be ready for 
Year 2000. The temporary rules provide a schedule for broker-dealers 
and non-bank transfer agents to remediate Year 2000 problems. The 
temporary rules balance the need to permit broker-dealers and non-bank 
transfer agents with sufficient time to address their Year 2000 
problems with the need of customers and the financial markets to have 
time to make alternative arrangements before harm is done. Because of 
the risks to investors and the financial markets, the temporary rules 
provide an additional mechanism for regulatory authorities to identify 
isolated problems and to take action to address those problems before 
the Year 2000.

V. Costs and Benefits of the Rules

    The Commission believes that the benefits of the rules justify the 
associated costs. To assist the Commission in its evaluation of the 
costs and benefits and the effect on competition, efficiency and 
capital formation that may result from the new rules, commenters were 
requested to provide analysis and data, if possible, relating to costs 
and benefits associated with the proposal. The Commission received only 
one comment that that touched on this issue.\107\
---------------------------------------------------------------------------

    \107\ One commenter stated that the Commission presented an 
inadequate relationship between the costs to brokerage firms (of 
being shut down) and the benefits to the investing public. See 
Grodsky Associates letter.
---------------------------------------------------------------------------

    The Commission believes that temporary Rules 15b7-3T, 17Ad-21T, and 
17a-9T are necessary to protect investors and the integrity of the 
securities markets during the transition to the Year 2000. The rules 
are designed to protect investors and the markets from the risks posed 
by any broker-dealers or non-bank transfer agents who do not succeed in 
making their mission critical systems Year 2000 compliant by the end of 
1999. In addition, the rules provide for the retention of records which 
will assist broker-dealers, non-bank transfer agents, the Commission, 
DEAs, and the Securities Investor Protection Corporation in identifying 
all securities positions and the location of securities in the event 
that a broker-dealer or non-bank transfer agent experiences a Year 2000 
problem.
    Since the Proposing Release was issued, the rule language has been 
changed to incorporate several suggestions provided by commenters. In 
particular, the Commission clarified that (1) only broker-dealers and 
non-bank transfer agents that use computers in the course of their 
business as broker-dealers and non-bank transfer agents are subject to 
the rules; (2) the rules only cover mission critical systems; and (3) 
for purposes of these rules, broker-dealers and non-bank transfer 
agents will not be presumed to have a material Year 2000 problem for 
failing to have written procedures to address Year 2000 problems in 
mission critical systems if they are under another entity's control. As 
a result of the changes, the costs have been reduced because the rule 
affects fewer broker-dealers and non-bank transfer agents. Nonetheless, 
we recognize that, as described below, these rules will impose costs on 
broker-dealers and non-bank transfer agents. We believe, however, that 
the benefits of this rule justify the costs.

A. Benefits

    The Commission believes that the rules will provide the following 
benefits:
     Broker-dealers and non-bank transfer agents will be 
required to focus on the serious issue of Year 2000 readiness
     Capital formation will be facilitated by the smooth 
functioning of the U.S. securities markets during the transition to the 
Year 2000
     The rules will help ensure that investors are able to 
promptly access their accounts and execute transactions at the turn of 
the century
     Investors will be protected in their investment activities 
by reduced individual firm risk and systemic risk that would result 
from computer system failures.
     The risks non-Year 2000 compliant broker-dealers and non-
bank transfer agents pose to the financial system will be reduced, 
permitting financial markets to efficiently operate without delays in 
executions and settlements.
     The temporary recordkeeping requirements will assist the 
Commission, broker-dealers, DEAs, Securities Investor Protection 
Corporation, and non-bank transfer agents in reconstructing records 
that are lost or damaged due to computer problems associated with the 
Year 2000, if any occur.
     The costs associated with these temporary rules are much 
lower than the costs that would be incurred if Year 2000 problems were 
left unchecked.

B. Costs

    We recognize that these rules will impose certain costs on broker-
dealers and transfer agents. To avoid being presumed to have a material 
Year 2000 problem, broker-dealers and non-bank transfer agents must, on 
or after August 31, 1999, have written procedures, have verified their 
Year 2000 remediation efforts through appropriate testing, and have 
addressed all exceptions contained in any public independent 
accountant's report. Although these rules may result in some firms 
accelerating their remediation programs, these are costs most broker-
dealers and non-bank transfer agents already must incur in order to 
comply with other Commission and/or SRO rules. In addition, virtually 
all broker-dealers and non-bank transfer agents must already incur 
these costs in order to take the necessary steps to become Year 2000 
compliant and therefore to stay in business post-Year 2000.

[[Page 42023]]

    Broker-dealers and transfer agents that have material Year 2000 
problems or do not have the operational capability to conduct their 
respective businesses could bear additional costs, i.e., the costs of 
not being able to engage in their business. However, the market itself 
may impose these costs on them once it became clear that they were not 
ready for the Year 2000 or do not have the required operational 
capability.
    Finally, as described below, these rules will impose additional 
costs on firms required to file notices and certificates with the 
Commission. The rules will also impose additional costs on firms 
subject to the recordkeeping requirements of the rules.
1. Rule 15b7-3T
    The Commission staff estimates that approximately 39 brokers-
dealers will be affected by the rule.\108\ The Commission staff 
estimates that each respondent will submit one notice. The Commission 
staff estimates that the aggregate cost burden for 39 broker-dealers to 
submit notices will be $1,950.\109\
---------------------------------------------------------------------------

    \108\ There are approximately 8,300 registered broker-dealers 
and the Commission staff estimates that approximately 3,900 will 
have systems that will need to be Year 2000 compliant. The 
Commission staff estimates that approximately one percent of these 
broker-dealers might be required to submit notices and may choose to 
submit certificates under the rule. This estimate is consistent with 
the estimates provided to the Commission by various SROs. The 
Commission notes that the estimated number of broker-dealers that 
will have systems that will need to be Year 2000 compliant has been 
reduced because adopted Rule 15b7-3T is narrower in scope than the 
proposed rule. In the Proposing Release, the Commission estimated 
that the 59 broker-dealers would be affected by the rule.
    \109\ This amount was calculated by multiplying 39 broker-
dealers by $50. The Commission staff estimates that the cost for 
each respondent submitting a notice will be $50 (0.5 hours at $100 
per hour).
---------------------------------------------------------------------------

    The Commission staff expect that most, if not all, broker-dealers 
with Year 2000 problems on or after August 31, 1999, will choose to 
submit an initial certificate in order to continue operations. Broker-
dealers that submit an initial certificate must file a second 
certificate. The Commission staff estimates that the aggregate cost 
burden for 39 broker-dealers to submit both certificates will be 
$3,900.\110\
---------------------------------------------------------------------------

    \110\ This amount was calculated by multiplying 39 broker-
dealers by $100. The Commission staff estimates that the cost for 
each respondent submitting a certificate will be $50 (0.5 hours at 
$100 per hour). Therefore, filing two certificates will cost a 
broker-dealer $100.
---------------------------------------------------------------------------

