[Federal Register Volume 63, Number 133 (Monday, July 13, 1998)]
[Rules and Regulations]
[Pages 37688-37708]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18296]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-40163; File No. S7-8-98]
RIN 3235-AH42
Year 2000 Readiness Reports To Be Made by Certain Transfer Agents
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting Rule 17Ad-18 under the Securities Exchange Act of 1934
(``Exchange Act'') to require certain transfer agents to file with the
Commission two reports regarding their Year 2000 compliance. The
reports will increase transfer agent awareness of the specific steps
they should be taking to prepare for the Year 2000; help coordinate
industry testing and contingency planning; supplement the Commission's
examination module for Year 2000 issues and identify potential Year
2000 compliance problems; and provide information regarding the
securities industry's preparedness for the Year 2000. The reports are
designed to be available to the public, which will enable issuers and
other parties to assess the risks of doing business with a transfer
agent that may not be Year 2000 compliant.
EFFECTIVE DATE: August 12, 1998.
FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant
Director, 202/942-4187; Thomas C. Etter, Jr., Special Counsel, 202/942-
0178; or Jeffrey Mooney, Special Counsel, 202/942-4174, Division of
Market Regulation, Securities and Exchange Commission, 450 Fifth
Street, NW., Mail Stop 10-1, Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Introduction
At midnight on December 31, 1999, unless the proper modifications
have been made, the program logic in many of the vast majority of the
world's computer systems will start to produce erroneous results
because, among other things, the systems will incorrectly read the date
``01/01/00'' as being January 1 of the year 1900 or another incorrect
date. In addition, systems may fail to detect that the Year 2000 is a
leap year. Problems also can arise earlier than January 1, 2000, as
dates in the next millennium are entered into non-Year 2000 compliant
programs. Year 2000 Problems could have negative repercussions
throughout the world's financial systems because of the extensive
interrelationship and information sharing between U.S. and foreign
financial firms and markets.\1\
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\1\ International Organization of Securities Commissions,
Statement of the IOSCO Technical Committee on Year 2000 (1997),
available at http://www.iosco.org.
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The Commission views the Year 2000 problem as an extremely serious
issue. A failure to assess properly the extent of the problem,
remediate systems that are not Year 2000 compliant, and then test those
systems could endanger the nation's capital markets and place at risk
the assets of millions of investors. In light of this, both transfer
agents and the Commission are working hard to address the industry's
Year 2000 Problems.
As part of its ongoing efforts relating to the Year 2000 on March
5, 1998, the Commission requested comment on proposed Rule 17Ad-18 that
would require transfer agents to file at least one report with the
Commission regarding its Year 2000 compliance.\2\ The proposed rule
noted that transfer agents present special considerations for the
Commission because unlike other entities regulated under the Exchange
Act transfer agents have no self-regulatory organization (``SRO'') to
assist them and the Commission in addressing Year 2000 issues.\3\
Therefore, the Commission's only information from non-bank transfer
agents is directly from the transfer agent themselves.
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\2\ Release No. 34-39726, (March 5, 1998), 63 FR 12062 (March
12, 1998).
\3\ SRO is defined in Section 3(a)(26) of the Exchange Act, 15
U.S.C. 78c(a)(26).
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The Commission received 26 comment letters in response to the
proposed rule.\4\ The majority of the
[[Page 37689]]
commenters generally supported the spirit of the Commission's proposed
rule with some commenters making suggestions on how they believed one
or more aspects of the proposed rule could be improved. However, the
majority of commenters objected to the requirement for an independent
accountant's report and objected to the Year 2000 reports submitted by
the transfer agents and related accountant's report being made
available to the public. Based on the comments received, the Commission
is adopting the proposed rule with changes discussed below.
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\4\ All comment letters and a summary of the comments are
available in File No. S7-8-98 at the Commission's Public Reference
Room, 450 Fifth Street, NW., Washington, DC 20549. The comment
period closed on April 27, 1998. See also Release No. 34-39859;
(April 14, 1998), 63 FR 19430 (extending the comment period from
April 13, 1998, to April 27, 1998).
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II. Description of the Proposed Rule
The Commission proposed Rule 17Ad-18 to require non-bank transfer
agents to file at least one report with the Commission regarding their
Year 2000 compliance. Under the proposed rule, a non-bank transfer
agent was a transfer agent whose appropriate regulatory agency
(``ARA'') was the Commission.\5\ Transfer agents that were also banks
and whose ARA was one of the federal banking agencies would have been
exempt from the proposed rule. The initial report would have been due
no later than 45 days after the Commission adopted the rule. Non-bank
transfer agents that did not qualify for an exemption under existing
Rule 17Ad-13(d) would have been required to submit follow-up reports to
the Commission on August 31, 1998, and August 31, 1999.\6\ The follow-
up reports also would have included an attestation by an independent
public accountant as to whether there was a reasonable basis for the
non-bank transfer agent's assertions in the reports.