    The Commission estimates the aggregate burden on broker-dealers to 
file one notice and two certificates will be $5,850.
2. Rule 17Ad-21T
    The Commission staff estimates that there will be approximately 6 
non-bank transfer agents affected by rule.\111\ The Commission staff 
also estimates that each respondent will submit one notice under the 
rule. The Commission staff estimates that the aggregate cost burden for 
6 non-bank transfer agents to submit notices will be $300.\112\
---------------------------------------------------------------------------

    \111\ The Commission staff estimates that there are 
approximately 600 non-bank transfer agents. The Commission staff 
estimates that approximately one percent of those non-bank transfer 
agents might be required to submit notices and may choose to submit 
certificates under the rule. The Commission emphasizes the serious 
difficulty in estimating the number of non-bank transfer agents that 
will have material Year 2000 problems at some point in the future. 
The Commission expects that most non-bank transfer agents will not 
have such problems.
    \112\ This amount was calculated by multiplying 6 non-bank 
transfer agents by $50. The Commission staff estimates that the cost 
for each respondent submitting a notice will be $50 (0.5 hours at 
$100 per hour).
---------------------------------------------------------------------------

    The certificate requirement is optional. The Commission, however, 
expects most, if not all, non-bank transfer agents with material Year 
2000 problems on or after August 31, 1999, to submit the initial 
certificate in order to continue performing certain functions. Non-bank 
transfer agents that submit an initial certificate must file a second 
certificate. The Commission staff estimates that the aggregate cost 
burden for 6 non-bank transfer agents to submit both certificates will 
be $600.\113\
---------------------------------------------------------------------------

    \113\ This amount was calculated by multiplying 6 non-bank 
transfer agents by $100. The Commission staff estimates that the 
cost for each respondent submitting a certificate will be $50 (0.5 
hours at $100 per hour). Therefore, it will cost a non-bank transfer 
agent $100 to file both certificates.
---------------------------------------------------------------------------

    The Commission estimates that the aggregate burden on non-bank 
transfer agents to file one notice and two certificates will be $900.

C. Recordkeeping Requirements

1. Transfer Agents
    The Commission staff estimates that there are approximately 600 
non-bank transfer agents that will be impacted by Rule 17Ad-21T's 
recordkeeping requirements. The Commission estimates that the 
recordkeeping costs to each non-bank transfer agent under the rule will 
be minimal because the Commission is simply codifying what is already 
an existing and established business practice.\114\ The Commission 
reached this conclusion after considering that these records will 
already exist and the rule only requires non-bank transfer agents to 
make separate copies. The Commission staff estimates the aggregate cost 
burden of 600 non-bank transfer agents to comply with this 
recordkeeping requirement to be approximately $4,590,000.\115\ The 
Commission notes that a substantial portion of this cost is already 
incurred by non-bank transfer agents because they perform this 
recordkeeping in the course of their business.\116\
---------------------------------------------------------------------------

    \114\ The RTC estimated that compliance with this recordkeeping 
requirement, if not already performed would take approximately \1/2\ 
hour to 4 hours of computer operations each night at a cost of 
between $50 to $2,000 per night. The cost of preserving the data on 
disk was estimated by RTC to be a one time cost of between $50 and 
$200. The RTC also estimated that preparation of the certification 
would consume 1.5 hours of labor and cost less than $1,000. See RTC 
letter.
    \115\ This amount was computed by adding $4,530,000 (600 non-
bank transfer agents multiplied by 151 days--the period between 
August 31, 1999, and March 31, 2000--multiplied by $50 for labor) 
and $60,000 (600 non-bank transfer agents multiplied by $100 for 
disks). The Commission staff estimates that the total burden for 
each non-bank transfer agent for the period between August 31, 1999, 
and March 31, 2000 will be approximately 38 hours (approximately 151 
business days at 0.25 hours per business day). With respect to 
burden hours, the Commission staff estimates that the aggregate 
burden for all non-bank transfer agents under the rule will be 
approximately 22,800 hours (600 transfer agents at 38 hours per non-
bank transfer agent).
    \116\ In its comment letter, the STA stated that backing up 
files is a standard and good practice, which is part of the cost of 
doing business. See STA letter. In addition, the RTC stated in their 
comment letter that ``All responsible information technology 
professionals already perform daily database and processing system 
file back-ups'' and that ``Maintenance of multiple day record back-
ups is a conservative, inexpensive and responsible approach designed 
to enhance recovery capabilities.'' See RTC letter.
---------------------------------------------------------------------------

    The rule also requires non-bank transfer agents that have a 
material Year 2000 problem to preserve for at least one year backup 
records for the five days immediately preceding the day the Year 2000 
problem was discovered. The Commission staff estimates that the non-
bank transfer agents that must comply with this provision will incur an 
aggregate cost burden of $1,200.\117\
---------------------------------------------------------------------------

    \117\ This amount was computed by multiplying 6 (the number of 
non-bank transfer agents the Commission estimates might have a 
material Year 2000 problem) by $200 (the cost to store five days of 
all master securityholder files for one year).
---------------------------------------------------------------------------

    The rule requires that non-bank transfer agents make at the close 
of business on December 27 through 31, 1999, a backup copy of all 
master securityholder lists and preserve these records in an easily 
accessible place for at least one year. The Commission staff estimates 
the aggregate cost burden to comply with this recordkeeping requirement 
to be approximately $120,000.\118\
---------------------------------------------------------------------------

    \118\ This amount was computed by multiplying 600 (the number of 
non-bank transfer agents) by $200 (the cost to store five days of 
master securityholder files for one year).
---------------------------------------------------------------------------

    The records required to be made and kept under the rule are records 
that are currently kept by non-bank transfer

[[Page 42024]]

agents. Thus, the Commission is not promulgating rules that require 
respondents to generate new records. Rather, the rules only require 
that a back-up copy be made and kept. The rules will aid the 
Commission, non-bank transfer agents, and the public in the event of 
operational failures by non-bank transfer agents. The Commission 
believes that the rules will guard against Year 2000 problems.
2. Broker-Dealers
    The Commission staff estimates that approximately 1,100 broker-
dealers will be affected by Rule 17a-9T.\119\ The Commission staff 
estimates that the aggregate cost burden for 1,100 broker-dealers to 
make and preserve the records required by this rule will be 
approximately $15,000.\120\
---------------------------------------------------------------------------

    \119\ Only those broker-dealers that are required to maintain 
certain net capital pursuant to Rule 15c3-1(a)(2)(i), 17 CFR 
240.15c3-1(a)(2)(i), will be required to comply with the rule.
    \120\ The Commission staff estimates that each such broker-
dealer subject to the rule will incur an average burden of 
approximately 0.75 hours to make and keep the records. The 
Commission believes that the recordkeeping function may be performed 
by clerical staff at a rate of $25 per hour. The Commission staff 
estimates that the total aggregate burden under the rule will be 
approximately 825 hours (1,100 brokers or dealers at 0.75 hours per 
broker or dealer).
---------------------------------------------------------------------------

    The records required to be copied and kept under the rule are 
records that are currently kept by broker-dealers.\121\ Thus, the 
Commission is not promulgating a rule that requires respondents to 
generate new records. Rather, the rules only require that back-up 
copies be made and kept. The records required by this rule will benefit 
the Commission and the public in the event of operational failures by 
broker-dealers. The records will assist in the identification of all 
securities positions carried by the broker-dealer, and the transfer to 
and conversion of records to another entity.
---------------------------------------------------------------------------

    \121\ See Rule 17a-3(a)(1), 17 CFR 17a-3(a)(1) and Rule 17a-
3(a)(5), 17 CFR 17a-3(a)(5).
---------------------------------------------------------------------------

VI. Effects on Competition, Efficiency and Capital Formation

    Section 23(a)(2) of the Exchange Act requires that the Commission, 
when adopting rules under the Exchange Act, consider the 
anticompetitive effects of those rules, if any, and balance any 
anticompetitive impact against the regulatory benefits gained in terms 
of furthering the purposes of the Exchange Act.\122\ In the Proposing 
Release, the Commission solicited comment on the effects of the rules 
on competition, efficiency and capital formation. The Commission 
received one comment regarding these issues.\123\ The commenter stated 
that the proposals would harm all of these areas.\124\ Specifically, 
the commenter stated that the rules would place smaller firms under 
unnecessary burdens.\125\ The commenter also objected to the filing and 
recordkeeping requirements as being inefficient.\126\
---------------------------------------------------------------------------

    \122\ 15 U.S.C. 78w(a)(2).
    \123\ See Dan Jamieson letter.
    \124\ Id.
    \125\ Id.
    \126\ Id.
---------------------------------------------------------------------------

    The Commission has considered Rules 15b7-3T, 17Ad-21T, and 17a-9T 
in light of the comment received and the standards cited in Section 
23(a)(2) of the Exchange Act.\127\ The Commission believes that these 
new rules do not impose any significant burden on competition not 
necessary or appropriate in furtherance of the Exchange Act. With the 
Year 2000 quickly approaching, all firms should be preparing for the 
Year 2000. Testing computer systems and remediating Year 2000 problems 
is a matter of good business practice that is necessary for the 
protection of investors and the securities markets. A firm that expends 
resources preparing for the Year 2000 will no longer be at a 
competitive disadvantage to another firm that does not expend any 
resources preparing for the Year 2000.
---------------------------------------------------------------------------

    \127\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission believes that the rules are necessary for the U.S. 
securities markets to operate efficiently at the turn of the century. 
Without the rules, non-compliant firms that interact with other market 
participants could have detrimental and potentially widespread 
consequences on other market participants. The new rules reduce the 
likelihood of a firm's Year 2000 problem affecting the securities 
markets to the detriment of investors and the public. By reducing the 
likelihood of firms experiencing Year 2000 problems (e.g., problems 
have the potential to delay executions and slow the settlement 
process), the Commission is promoting efficiency.
    The rules will not hinder capital formation. The rules are 
necessary to ensure that the U.S. securities markets function 
efficiently in the Year 2000 and, more specifically, that broker-
dealers and non-bank transfer agents are able to provide their 
customers prompt and efficient service.

VII. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with Section 4 of the Regulatory Flexibility Act 
(``RFA'').\128\ It relates to new temporary Rules 15b7-3T, 17a-9T, and 
17Ad-21T under the Exchange Act.
---------------------------------------------------------------------------

    \128\ See 5 U.S.C. 604.
---------------------------------------------------------------------------

    An Initial Regulatory Flexibility Analysis (``IRFA'') was prepared 
in accordance with 5 U.S.C. 603 and was made available to the 
public.\129\
---------------------------------------------------------------------------

    \129\ See Proposing Release.
---------------------------------------------------------------------------

A. Need for and Objectives of Amendments

    Unless proper modifications have been made, many computer systems 
in the Year 2000 will incorrectly read the date ``01/01/00'' as being 
in the year 1900 or another incorrect date. Year 2000 problems could 
have negative repercussions throughout the financial system because of 
the extensive interrelationship between broker-dealers, transfer 
agents, other market participants and markets. The new rules are 
intended to reduce the chances of harm to investors and the potential 
systemic risk to the public and the financial markets as a result of 
operational failures by registered broker-dealers and non-bank transfer 
agents.
1. Rule 15b7-3T
    Temporary Rule 15b7-3T is needed to protect investors and the 
integrity of the securities markets during the transition to the Year 
2000. The objective of the rule is to help ensure that broker-dealers 
operating at the turn of the century are Year 2000 compliant. To 
accomplish this objective, Rule 15b7-3T requires broker-dealers that 
have or are presumed to have a material Year 2000 problem on or after 
August 31, 1999, to notify the Commission and their DEA. Those broker-
dealers that have or are presumed to have a material Year 2000 problem 
must cease to conduct their securities business.
    The rule, however, provides those brokers or dealers that are not 
Year 2000 compliant on or after August 31, 1999, the opportunity to 
remediate their Year 2000 problem by submitting a certificate to the 
Commission. By filing a certificate, firms have until November 15, 
1999, to remediate their Year 2000 problems. A broker-dealer that 
continues to have a material Year 2000 problem on November 15, 1999, 
has until December 1, 1999, to unwind its business. If a broker-dealer 
submits a certificate stating that it will remediate its Year 2000 
problem by November 15, 1999, that broker-dealer is required to submit 
a second certificate to the Commission stating that it has remediated 
its Year 2000 problem or it intends to cease operations.

[[Page 42025]]

2. Rule 17Ad-21T
    Temporary Rule 17Ad-21T is needed to protect investors and the 
national market system during the transition to the Year 2000. The 
objective of the rule is to help ensure that that non-bank transfer 
agents will be capable of performing their functions in the Year 2000. 
To accomplish this objective, Rule 17Ad-21T requires non-bank transfer 
agents that have or are presumed to have a material Year 2000 problem 
on or after August 31, 1999, to notify the Commission. Non-bank 
transfer agents that have a material Year 2000 problem on or after 
August 31, 1999, must cease to conduct their transfer agent operations.
    The rule, however, permits those non-bank transfer agents that have 
or are presumed to have a material Year 2000 problem on or after August 
31, 1999, the opportunity to submit a certificate stating their Year 
2000 status and intent to remediate the problem. By filing a 
certificate, firms have until November 15, 1999, to remediate their 
Year 2000 problems. A non-bank transfer agent that continues to have a 
material Year 2000 problem on November 15, 1999, has until December 1, 
1999, to unwind its business. If a non-bank transfer agent submits a 
certificate stating that it will remediate its Year 2000 problem by 
November 15, 1999, that non-bank transfer agent is required to submit a 
second certificate to the Commission stating that it has remediated its 
Year 2000 problem or it intends to cease operations.
    In addition, Rule 17Ad-21T contains a recordkeeping requirement. 
The objective of the rule's recordkeeping requirement is to help 
facilitate the transfer to and conversion of records to a Year 2000 
compliant transfer agent, if necessary. The rule requires that 
registered non-bank transfer agents implement daily backup procedures 
and maintain backup records for all master securityholder files 
beginning August 31, 1999, and ending March 31, 2000. Records backup 
must be performed at the close of each business day. The records must 
be preserved for a five business day period.
    If a firm has a material Year 2000 problem, the rule mandates that 
it must preserve, for at least one year, the backup records for the 
five days immediately preceding the day the problem was discovered. In 
addition, firms must make, at the close of business on December 27 
through 31, 1999, a backup copy of all master securityholder files and 
preserve these records in an easily accessible place for at least one 
year.
3. Rule 17a-9T
    Temporary Rule 17a-9T is needed to assist broker-dealers, the 
Commission, the DEAs, and the Securities Investor Protection 
Corporation in identifying all securities positions carried by the 
broker-dealer and the location of the securities in the event that a 
broker-dealer experiences a Year 2000 problem. The rule requires 
certain broker-dealers to make before January 1, 2000, separate 
blotters pursuant to Rule 17a-3(a)(1) \130\ and a separate securities 
record or ledger pursuant to Rule 17a-3(a)(5) for each of the last 
three business days of 1999. These records must be preserved for a 
period of not less than one year.
---------------------------------------------------------------------------