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\5\ ARA is defined in Section 3(a)(34)(B) of the Exchange Act,
15 U.S.C. 78c(a)(34)(B). Transfer agents that are also banks have
either the Board of Governors of the Federal Reserve System, the
Office of the Comptroller of the Currency, or the Federal Deposit
Insurance Corporation as their ARA. Approximately 1,360 transfer
agents are registered with the Commission, and the Commission is the
ARA for approximately 740 of them.
\6\ 17 CFR 240.17Ad-13(d). Generally, the Rule 17Ad-13(d)
exemption applies to issuer transfer agents, small transfer agents
exempt under Rule 17Ad-4(b), and bank transfer agents.
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As noted in the proposed rule, the Commission has advised all
transfer agents that if a transfer agent's computer systems have Year
2000 Problems, the transfer agent's record may be inaccurate or not
current and therefore be in violation of Rules 17Ad-6 and 17Ad-7 under
the Exchange Act.\7\
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\7\ 17 CFR 240.17Ad-6 and 17Ad.7.
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III. Discussion of Significant Issues
A. Reporting Threshold
The Office of Thrift Supervision (``OTS'') requested that the
Commission extend the exemption in the proposed rule for bank transfer
agents to include savings associations regulated by the OTS. The OTS
stated that savings associations, unlike other non-bank transfer
agents, are subject to comprehensive examinations by a Federal banking
agency, using the same uniform examination standards developed under
the oversight of the Federal Financial Institutions Examination
Council. The OTS also noted that it is subject to similar Congressional
oversight on Year 2000 issues as the Commission and the other Federal
bank regulatory agencies. The OTS believes that it would be duplicative
and inconsistent to require savings associations to file the reports
with the Commission exempting banks from the requirement.
The Commission agrees with the OTS. Accordingly, the rule as
adopted excludes from its reporting requirements transfer agents that
are savings associations regulated by the OTS. Therefore the term
``non-bank transfer agent'' used in the rule and in the remainder of
this release means a transfer agent whose: (i) Appropriate regulatory
agency, as that term is defined by 15 U.S.C. 78(c)(34)(B), is the
Commission; but (ii) is not a savings association, as defined in
Section 3 of the Federal Deposit Insurance Act, 12 U.S.C. 1813, which
is regulated by the OTS. Because the Commission will continue to be the
ARA for these non-bank transfer agents, the Commission will continue to
consult with the OTS about the results of their examinations.
B. Attestation Requirement
The proposed rule would have required transfer agents that did not
qualify for an exemption under existing Rule 17Ad-13(d) to make
assertions about their efforts to address Year 2000 problems and to
engage an independent public accountant to attest to their
assertions.\8\ As proposed, each non-bank transfer agent would have
been required to assert:
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\8\ The attestation report would have only been required to be
filed with the follow-up reports.
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(1) Whether it has developed written plans for preparing and
testing its computer systems for potential Year 2000 Problems;
(2) Whether the board of directors, or similar body, has approved
these plans, and whether a member of the non-bank transfer agent's
board of directors, or similar body, is responsible for executing the
plans;
(3) Whether its Year 2000 remediation plans address all domestic
and international operations, including the activities of its
subsidiaries, affiliates, and divisions;
(4) Whether it has assigned existing employees, hired new
employees, or engaged third parties to execute its Year 2000
remediation plans; and
(5) Whether it has conducted internal and external testing of its
Year 2000 solutions and whether the results of those tests indicate
that the non-bank transfer agent has modified its software to correct
Year 2000 problems.
The American Institute of Certified Public Accountants (``AICPA'')
commented that the required attestation report would be difficult for
independent public accountants to provide.\9\ The AICPA explained that
some of the required assertions are not appropriate for accountant
attestation because the assertions are not capable of reasonably
consistent measurement against established criteria. Currently, there
are no established criteria related to Year 2000 remediation efforts.
The lack of established criteria would likely result in significant
variation in the examination procedures performed by independent public
accountants and thus reduce the usefulness of the attestation reports.
In addition, the AICPA expressed concern that the purpose and
conclusions of the attestation report could be misunderstood. The AICPA
was primarily concerned that uninformed users of the attestation
reports would place undue reliance on them.
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\9\ Letter from Alan W. Anderson, Senior Vice-President,
Technical Services and Deborah D. Lambert, Chair, Auditing Standards
Board, AICPA (April 13, 1998).
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The AICPA suggested that an ``agreed-upon procedures'' engagement,
instead of an attestation engagement, would more effectively meet the
Commission's goals. Pursuant to such an engagement, non-bank transfer
agents would engage independent public accountants to perform and to
report on specific procedures designed to meet the Commissions
objectives. This would eliminate the variability of examination
procedures performed by independent public accountants and thus
increase the consistency of the reports the Commission would receive.
The AICPA's letter outlined elements of an agreed upon procedures
report and offered to follow-up with the Commission staff regarding the
development of specific procedures for a Year 2000 engagement.
[[Page 37690]]
The Commission is deferring consideration of whether to adopt a
requirement that the second report be evaluated by an independent
public accountant. The Commission, however, will consider such a
requirement if the accounting industry recommends a standard which can
be used by public accountants in connection with the second report.\10\
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\10\ In light of the AICPA's comment letter and ongoing efforts,
in a companion release also issued today the Commission is re-
opening the comment period with respect to the proposal to have an
independent public accountant review a non-bank transfer agent's
second Year 2000 report. The public file (No. S7-8-98) will include
both the AICPA's original comment letter and any follow-up letter
submitted by the AICPA for the Commission's consideration.
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C. Public Availability
In the proposed rule, the Commission expressed its preliminary view
that it should make publicly available non-bank transfer agent reports
regarding their Year 2000 remediation efforts. Certain commenters
expressed the following concerns: (i) Members of the public could place
undue reliance on the reports, (ii) the technical nature of the reports
may confuse investors, (iii) detailed testing reports could be
misleading and unnecessarily alarming, and (iv) the reports could
contain confidential proprietary information.
However, the Commission believes that the public's interest is best
served by requiring full and open disclosure. Allowing the public,
particularly other non-bank transfer agents and counterparties, to have
access to the information reported by non-bank transfer agents will
enable interested persons to assess the Year 2000 readiness of a non-
bank transfer agent with which they are doing business. For example,
after receiving a non-bank transfer agent's report, an issuer might
request additional information or assurances if the non-bank transfer
agent does not appear to be taking the steps necessary to be Year 2000
compliant. In the absence of such assurances, the issuer could
determine whether it wishes to continue its dealings with that non-bank
transfer agent. Accordingly, the final rule provides that these reports
will be available to the public.
D. Timing
Under the proposed rule, the initial report would have evaluated
the efforts of non-bank transfer agents as of December 31, 1997, and
would have been required to be filed no later than 45 days after the
Commission adopted the proposed rule. The follow-up reports would have
evaluated non-bank transfer agent efforts as of June 30, 1998 and June
30, 1999, and would have been due August 31, 1998, and August 31, 1999,
respectively.
Some commenters expressed concerns about making reports based on
old data. These commenters explained that non-bank transfer agents
might not have retained the information needed to prepare the reports
and would require non-bank transfer agents to provide data that was
outdated and misleading.
In light of these concerns, the rule adopted today by the
Commission requires non-bank transfer agents to file the initial report
with the Commission by August 31, 1998. This report should reflect the
status of the non-bank transfer agent's Year 2000 efforts as of July
15, 1998. The rule requires transfer agents to submit only one follow-
up report, which must be filed with the Commission by April 30, 1999,
and should reflect the status of the transfer agent's Year 2000 efforts
as of March 15, 1999.
The rule adopted today also requires a non-bank transfer agent
whose registration with the Commission becomes effective between the
adoption of this rule and December 31, 1999, to file Part I of Form TA-
Y2K with the Commission no later than 30 days after their registration
becomes effective describing their Year 2000 compliance as of the date
of their registration. New transfer agents whose registration with the
Commission becomes effective between January 1, 1999, and April 30,
1999, would be required to file the second report due on April 30,
1999.
E. Reporting Requirements
As previously discussed, the proposed rule would have required
certain non-bank transfer agents to discuss the steps they have taken
to address Year 2000 Problems. More specifically, non-bank transfer
agents would have been required to (i) indicate whether their board of
directors or similar body has approved and funded written Year 2000
remediation plans that address all major computer systems; (ii)
describe their Year 2000 staffing efforts and the work performed by
Year 2000 dedicated staff;\11\ (iii) discuss their progress on each
stage of preparation for the Year 2000;\12\ (iv) indicate if they have
written contingency plans to deal with Year 2000 problems that may
occur;\13\ and (v) identify what levels of management are responsible
for Year 2000 remediation efforts.