    \130\ 17 CFR 240.17a-3(a)(1).
---------------------------------------------------------------------------

B. Significant Issues Raised by Public Comments

    No public comments were received in response to the IRFA and no 
comments specifically addressed that analysis. Commenters did, however, 
discuss limiting the scope of the proposed rules to exclude small 
firms. For example, several commenters urged the Commission to limit 
the applicability of Rule 15b7-3T to clearing firms, firms with larger 
numbers of customer accounts, firms that use computers for record 
keeping, order execution or order transmission, or firms with higher 
capital requirements.\131\
---------------------------------------------------------------------------

    \131\ See letters from US Participation, Goffstown Financial 
Investments, Holly Securities, HBK Finance, Intellivest Securities, 
Grodsky Associates, Dan Jamieson, Monroe Securities, Gramercy 
Securities, and Wall Street Capital Company.
---------------------------------------------------------------------------

    In response to commenters' concerns that the scope of the proposed 
Rule 15b7-3T is too broad, the Commission has modified the language of 
Rule 15b7-3T to clarify that the rule applies only to broker-dealers 
that use computers in the conduct of their business as a broker or 
dealer. In order to clarify the rule's scope, the Commission noted in 
this adopting release that Rule 15b7-3T is not intended to cover a 
broker-dealer whose reliance on automation is limited to the use of 
off-the-shelf word processing or accounting software. Moreover, smaller 
broker-dealers that still transmit orders via the telephone are not 
intended to be covered; only broker-dealers that use computers to 
conduct their business as broker-dealers are subject to the rule.
    The Commission further clarified in the release and rule that only 
material problems in mission critical systems trigger the provisions of 
this rule. In other words, only problems that might pose a risk to 
investors and markets are covered by this rule.
    The Commission has decided not to exclude broker-dealers from the 
rule based on factors such as size or number of accounts. The 
Commission believes that even small or introducing broker-dealers have 
the potential to affect other market participants by, for example, 
introducing inaccurate or corrupted data into other systems. The 
Commission believes the more appropriate test for applicability is 
whether a broker-dealer uses computers in the conduct of its business 
as a broker-dealer.
    Although the Commission did not receive any comments requesting 
that Rule 17Ad-21T be limited to exclude small non-bank transfer 
agents, the Commission has determined to limit Rule 17Ad-21T to non-
bank transfer agents that use computers in the conduct of their 
business as a transfer agent.

C. Legal Basis

    Proposed Rules 15b7-3T and 17a-9T are being proposed pursuant to 
Sections 3(b), 15(b) and (c), 17, and 23(a) of the Exchange Act [15 
U.S.C. 78c(b), 78o(b) and (c), 78q and 78w(a)]. Proposed Rule 17Ad-21T 
is being proposed pursuant to Sections 17(a), 17A(d), and 23(a) of the 
Exchange Act [15 U.S.C. 78q(a), 78q-1(d) and 78w(a)].

D. Small Entities Subject to the Rule

    For purposes of Commission rulemaking, paragraph (c) of Rule 0-10 
under the Exchange Act \132\ defines the term ``small business'' or 
``small organization'' to include any broker or 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 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 section.
---------------------------------------------------------------------------

    \132\ 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking, paragraph (h) of Rule 0-10 
under the Exchange Act \133\ defines the term ``small business'' or 
``small organization'' to include any transfer agent that: (1) Received 
less than 500 items for transfer and less than 500 items for processing 
during the preceding six months (or in the time that it has been in 
business, if shorter); (2) Transferred items only of issuers that

[[Page 42026]]

would be deemed ``small businesses'' or ``small organizations'' as 
defined in this section; (3) Maintained master shareholder files that 
in the aggregate contained less than 1,000 shareholder accounts or was 
the named transfer agent for less than 1,000 shareholder accounts at 
all times during the preceding fiscal year (or in the time that it has 
been in business, if shorter); and (4) Is not affiliated with any 
person (other than a natural person) that is not a small business or 
small organization under this section.
---------------------------------------------------------------------------

    \133\ 17 CFR 240.0-10(h).
---------------------------------------------------------------------------

    All registered brokers or dealers that use computers in the conduct 
of their business are subject to the requirements of Rule 15b7-3T. The 
Commission staff estimates that there are 8,300 registered broker-
dealers, of which approximately 5,200 qualify as ``small entities'' for 
purposes of the RFA. Not all of the 5,200 broker-dealers that qualify 
as ``small entities'' will be subject to the new rule. Specifically, 
broker-dealers that do not use computers in the conduct of their 
business will not be subject to the rule.
    All registered non-bank transfer agents that use computers in the 
conduct of their business are subject to Rule 17Ad-21T. The Commission 
staff estimates that there are approximately 1,120 registered transfer 
agents. Approximately 600 are non-bank transfer agents. Of these, 430 
qualify as ``small entities'' for purposes of the RFA. Not all of the 
430 non-bank transfer agents that qualify as ``small entities'' will be 
subject to the new rule, however. Specifically, non-bank transfer 
agents that do not use computers in the conduct of their business will 
not be subject to the rule.
    Rule 17a-9T applies only to broker-dealers that are required to 
maintain a minimum net capital of $250,000 pursuant to Rule 15c3-
1(a)(2)(i) as of December 29, 30, and 31, 1999. The Commission 
estimates that of the 8,300 registered broker-dealers, 1,100 are 
required to maintain a minimum net capital of $250,000. The Commission 
staff estimates that 15 of these broker-dealers may qualify as ``small 
entities,'' as defined in the RFA.

E. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The Commission believes that, for business reasons, prudent broker-
dealers should already have developed plans to address potential 
computer problems caused by the Year 2000. Therefore, Rule 15b7-3T is 
not placing new burdens on broker-dealers to develop plans or address 
computer problems. The rule does, however, require broker-dealers that 
are not Year 2000 compliant to (1) notify the Commission and their DEAs 
of material Year 2000 problems on or after August 31, 1999, (2) submit 
a certificate to the Commission if they wish to continue operations 
beyond August 31, 1999, and (3) submit a second certificate to the 
Commission if they previously filed a certificate and wish to stay in 
business.
    The Commission believes that, for business reasons, prudent non-
bank transfer agents should already have developed plans to address 
potential computer problems caused by the Year 2000. Therefore, Rule 
17Ad-21T is not placing new burdens on non-bank transfer agents to 
develop plans or address computer problems. The rule does, however, 
require non-bank transfer agents that are not Year 2000 compliant to 
(1) notify the Commission of material Year 2000 problems on or after 
August 31, 1999, (2) submit a certificate to the Commission if they 
wish to continue operations beyond August 31, 1999, and (3) submit a 
second certificate to the Commission if they previously filed a 
certificate and wish to stay in business.
    In addition, Rule 17Ad-21T contains a recordkeeping requirement. 
The rule requires that registered non-bank transfer agents implement 
daily backup procedures and maintain backup records for all master 
securityholder files beginning August 31, 1999, and ending March 31, 
2000. Records backup must be performed at the close of each business 
day. The records must be preserved for a rolling five business day 
period. The rule also requires that if a firm has a material Year 2000 
problem, it must preserve for at least one year the five day backup 
records immediately preceding the day the problem was discovered. In 
addition, firms must make, at the close of business on December 27 
through 31, 1999, a backup copy for all master securityholder files and 
preserve these records in an easily accessible place for at least one 
year. The recordkeeping requirement does not require non-bank transfer 
agents to make any new records, but only to preserve a separate copy of 
an existing record.
    Temporary Rule 17a-9T provides that only those broker-dealers 
required to maintain a minimum net capital of $250,000 are required to 
make and preserve a separate trade blotter and a separate securities 
record or ledger as of the close of business of each of the last three 
business days of 1999. The recordkeeping requirement does not require 
such broker-dealers to make any new records, but only to preserve a 
separate copy of an existing record. The records are required to be 
kept in an easily accessible place for a period of not less than one 
year. The Commission notes that this is not a continuing obligation, 
but only applies on December 29, 30, and 31, 1999.

F. Duplicative, Overlapping or Conflicting Federal Rules

    The Commission believes that there are no rules that duplicate, 
overlap, or conflict with the adopted rules.

G. Steps to Minimize Impact on Small Entities

    The RFA directs the Commission to consider significant alternatives 
that would accomplish the stated objective, while minimizing any 
significant adverse economic impact on small entities. Pursuant to 
Section 3(c) of the RFA, the Commission considered the following 
alternatives:
    (a) The establishment of differing compliance or reporting 
requirements or timetables the take into account the resources 
available to small entities;
    (b) the clarification, consolidation, or simplification of 
compliance and reporting requirements under the rules for such small 
entities;
    (c) the use of performance rather than design standards; and
    (d) an exemption from coverage of the rules, or any part thereof, 
for such small entities.
    Regarding the first alternative, the compliance and reporting 
requirements contained in 15b7-3T and 17Ad-21T are narrowly tailored to 
help ensure all firms are Year 2000 compliant and not subjected to 
unnecessary burdens. In an effort to allow firms with Year 2000 
problems the maximum amount of time possible to remedy them, the 
Commission has extended the deadline one month, from October 15, 1999, 
to November 15, 1999. Pushing back the deadline provides small entities 
which may have limited resources extra time to become Year 2000 
compliant. Rather than allowing only small entities to take advantage 
of the extra month, the Commission decided to allow all firms to take 
advantage of the extension.
    Regarding the second alternative, the Commission notification 
requirements contained in Rules 15b7-3T and 17Ad-21T simply state that 
notice must be made. The certification provisions were designed to 
clearly and succinctly set forth the information necessary to be 
included in the certificate. As for Rule 17a-9T, which contains a 
minimum net capital requirement of $250,000, the Commission anticipates 
that very few small entities, if any, will be obligated to comply with 
the rule.
    Regarding the third alternative, Rules 15b7-3T and 17Ad-21T 
incorporate the

[[Page 42027]]

use of performance standards because they do not set forth the method 
for broker-dealers or non-bank transfer agents to become Year 2000 
compliant, but only require them to be Year 2000 compliant and able to 
perform their ordinary business functions for investors. Similarly, the 
notice requirements do not specify the form the notices must take. 
Adequate notice must be provided to the Commission for purposes of 
Rules 15b7-3T and 17Ad-21T, but the Commission is not determining the 
design or the format of those notices.
    Regarding the fourth alternative, Rules 15b7-3T and 17Ad-21T 
exclude from coverage firms that do not use computers to conduct their 
business. This exclusion, which was created in response to commenters' 
concerns, is primarily designed to benefit small firms. In addition, 
smaller broker-dealers, i.e., firms that are not required to maintain 
minimum net capital of $250,000, would be exempt from the requirements 
of Rule 17a-9T. The Commission believes, however, that all registered 
broker-dealers and transfer agents that do not fit into the exclusions 
set forth above are important to protecting investors and the national 
securities market from Year 2000 problems.
    Therefore, having considered the foregoing alternatives, the 
Commission believes the rules include regulatory alternatives that 
minimize the impact on small entities while achieving the stated 
objectives.

VIII. Paperwork Reduction Act

    As explained in the proposing release, certain provisions of the 
rules contain ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995 (``PRA'') (44 U.S.C. 
3501 et seq.). Accordingly, the Commission submitted the collection of 
information requirements contained in the rules to the Office of 
Management and Budget (``OMB'') for review in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. OMB approved the new collections and 
assigned the following control numbers: Rule 15b7-3T, OMB No. 3235-
0526; Rule 17a-9T, OMB No. 3235-0524; Rule 17Ad-21T(c) and (e), OMB No. 
3235-0525; and Rule 17Ad-21T(f), OMB No 3235-0525. The new rules are 
necessary to protect investors and the financial markets from Year 2000 
problems. An agency may not sponsor, conduct, or require response to an 
information collection unless a currently valid OMB control number is 
displayed.
    In the Proposing Release, the Commission requested comment on the 
proposed collections of information. Only one comment was received that 
specifically addressed the PRA submission.\134\ However, other comments 
touched on PRA related issues. Based on these comments, the Commission 
has revised the collections of information required under the rules, as 
discussed below.
---------------------------------------------------------------------------

    \134\ In its comment letter, RTC estimated that the notification 
and certification requirement of Rule 17Ad-21T would consume 1.5 
hours.
---------------------------------------------------------------------------

A. Rules 15b7-3T and 17Ad-21T(c) and (e)

    As more fully described in Section II. A and B above, the 
Commission has added a second certification requirement to Rules 15b7-
3T and 17Ad-21T.\135\ The second certification provision is designed to 
give firms the opportunity to certify to the Commission, the public, 
and their customers that they have, in fact, remediated their Year 2000 
problem. In addition, the second certification notifies the Commission 
of which firms have fixed their Year 2000 problems and which firms have 
not.
---------------------------------------------------------------------------

    \135\ The Commission requested comment in the Proposing Release 
on whether to have more than one certification provision in case a 
broker-dealer does not complete its remediation efforts by a target 
date. See Proposing Release.
---------------------------------------------------------------------------

    There are approximately 8,300 registered broker-dealers and 600 
registered non-bank transfer agents. The Commission staff estimates 
that approximately 3,900 broker-dealers and 600 non-bank transfer 
agents will have systems that will need to be Year 2000 compliant.\136\ 
Based on information provided by the SROs, the Commission staff 
estimates that approximately one percent of these broker-dealers might 
be required to submit notices and choose to submit certificates under 
the rule. Thus, the Commission staff estimates that there will be 
approximately 39 broker-dealers that will be affected by the rule. 
Similarly, the Commission staff estimated that one percent of non-bank 
transfer agents (approximately 6 entities) will be affected by the 
rule.
---------------------------------------------------------------------------