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\11\ This includes whether the transfer agent has assigned
existing employees, has hired new employees, or has engaged third
parties to provide assistance in avoiding Year 2000 Problems.
\12\ These stages are: (i) awareness of potential Year 200
Problems; (ii) assessment of what steps must be taken to avoid Year
2000 Problems; (iii) implementation of the steps needed to avoid
Year 2000 Problems; (iv) internal testing of software designed to
avoid Year 2000 Problems; (v) integrated or industry-wide testing of
software designed to avoid Year 200 Problems (including testing with
other transfer agents, other financial institutions, customers, and
vendors); and (vi) implementation of tested software that will avoid
Year 2000 Problems.
\13\ Contingency planning should provide for adequate
protections to ensure the success of critical systems is interfaces
fail or unexpected problems are experienced with operating systems
and infrastructure software. In addition, contingency plans should
provide for the failure of external systems that interact with the
transfer agents' computer systems. For example, contingency plans
should anticipate the failure of a vendor that services mission
critical applications and should provide for the potential that a
significant customer experiences difficulty due to Year 2000
problems.
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One commenter suggested certain changes to the specific reporting
requirements to better clarify the information sought by the
Commission. For example, the proposed rule would have required non-bank
transfer agents to discuss the extent to which it has assigned existing
employees, or engaged third parties in the Year 2000 effort. In
addition, non-bank transfer agents would have been required to identify
the levels of management involved in the Year 2000 efforts, discuss the
specific responsibilities of these managers, and provide an estimate of
the time they have spent on Year 2000 efforts. The commenter explained
that these proposed requirements may be very burdensome, particularly
for those firms that have comprehensive, complex-wide Year 2000 plans.
Fixing Year 2000 problems may require the dedicated efforts of a
significant number of employees and consultants. In addition, the tasks
and responsibilities involved are detailed, extensive, and constantly
changing.
The Commission agrees that some modification and clarification of
the reporting requirements is warranted. The rule adopted today
requires non-bank transfer agents to provide a summary of the efforts
of individuals or groups of individuals assigned to work on the Year
2000 Problem. The non-bank transfer agent will not have to provide an
estimate of the time that its management has spent on Year 2000
efforts. Finally, the non-bank transfer agent must report the number
and description of material exceptions identified during the internal
and external testing of its software that are unresolved as of the
report date. The Commission is leaving the determination of what
constitutes a
[[Page 37691]]
material exception to the non-bank transfer agent's judgment.
F. Report Format
The proposed rule would have required certain non-bank transfer
agents to discuss, in narrative format, their efforts to address Year
2000 Problems. The National Association of Securities Dealers
Regulation (``NASDR'') commented that the Commission should prescribe
an objective format, such as a check-the-box questionnaire, for non-
bank transfer agents to use when reporting on their Year 2000 efforts.
The NASDR explained that an open narrative format might lead to great
disparity in the nature and detail of the reports the non-bank transfer
agents would submit. Providing an objective reporting format would
produce consistent results, improve the accuracy and comparability of
reports received, and reduce the time required to summarize, track,
analyze, and report the information received.
The Commission agrees that the checklist format suggested by the
NASDR may be a more efficient way of collecting certain information and
believes that prescribing such a format would decrease the burden the
Year 2000 reporting requirements impose on non-bank transfer agents.
However, the Commission is concerned that by limiting the reporting
requirements to a check-the-box format, the largest, most significant
non-bank transfer agents would not provide the Commission with
sufficient information to effectively assess Year 2000 problems.
Therefore, the rule as adopted requires all non-bank transfer agents to
file with the Commission Part I of Form TA-Y2K, a check-the-box style
report.\14\ Part I of Form TA-Y2K requires non-bank transfer agents to
provide generally the same information as the proposed rule would have
required to be submitted in narrative form. However, non-bank transfer
agents that do not qualify for an exemption under Rule 17Ad-13(d) will
be required to supplement Part I by completing Part II of Form TA-Y2K,
which requires a narrative discussion of their efforts to address Year
2000 Problems. Because Rule 17Ad-13(d) generally exempts small transfer
agents or issuer transfer agents that typically handle few issues, the
potential that these transfer agents could disrupt the clearance and
settlement process is not as likely as larger transfer agents that
process more issues for more issuers.
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\14\ For a copy of Form TA-Y2K see Appendix A.
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Copies of Form TA-Y2K are available in the Commission Public
Reference Room located at 450 Fifth Street, NW, Washington DC 20549 or
copies can be obtained from the Commission's internet web site at the
following address: www.sec.gov.
IV. Costs and Benefits of the Rules and Their Effects on
Competition, Efficiency, and Capital Formation
Section 23(a) of the Exchange Act \15\ requires the Commission, in
adopting rules under the Exchange Act, to consider the competitive
effects of such rules and to not adopt a rule that would impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act. Furthermore, Section 3(f) of the
Exchange Act \16\ provides that whenever the Commission is engaged in
rulemaking and is required to consider or determine whether an action
is necessary or appropriate in the public interest, the Commission also
shall consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital formation.
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\15\ 15 U.S.C. 78W (A)(2).
\16\ U.S.C. 78c.
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The Commission has considered the amendments to Rule 17Ad-18 in
light of the standards cited in Sections 3 and 23 (a)(2) of the
Exchange Act. In the proposed rule, the Commission requested that
commenters provide analysis and data supporting the costs and benefits
of the proposed rule. In addition, the Commission sought comments on
the proposed rule's effect on competition, efficiency, and capital
formation.
Several commenters indicated that the Commission's cost estimates
were too low. However, no commenters provided detailed information or
data as to the costs of the proposed rule. One commenter questioned
whether the additional regulations and their expense will generate
greater preparedness and compliance or whether they would be a greater
distraction and misdirect the focus from Year 2000 preparations.
Another commenter noted that the Division of Market Regulation has
already requested information from each transfer agent regarding its
Year 2000 preparations. Therefore, the commenter believed that the
proposed rule was duplicative. Another commenter suggested that instead
of the proposed rule the Commission should issue an interpretive
release under Rule 17Ad-13 that provided standards for transfer agent
Year 2000 programs.
Two commenters believed that preparation of the reports required by
the proposed rule was not costly or difficult. One of these commenters
suggested that all transfer agents, regardless of size or being
regulated by other authorities, should provide the reports required by
the proposed rule. Three commenters suggested that the Commission also
should require transfer agents to obtain certifications from their
vendors. No commenter addressed the issue of whether the proposed rule
would affect competition or regarding the proposed rule's affect on
efficiency and capital formation.
A. Cost Benefit Analysis
Based on comments received, the Commission has revised the proposed
rule to lower the aggregate cost of compliance with the rule. As
discussed above, the Commission is adopting new Form TA-Y2K,
eliminating one of the reporting dates, and expanding the reporting
requirement for certain non-bank transfer agents. Under the final rule,
all non-bank transfer agents are required to file Part I of Form TA-
Y2K, a less burdensome check-the-box report, twice. The proposed rule
required an initial report from all non-bank transfer agents and two
follow-up reports from those non-bank transfer agents that did not
qualify for an exemption under Rule 17Ad-13(d). Under the final rule,
each non-bank transfer agent that does not qualify for an exemption
under Rule 17Ad-13(d) is also required to complete Part II of Form TA-
Y2K.
The Commission is also deferring consideration of whether to
require non-bank transfer agents to engage accountants to examine their
efforts to address Year 2000 Problems. The Commission is allowing non-
bank transfer agents to summarize by group the efforts of Year 2000
dedicated individuals as opposed to requiring individual descriptions
of their efforts. Non-bank transfer agents will not have to provide an
estimate of the time management has spent on Year 2000 efforts.
Finally, non-bank transfer agents are only required to report the
number and description of unresolved material exceptions identified
during the internal and external testing of their software.
Based on field testing of a virtually identical form, Form BD-Y2K,
conducted by the Office of Compliance Inspections and Examinations, the
Commission estimates that on average a non-bank transfer agent will
spend approximately two hours completing Part I of Form TA-Y2K
resulting in a total cost to the industry of $296,000.\17\ This is
based on 740 respondents
[[Page 37692]]
spending four hours at $100 per hour preparing two Part Is of Form TA-
Y2K. The Commission estimates that on average a non-bank transfer agent
will spend 35 hours completing Part II of Form TA-Y2K resulting in a
total cost to the industry of $1,400,000. This is based upon 200 non-
bank transfer agents spending 70 hours at $100 per hour preparing two
Part IIs of Form TA-Y2K. Therefore, based upon the adjustments to the
proposed rule, the Commission has revised its cost to the industry to a
total of $1,696,000 ($296,000 + $1,400,000). It is important to note
that the total cost estimate is not an annual cost. Non-bank transfer
agents will only be required to prepare and file two Form TA-Y2Ks.
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\17\ Field tests of Part I of Form BD-Y2K indicated that it
could be completed in as little as 30 minutes. However, the
Commission believes that it may take longer for some broker-dealers
to complete Part I of Form BD-Y2K.