    \136\ In the Proposing Release, the Commission estimated that 
5,900 broker-dealers would have systems that would need to be Year 
2000 compliant. This estimate was reduced to 3,900 broker-dealers 
after the rule was changed to specifically exclude broker-dealers 
that do not use computers in the conduct of their businesses.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission staff estimated that each 
respondent submitting a notice of a material Year 2000 problem will 
incur an average burden of 0.5 hours, and that each respondent 
submitting a certificate will incur an average burden of 0.5 hours. The 
burden for submitting a second certificate is estimated by the 
Commission staff to be an additional 0.5 hours. Hence, the Commission 
estimates that the total burden per broker-dealer and non-bank transfer 
agent will be 1.5 hours.
    The notice requirement of the rule is mandatory for all affected 
broker-dealers and non-bank transfer agents. The certification process 
is optional. The Commission, however, expects most broker-dealers and 
non-bank transfer agents with material Year 2000 problems after August 
31, 1999, to submit the initial certificate and the follow-up 
certificate in order to continue performing certain functions. Thus, 
the aggregate burden for 39 broker-dealer respondents will be 
approximately 58.5 hours (39 broker-dealers multiplied by 1.5 hours), 
and the aggregate burden for 6 non-bank transfer agent respondents will 
be approximately 9 hours (6 non-bank transfer agents multiplied by 1.5 
hours). The Commission notes that its estimate of the paperwork burden 
for Rules 15b7-3T and 17Ad-21T(c) and (e) has changed slightly from 
that approved by OMB. Accordingly, the Commission has submitted a PRA 
Change Worksheet to OMB.

B. Rule 17Ad-21T(g)

    In response to the comments received, the Commission made several 
changes to Rule 17Ad-21T, particularly with regard to the type of 
records required to be retained. Nevertheless, the Commission estimates 
that the burden on transfer agents will stay the same. The Commission 
estimates that the recordkeeping burden to non-bank transfer agents 
under the rule should be minimal because the records will already exist 
and the rule only requires non-bank transfer agents to make separate 
copies. The Commission staff estimates that there are approximately 600 
non-bank transfer agents. The Commission staff estimates that non-bank 
transfer agents will incur a burden of 0.25 hours per business day to 
comply with the recordkeeping requirement.\137\ Thus, the Commission 
staff estimates that the total burden for each non-bank transfer agent 
for the period between August 31, 1999, and March 31, 2000, will be 
approximately 38 hours (approximately 151 business days at 0.25 hours 
per business day). The Commission staff estimates that the aggregate 
burden for all non-bank transfer agents under the rule will be 
approximately 22,800 hours (600

[[Page 42028]]

transfer agents at 38 hours per transfer agent). The Commission notes 
that a substantial portion of this burden is already assumed by non-
bank transfer agents.\138\
---------------------------------------------------------------------------

    \137\ The RTC estimated that compliance with this recordkeeping 
requirement, if not already performed, as is the case with RTC, 
would take approximately \1/2\ hour to 4 hours of computer 
operations each night. See RTC letter.
    \138\ In the STA comment letter, the STA stated that backing up 
files is a standard and good practice, which is part of the cost of 
doing business. See STA letter. In addition, the RTC stated in their 
comment letter that ``All responsible information technology 
professionals already perform daily database and processing system 
file back-ups'' and that ``Maintenance of multiple day record back-
ups is a conservative, inexpensive and responsible approach designed 
to enhance recovery capabilities.'' See RTC letter.
---------------------------------------------------------------------------

C. Rule 17a-9T

    As more fully described in Section III. B above, the Commission 
extended 17a-9T's recordkeeping requirement from the last two business 
days of 1999 to the last three business days of 1999. The Commission 
has made no other substantive changes to the rule because the rule does 
not require broker-dealers to make new records, but only to preserve a 
copy of existing records.
    In the Proposing Release, the Commission estimated that each 
broker-dealer subject to the rule would incur an average burden of 0.5 
hours (0.25 hours per day). Because the Commission has extended the 
recordkeeping requirement to include December 29, 1999, the Commission 
staff now estimates that each broker-dealer will incur an average 
burden of 0.75 hours.
    Since the Proposing Release, the Commission has also revised its 
estimate regarding the number of broker-dealers that will be required 
to comply with the rule. In the Proposing Release, the Commission 
estimated that approximately 4,300 broker-dealers would be subject to 
the rule's requirement. After reviewing current filings with the 
Commission, we now estimate that approximately 1,100 broker-dealers 
will meet the net capital requirements necessary to be subject to the 
rule.\139\ The Commission staff estimates that the total aggregate 
burden under the rule will be approximately 825 hours (1,100 broker-
dealers at 0.75 hours per broker-dealer). The Commission staff's 
estimate of the aggregate paperwork burden to comply with Rule 17a-9T 
has decreased from 2,150 hours to 825 hours.\140\ Accordingly, the 
Commission has submitted to OMB a revision of the currently approved 
collection.
---------------------------------------------------------------------------

    \139\ Only those broker-dealers that are required to maintain 
certain net capital pursuant to Rule 15c3-1(a)(2)(i), 17 CFR 
240.15c3-1(a)(2)(i), will be required to comply with this rule. As a 
result of the rule's limited scope, the Commission staff estimates 
that approximately 1,100 registered broker-dealers will be required 
to comply with the rule.
    \140\ See Proposing Release.
---------------------------------------------------------------------------

IX. Effective Date

    The effective date for Rules 15b7-3T, 17Ad-21T and 17a-9T is August 
30, 1999. Section 553(d) of the Administrative Procedure Act requires 
that, unless an exception applies, a substantive rule may not be made 
effective less than 30 days after notice of the rule has been published 
in the Federal Register.\141\ One exception to the 30-day requirement 
is when an agency finds good cause for a shorter notice period. We find 
that good cause exists in this situation.
---------------------------------------------------------------------------

    \141\ 5 U.S.C. 553(d)
---------------------------------------------------------------------------

    The need to implement the rules less than 30 days after publication 
arises from the time-sensitive nature of the Year 2000 problem as well 
as from the specific date components of the rule. Because the date by 
which Year 2000 problems in mission critical computer systems must be 
repaired cannot be changed, the effectiveness of these rules cannot be 
delayed beyond August 30. The rule will permit us to act to reduce the 
risk to investors and the securities markets posed by broker-dealers 
and non-bank transfer agents that have not adequately prepared their 
computer systems for the millennium transition.
    We also believe that this early effectiveness will not impose any 
significant burdens on broker-dealers and transfer agents subject to 
the rule. First, we are adopting these rules in an open meeting more 
than 30 days before they become effective. Our formal Federal Register 
notice will provide less than 30 days notice because of the time 
required to prepare the rule for publication. As a result, many broker-
dealers and non-bank transfer agents subject to the rule will, in fact, 
have more than 30 days notice before the rules become effective. 
Moreover, these rules will be effective only a few days earlier than 
they otherwise would have been. This minimizes the burden imposed by 
early effectiveness.
    Second, we believe that the broker-dealers and transfer agents 
subject to these rules are effectively already in preparation for their 
effectiveness. In particular, broker-dealers and transfer agents are 
already aware that we are treating the Year 2000 problem as a serious 
problem. In addition, because a broker-dealer or transfer agent that 
does not fix its computer systems by the end of the year will likely 
not be able to continue in business, virtually all persons directly 
affected by this rule are already fixing their systems. Indeed, many 
broker-dealers are already subject to testing requirements imposed by 
their SROs. We therefore find that good cause exists to make these 
rules effective less than thirty days after publication in the Federal 
Register.