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No commenters addressed the potential benefits of the rule and the
Commission has not been able to quantify those benefits. However, the
Commission believes that the benefits will outweigh the costs. The
Commission is aware of the significant effort the securities industry
has put forth and the progress its has made, but believes that
significant progress still needs to be made by the securities industry
to be ready for the Year 2000. As noted above, because transfer agents
do not have an SRO, the only available information is from the transfer
agents themselves.
The Commission does not yet have comprehensive information
regarding the readiness of the transfer agent industry for the Year
2000. While the federal banking agencies are examining bank transfer
agents, it is important for the Commission to obtain complete
information from non-bank transfer agents to permit the Commission to
assess the risks associated with non-bank transfer agents that fail to
show adequate Year 2000 progress. Moreover, the Commission believes
that a requirement to file Year 2000 reports should encourage non-bank
transfer agents to proceed expeditiously with their efforts to prepare
for the Year 2000. The Commission will use the reported information to
obtain a more complete picture of the industry's overall Year 2000
preparations and to identify transfer agent-specific and industry-wide
problems. Information in the reports will help the Commission focus its
Year 2000-related efforts for the rest of 1998 and 1999 on particular
industry segments or non-bank transfer agents that appear to pose the
greatest risk of non-compliance.
In sum, the rule will enable the Commission to take a more active
role in assessing the Year 2000 risk to the securities industry. The
reports non-bank transfer agents will be required to file will increase
transfer agent awareness that they should be taking specific steps now
to prepare for the Year 2000; help coordinate industry testing and
contingency planning; supplement the Commission's examination module
for Year 2000 issues; provide information regarding the securities
industry's preparedness for the Year 2000; and (iv) enable the
Commission to identify particular compliance problems.
B. Efficiency, Competition, and Capital Formation
In the proposing release, the Commission stated that the proposed
rule should not unduly burden competition. No commenter addressed the
proposed rule's effect on competition.
The Commission believes that it has drafted Rule 17Ad-18 so as to
minimize their impact on competition. As discussed above, the
Commission has structured the form of the report to differentiate
between non-bank transfer agents based upon the threat they would pose
to customers and the market if they are not Year 2000 compliant. As
discussed above, non-bank transfer agents that qualify for an exemption
under Rule 17Ad-13(d) (i.e., small transfer agents and issuer transfer
agents) are only required to file the less burdensome Year 2000 report.
Larger non-bank transfer agents that provide services for multiple
issuers do not qualify for an exemption and are required to provide
additional information. The Commission believes that Rule 17Ad-18 does
not impose any burden on competition not necessary or appropriate in
furtherance of the Exchange Act.
The Commission believes that the rule should increase the
efficiency and effectiveness of the industry's efforts to prepare for
the Year 2000 by increasing awareness, focusing industry efforts, and
providing critical information for identifying and remedying problems.
In addition, the Commission believes that the rule does not adversely
affect capital formation. However, failure on the part of the
securities industry to adequately prepare for the Year 2000 could
adversely affect capital formation at the beginning of the next
millennium.
V. Final Regulatory Flexibility Analysis
A final Regulatory Flexibility Analysis (``FRFA'') concerning Rule
17Ad-18 has been prepared in accordance with the provisions of the
Regulatory Flexibility Act (``RFA''), as amended by Pub. L. 104-121,
110 Stat. 847, 864 (1996), 5 U.S.C. 604. The FRFA notes that Rule 17Ad-
18 will increase transfer agent awareness of the specific steps they
should be taking to prepare for the Year 2000; help coordinate industry
testing and contingency planning; supplement the Commission's
examination module for Year 2000 issues and identify potential Year
2000 compliance problems; and provide information regarding the
securities industry's preparedness for the Year 2000.
The Commission received no comments on the Initial Regulatory
Flexibility Analysis (``IRFA'') prepared in connection with the
proposed rule, and no comment letters specifically addressed the IRFA.
However, as discussed in paragraph III.A above, certain commenters
expressed concern about the threshold for determining which non-bank
transfer agents are required to report on their efforts to prepare for
the Year 2000, and estimated costs associated with obtaining the
independent public accountant's attestation.
As discussed more fully in the FRFA, the rule will affect transfer
agents that are small entities pursuant to Rule 0-10 under the Exchange
Act.\18\ When used with reference to a transfer agent, the Commission
has defined the term ``small entity'' to mean a 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) 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 (3) is not
affiliated with any person (other than a natural person) that is not a
small business or small organization under Rule 0-10. Approximately 413
registered transfer agents qualify as ``small entities'' for purposes
of the RFA.
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\18\ 17 CFR 240.0-10.