X. Statutory Basis

    Pursuant to the Exchange Act of 1934 and particularly Sections 
3(b), 15(b) and (c), 17, and 23(a) thereof [15 U.S.C. 78c(b), 78o(b) 
and (c), 78q and 78w(a)], the Commission is adopting 240.15b7-3T and 
240.17a-9T of Title 17 of the Code of Federal Regulation in the manner 
set forth below. Pursuant to the Exchange Act of 1934 and particularly 
Sections 17(a), 17A(d), and 23(a) thereof [15 U.S.C. 78q(a), 78q-1(d) 
and 78w(a)], the Commission is adopting 240.17Ad-21T of Title 17 of the 
Code of Federal Regulation in the manner set forth below.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, Title 17, Chapter II 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 adding Sec. 240.15b7-3T to read as follows:


Sec. 240.15b7-3T  Operational capability in a Year 2000 environment.

    (a) This section applies to every broker or dealer registered 
pursuant to Section 15 of the Act, (15 U.S.C. 78o) that uses computers 
in the conduct of its business as a broker or dealer. If you have a 
material Year 2000 problem, then you do not have operational capability 
within the meaning of Section 15(b)(7) of the Act (15 U.S.C. 
78o(b)(7)).
    (b)(1) You have a material Year 2000 problem under paragraph (a) of 
this section if, at any time on or after August 31, 1999:
    (i) Any of your mission critical computer systems incorrectly 
identifies any date in the Year 1999 or the Year 2000; and
    (ii) The error impairs or, if uncorrected, is likely to impair, any 
of your mission critical systems.

[[Page 42029]]

    (2) You will be presumed to have a material Year 2000 problem if, 
at any time on or after August 31, 1999, you:
    (i) Do not have written procedures reasonably designed to identify, 
assess, and remediate any Year 2000 problems in mission critical 
systems under your control;
    (ii) Have not verified your Year 2000 remediation efforts through 
reasonable internal testing of mission critical systems under your 
control;
    (iii) Have not verified your Year 2000 remediation efforts by 
satisfying Year 2000 testing requirements imposed by self-regulatory 
organizations to which you are subject; or
    (iv) Have not remediated all exceptions related to your mission 
critical systems contained in any independent public accountant's 
report prepared on your behalf pursuant to Sec. 240.17a-5(e)(5)(vi).
    (c) If you have or are presumed to have a material Year 2000 
problem, you must immediately notify the Commission and your designated 
examining authority of the problem. You must send this notice to the 
Commission by overnight delivery to the Division of Market Regulation, 
U.S. Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-1002 Attention: Y2K Compliance.
    (d)(1) If you are a broker or dealer that is not operationally 
capable because you have or are presumed to have a material Year 2000 
problem, you may not, on or after August 31, 1999:
    (i) Effect any transaction in, or induce the purchase or sale of, 
any security; or
    (ii) Receive or hold customer funds or securities, or carry 
customer accounts.
    (2) Notwithstanding paragraph (d)(1) of this section, you may 
continue to effect transactions in, or induce the purchase or sale of, 
a security, receive or hold customer funds or securities, or carry 
customer accounts:
    (i) Until December 1, 1999, if you have submitted a certificate to 
the Commission in compliance with paragraph (e) of this section; or
    (ii) Solely to the extent necessary to effect an orderly cessation 
or transfer of these functions.
    (e)(1)(i) If you are a broker or dealer that is not operationally 
capable because you have or are presumed to have a material Year 2000 
problem, you may, in addition to providing the Commission the notice 
required by paragraph (c) of this section, provide the Commission and 
your designated examining authority a certificate signed by your chief 
executive officer (or an individual with similar authority) stating:
    (A) You are in the process of remediating your material Year 2000 
problem;
    (B) You have scheduled testing of your affected mission critical 
systems to verify that the material Year 2000 problem has been 
remediated, and specify the testing dates;
    (C) The date by which you anticipate completing remediation of the 
material Year 2000 problem in your mission critical systems, and will 
therefore be operationally capable; and
    (D) Based on inquiries and to the best of the chief executive 
officer's knowledge, you do not anticipate that the existence of the 
material Year 2000 problem in your mission critical systems will impair 
your ability, depending on the nature of your business, to ensure 
prompt and accurate processing of securities transactions, including 
order entry, execution, comparison, allocation, clearance and 
settlement of securities transactions, the maintenance of customer 
accounts, or the delivery of funds and securities; and you anticipate 
that the steps referred to in paragraphs (e)(1)(i)(A) through (C) of 
this section will result in remedying the material Year 2000 problem on 
or before November 15, 1999.
    (ii) If the information contained in any certificate provided to 
the Commission pursuant to paragraph (e) of this section is or becomes 
misleading or inaccurate for any reason, you must promptly file an 
updated certificate correcting such information. In addition to the 
information contained in the certificate, you may provide the 
Commission with any other information necessary to establish that your 
mission critical systems will not have material Year 2000 problems on 
or after November 15, 1999.
    (2) If you have submitted a certificate pursuant to paragraph 
(e)(1) of this section, you must submit a certificate to the Commission 
and your designated examining authority signed by your chief executive 
officer (or an individual with similar authority) on or before November 
15, 1999, stating that, based on inquiries and to the best of the chief 
executive officer's knowledge, you have remediated your Year 2000 
problem or that you will cease operations. This certificate must be 
sent to the Commission by overnight delivery to the Division of Market 
Regulation, U.S. Securities and Exchange Commission, 450 Fifth Street, 
NW, Washington, DC 20549-1002 Attention: Y2K Compliance.
    (f) Notwithstanding paragraph (d)(2) of this section, you must 
comply with the requirements of paragraph (d)(1) of this section if you 
have been so ordered by the Commission or by a court.
    (g) For the purposes of this section:
    (1) The term mission critical system means any system that is 
necessary, depending on the nature of your business, to ensure prompt 
and accurate processing of securities transactions, including order 
entry, execution, comparison, allocation, clearance and settlement of 
securities transactions, the maintenance of customer accounts, and the 
delivery of funds and securities; and
    (2) The term customer includes a broker or dealer.
    (h) This temporary section will expire on July 1, 2001.
    3. By adding Sec. 240.17a-9T to read as follows:


Sec. 240.17a-9T  Records to be made and retained by certain exchange 
members, brokers and dealers.