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The Commission has drafted Rule 17Ad-18 to minimize its impact on
small transfer agents while enhancing investor protection and
minimizing any impact on competition, in part, by adopting different
reporting requirements to take into account the resources available to
small non-bank transfer agents. First, small bank transfer agents are
not required to submit any reports. Second, while the rule requires all
non-bank transfer agents to report on their efforts to address Year
2000 problems, the Commission has adopted two reporting formats. Small
non-bank
[[Page 37693]]
transfer agents are only required to file a less burdensome check-the-
box style Year 2000 report. As noted in section IV.A above, the
Commission estimates that it would take each non-bank transfer agent
approximately four hours to complete Part I of Form TA-Y2K. The
remaining non-bank transfer agents are required to provide, in addition
to the check-the-box style report, a more extensive narrative
discussion of their Year 2000 efforts. These non-bank transfer agents
are typically larger transfer agents that process multiple issues and
could potentially have a greater impact on the clearance and settlement
system. Thus, by adopting different reporting requirements and by
exempting small bank transfer agents, the Commission has imposed no
burden, or only a very limited burden, on small transfer agents.
The FRFA notes that it would be difficult to further simplify,
consolidate, or adjust compliance standards for small non-bank transfer
agents and be able to effectively monitor the securities industry's
efforts to prepare for the Year 2000. The Commission believes that the
alternate reporting requirement adopted today for small non-bank
transfer agents strikes the appropriate balance between the need to
protect investors and to minimize any impact on small non-bank transfer
agents. The Commission also considered the use of performance rather
than design standards. However, the Commission concluded that it would
be inconsistent with the purpose of the rule to use performance
standards to specify different requirements for small entities.
A copy of the FRFA may be obtained by contacting Jeffrey Mooney,
Special Counsel, U.S. Securities and Exchange Commission, Mail stop 10-
1, 450 Fifth Street, NW., Washington, DC 20549.
VI. Paperwork Reduction Act
As set forth in the proposed rule, Rule 17Ad-18 contains
collections of information within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\19\ Accordingly, the collection of
information requirements were submitted to the Office of Management and
Budget (``OMB'') for review and were approved by OMB which assigned the
following control number 3235-0512.
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\19\ 44 U.S.C. 3501 et seq.
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The proposed rule solicited comments on the proposed collections of
information. No comments were received that specifically addressed the
PRA submission. However, as discussed above, the Commission received
suggestions that would improve the collections of information. Based
upon these suggestions, the collections of information have been
adjusted as described in section III. above. For example, the rule
adopted today requires non-bank transfer agents to provide a summary of
the efforts of individuals or groups of individuals assigned to work on
the Year 2000 Problem, and the reports will not have to provide an
estimate of the time management has spent on Year 2000 efforts, nor the
number and nature of material exceptions identified during the internal
and external testing of its software.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the agency displays a
valid OMB control number. The collection of information under Rule
17Ad-18 is necessary for non-bank transfer agents to comply with
certain requirements and is necessary to provide the Commission with
information on the security industry's readiness for the Year 2000. The
information collected pursuant to Rule 17Ad-18 will be made public.
Based upon the adjustments to the amendments, the Commission is
adjusting its burden estimate. The Commission estimated in the proposed
rule that, on average, a non-bank transfer agent would spend 50 hours
preparing each of the three Year 2000 reports and obtaining the two
independent public accountant's Attestations. The Commission estimates
that under the final amendments, a non-bank transfer agent will, on
average, spend two hours preparing Part I of Form TA-Y2K and 35 hours
preparing Part II of Form TA-Y2K. The total annualized burden to the
securities industry is estimated at 8,480 hours. This is based on 740
respondents spending two hours preparing Part I and 200 respondents
preparing Part II of Form TA-Y2K.
VII. Statutory Analysis
Pursuant to the Securities Exchange Act of 1934 and particularly
Sections 17(a) and 23(a) thereof, 15 U.S.C. 78o(c)(3) and 78w, the
Commission is adopting amendments to Sec. 240.17Ad-18 of Title 17 of
the Code of Federal Regulations in the manner set forth below.
List of Subjects in 17 CFR Parts 240 and 249
Broker-dealers, Reporting and recordkeeping requirements,
Securities.
Text of Final Rule
In accordance with the foregoing, Title 17, chapter II, part 240 of
the Code of Federal Regulations is amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and
80b-11, unless otherwise noted.
* * * * *
2. By adding Sec. 240.17Ad-18 to read as follows:
Sec. 240.17Ad-18 Year 2000 Reports to be made by certain transfer
agents.
(a) Each registered non-bank transfer agent must file Part I of
Form TA-Y2K (Sec. 249.619 of this chapter) with the Commission
describing the transfer agent's preparation for Year 2000 Problems.
Part I of Form TA-Y2K shall be filed no later than August 31, 1998, and
April 30, 1999. Part I of Form TA-Y2K shall reflect the transfer
agent's preparation for the Year 2000 as of July 15, 1998, and March
15, 1999, respectively.
(b) Each registered non-bank transfer agent, except for those
transfer agents that qualify for the exemption in paragraph (d) of
Sec. 240.17Ad-13, must file with the Commission Part II of Form TA-Y2K
(Sec. 249.619 of this chapter) in addition to Part I of Form TA-Y2K.
Part II of Form TA-Y2K report shall address the following topics:
(1) Whether the board of directors (or similar body) of the
transfer agent has approved and funded plans for preparing and testing
its computer systems for Year 2000 Problems;
(2) Whether the plans of the transfer agent exist in writing and
address all mission critical computer systems of the transfer agent
wherever located throughout the world;
(3) Whether the transfer agent has assigned existing employees, has
hired new employees, or has engaged third parties to provide assistance
in addressing Year 2000 Problems; and if so, a description of the work
that these groups of individuals have performed as of the date of each
report;
(4) The current progress on each stage of preparation for potential
problems caused by Year 2000 Problems. These stages are:
(i) Awareness of potential Year 2000 Problems;
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(ii) Assessment of what steps the transfer agent must take to
address Year 2000 Problems;
(iii) Implementation of the steps needed to address Year 2000
Problems;
(iv) Internal testing of software designed to address Year 2000
Problems, including the number and description of the material
exceptions resulting from such testing that are unresolved as of the
reporting date;
(v) Point-to point or industry-wide testing of software designed to
address Year 2000 Problems (including testing with other transfer
agents, other financial institutions, and customers), including the
number and description of the material exceptions resulting from such
testing that are unresolved as of the reporting date; and
(vi) Implementation of tested software that will address Year 2000
Problems;
(5) Whether the transfer agent has written contingency plans in the
event that, after December 31, 1999, it has computer problems caused by
Year 2000 Problems; and
(6) What levels of the transfer agent's management are responsible
for addressing potential problems caused by Year 2000 Problems,
including a description of the responsibilities for each level of
management regarding the Year 2000 Problems;
(7) Any additional material information in both reports concerning
its management of Year 2000 Problems that could help the Commission
assess the transfer agent's readiness for the Year 2000.
(8) Part II of Form TA-Y2K (Sec. 249.619 of this chapter) shall be
filed no later than August 31, 1998, and April 30,999. Part II of Form
TA-Y2K shall reflect the transfer agent's preparation for the Year 2000
as of July 15, 1998, and March 15, 1999, respectively.
(c) Any non-bank transfer agent that registers between the adoption
of the final rule and December 31, 1999, must file with the Commission
Part I of Form TA-Y2K (Sec. 249.619 of this chapter) no later than 30
days after their registration becomes effective. New transfer agents
whose registration with the Commission becomes effective between
January 1, 1999, and April 30, 1999, would be required to file the
second report due on April 30, 1999.
(d) For purposes of this section, the term Year 2000 Problem shall
include problems arising from:
(1) Computer software incorrectly reading the date ``01/01/00'' as
being the year 1900 or another incorrect year;
(2) Computer software incorrectly identifying a date in the Year
1999 or any year thereafter;
(3) Computer software failing to detect that the Year 2000 is a
leap year; or
(4) Any other computer software error that is directly or
indirectly caused by paragraph (d)(1), (2), or (3) of this section.
(e) For purposes of this section, the term non-bank transfer agent
means a transfer agent whose:
(1) Appropriate regulatory agency, as that term is defined by 15
U.S.C. 78(c)(34)(B), is the Securities and Exchange Commission; and
(2) Is not a savings association, as defined by Section 3 of the
Federal Deposit Insurance Act, 12 U.S.C. 1813, which is regulated by
the Office of Thrift Supervision.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
3. The authority citation for part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
4. By adding Sec. 249.619 and Form TA-Y2K to read as follows.
Sec. 249.619 Form TA-Y2K, information required of transfer agents
pursuant to section 17 of the Securities Exchange Act of 1934 and
Sec. 240.17Ad-18 of this chapter.
This form shall be used by every registered transfer agent required
to file reports under Sec. 240.17Ad-18 of this chapter.
Note: Form TA-Y2K does not appear in the Code of Federal
Regulations. Form TA-Y2K is attached as Appendix A to this document.
By the Commission.
Dated: July 2, 1998.
Margaret H. McFarland,
Deputy Secretary.
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[FR Doc. 98-18296 Filed 7-10-98; 8:45 am]
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