    This section applies to every member, broker or dealer registered 
pursuant to Section 15 of the Act, (15 U.S.C. 78o), that is required to 
maintain, as of December 29, December 30 and December 31, 1999, minimum 
net capital of $250,000 pursuant to Sec. 240.15c3-1(a)(2)(i).
    (a) You must make before January 1, 2000, for each of December 29, 
December 30 and December 31, 1999, separate copies of the blotters 
pursuant to Sec. 240.17a-3(a)(1).
    (b) You must make before January 1, 2000, as of the close of 
business for each of December 29, December 30 and December 31, 1999, a 
separate copy of the securities record or ledger pursuant to 
Sec. 240.17a-3(a)(5).
    (c) You must preserve these records for a period of not less than 
one year.
    (d) The provisions of Sec. 240.17a-4(i) shall apply as if part of 
this Sec. 240.17a-9T.
    (e) You may preserve these records in any format that is acceptable 
and in compliance with the conditions described in Sec. 240.17a-4(f).
    (f) You must furnish promptly to a representative of the Commission 
such legible, true and complete copies of those records, as may be 
requested.
    (g) This temporary section will expire on July 1, 2001.
    4. By adding Sec. 240.17Ad-21T to read as follows:


Sec. 240.17Ad-21T  Operational capability in a Year 2000 environment.

    (a) This section applies to every registered non-bank transfer 
agent that uses computers in the conduct of its business as a transfer 
agent.
    (b)(1) You have a material Year 2000 problem if, at any time on or 
after August 31, 1999:

[[Page 42030]]

    (i) Any of your mission critical computer systems incorrectly 
identifies any date in the Year 1999 or the Year 2000, and
    (ii) The error impairs or, if uncorrected, is likely to impair, any 
of your mission critical systems under your control.
    (2) You will be presumed to have a material Year 2000 problem if, 
at any time on or after August 31, 1999, you:
    (i) Do not have written procedures reasonably designed to identify, 
assess, and remediate any material Year 2000 problems in your mission 
critical systems under your control;
    (ii) Have not verified your Year 2000 remediation efforts through 
reasonable internal testing of your mission critical systems under your 
control and reasonable testing of your external links under your 
control; or
    (iii) Have not remediated all exceptions related to your mission 
critical systems contained in any independent public accountant's 
report prepared on your behalf pursuant to Sec. 240.17Ad-18(f).
    (c) If you have or are presumed to have a material Year 2000 
problem, you must immediately notify the Commission and your issuers of 
the problem. You must send this notice to the Commission by overnight 
delivery to the Division of Market Regulation, U.S. Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-1002 
Attention: Y2K Compliance.
    (d)(1) If you are a registered non-bank transfer agent that has or 
is presumed to have a material Year 2000 problem, you may not, on or 
after August 31, 1999, engage in any transfer agent function, 
including:
    (i) Countersigning such securities upon issuance;
    (ii) Monitoring the issuance of such securities with a view to 
preventing unauthorized issuance;
    (iii) Registering the transfer of such securities;
    (iv) Exchanging or converting such securities; or
    (v) Transferring record ownership of securities by bookkeeping 
entry without physical issuance of securities certificates.
    (2) Notwithstanding paragraph (d)(1) of this section, you may 
continue to engage in transfer agent functions:
    (i) Until December 1, 1999, if you have submitted a certificate to 
the Commission in compliance with paragraph (e) of this section; or
    (ii) Solely to the extent necessary to effect an orderly cessation 
or transfer of these functions.
    (e)(1)(i) If you are a registered non-bank transfer agent that has 
or is presumed to have a material Year 2000 problem, you may, in 
addition to providing the Commission the notice required by paragraph 
(c) of this section, provide the Commission and your issuers a 
certificate signed by your chief executive officer (or an individual 
with similar authority) stating:
    (A) You are in the process of remediating your material Year 2000 
problem;
    (B) You have scheduled testing of your affected mission critical 
systems to verify that the material Year 2000 problem has been 
remediated, and specify the testing dates;
    (C) The date by which you anticipate completing remediation of the 
material Year 2000 problem in your mission critical systems; and
    (D) Based on inquiries and to the best of the chief executive 
officer's knowledge, you do not anticipate that the existence of the 
material Year 2000 problem in your mission critical systems will impair 
your ability, depending on the nature of your business, to assure the 
prompt and accurate transfer and processing of securities, the 
maintenance of master securityholder files, or the production and 
retention of required records; and you anticipate that the steps 
referred to in paragraphs (e)(1)(i)(A) through (C) of this section will 
result in remedying the material Year 2000 problem on or before 
November 15, 1999.
    (ii) If the information contained in any certificate provided to 
the Commission pursuant to paragraph (e) of this section is or becomes 
misleading or inaccurate for any reason, you must promptly file an 
updated certificate correcting such information. In addition to the 
information contained in the certificate, you may provide the 
Commission with any other information necessary to establish that your 
mission critical systems will not have material Year 2000 problems on 
or after November 15, 1999.
    (2) If you have submitted a certificate pursuant to paragraph 
(e)(1) of this section, you must submit a certificate to the Commission 
and your issuers signed by your chief executive officer (or an 
individual with similar authority) on or before November 15, 1999, 
stating that, based on inquiries and to the best of the chief executive 
officer's knowledge, you have remediated your Year 2000 problem or that 
you will cease operations. This certificate must be sent to the 
Commission by overnight delivery to the Division of Market Regulation, 
U.S. Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-1002 Attention: Y2K Compliance.
    (f) Notwithstanding paragraph (d)(2) of this section, you must 
comply with the requirements of paragraph (d)(1) of this section if you 
have been so ordered by the Commission or by a court.
    (g) Beginning August 31, 1999, and ending March 31, 2000, you must 
make backup records for all master securityholder files at the close of 
each business day and must preserve these backup records for a rolling 
five business day period in a manner that will allow for the transfer 
and conversion of the records to a successor transfer agent. If you 
have a material Year 2000 problem, you must preserve for at least one 
year the five day backup records immediately preceding the day the 
problem was discovered. In addition, you must make at the close of 
business on December 27 through 31, 1999, a backup copy for all master 
securityholder files and preserve these records for at least one year. 
Such backup records must permit the timely restoration of such systems 
to their condition existing prior to experiencing the material Year 
2000 problem. Copies of the backup records must be kept in an easily 
accessible place but must not be located with or held in the same 
computer system as the primary records, and you must be able to 
immediately produce or reproduce them. You must furnish promptly to a 
representative of the Commission such legible, true, and complete 
copies of those records, as may be requested.
    (h) For the purposes of this section:
    (1) The term mission critical system means any system that is 
necessary, depending on the nature of your business, to assure the 
prompt and accurate transfer and processing of securities, the 
maintenance of master securityholder files, and the production and 
retention of required records as described in paragraph (d) of this 
section;
    (2) The term customer includes an issuer, transfer agent, or other 
person for which you provide transfer agent services;
    (3) The term registered non-bank transfer agent means a transfer 
agent, whose appropriate regulatory agency is the Commission and not 
the Office of the Comptroller of the Currency, the Board of Governors 
of the Federal Reserve System, or the Federal Deposit Insurance 
Corporation; and
    (4) The term master securityholder file has the same definition as 
defined in Sec. 240.17Ad-9(b).
    (i) This temporary section will expire on July 1, 2001.

    By the Commission.


[[Page 42031]]


    Dated: July 27, 1999.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-19824 Filed 8-2-99; 8:45 am]
BILLING CODE 8010-01-P