Year 2000 Readiness Reports To Be Made by Certain Transfer Agents

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-40165; 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: Proposed rule; request for additional comments.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is re-

opening the comment period with respect to its proposal that would have

required transfer agents to engage an independent public accountant to

attest to specific assertions included in the transfer agent's report

on Year 2000 compliance. The attestation by independent public

accountants was one component of Rule 17Ad-18 under the Securities

Exchange Act of 1934 proposed by the Commission in Release No. 34-

39726, which was published in the Federal Register on March 12, 1998

(63 FR 12062).

DATES: Comments should be received on or before August 12, 1998.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission (``Commission''),

450 Fifth Street, NW, Washington, DC 20549. Comments also may be

submitted electronically at the following E-mail address: rule-

[email protected]. Comment letters should refer to File No. S7-8-98;

this file number should be included on the subject line if E-mail is

used. All comments received will be available for public inspection and

copying at the Commission's Public Reference Room, 450 Fifth Street,

NW, Washington, DC 20549. Electronically submitted comment letters will

be posted on the Commission's Internet web site (http://www.sec.gov).

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:

mmission's Internet web site (http://www.sec.gov).

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 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 the year 1900 or another incorrect date. In addition, systems may

fail to detect that the Year 2000 is a leap year. Problems can also

arise earlier than January 1, 2000, as dates in the next millennium are

entered into non-Year 2000 compliant programs.

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 the

transfer agent industry and the Commission are working hard to address

the industry's Year 2000 problems.

In a companion release also issued today, the Commission is

adopting Rule 17Ad-18 \1\ under the Securities Exchange Act \2\ to

require certain transfer agents to file reports with the Commission

regarding Year 2000 compliance.\3\

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\1\ 17 CFR 240.17Ad-18.

\2\ U.S.C 78a et seq.

\3\ Release No. 34-XXXXX, (XXXX X, 1998), (``Adopting

Release'').

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II. Year 2000 Reporting Requirements

rtain transfer agents to file reports with the Commission

regarding Year 2000 compliance.\3\

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\1\ 17 CFR 240.17Ad-18.

\2\ U.S.C 78a et seq.

\3\ Release No. 34-XXXXX, (XXXX X, 1998), (``Adopting

Release'').

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II. Year 2000 Reporting Requirements

Rule 17Ad-18 requires new Form TA-Y2K to be filed by each transfer

agents 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 Office of

Thrift Supervision. Part I of Form TA-Y2K is a check-the-box Year 2000

questionnaire. Each transfer agent that does not qualify for an

exemption under Rule 17Ad-13(d) \4\ will also be required to file Part

II of Form TA-Y2K, which requires a narrative discussion of its efforts

to address Year 2000 Problems.

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\4\ 17 CFR 240.17Ad-13(d). Generally, Rule 17Ad-13(d) exempts

the following transfer agents from the rule's annual reporting

requirements: issuer transfer agents, small transfer agents exempt

under Rule 17Ad-4(b), and bank transfer agents.

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Generally, Form TA-Y2K requires each transfer agent to discuss the

steps it has taken to address Year 2000 Problems. Each transfer agent

is required, among other things, to (i) indicate whether its board of

directors, or similar body, has approved and funded written Year 2000

remediation plans that address all mission critical computer systems;

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Generally, Form TA-Y2K requires each transfer agent to discuss the

steps it has taken to address Year 2000 Problems. Each transfer agent

is required, among other things, to (i) indicate whether its board of

directors, or similar body, has approved and funded written Year 2000

remediation plans that address all mission critical computer systems;

(ii) describe its Year 2000 staffing efforts; (iii) discuss its

progress on each stage of preparation for the Year 2000;\5\ (iv)

indicate if it has written contingency plans to deal with Year 2000

problems that may occur; and (v) identify what levels of management are

responsible for Year 2000 remediation efforts.\6\

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\5\ These stages are: (i) awareness of potential Year 2000

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 2000 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.

\6\ The Commission refers members of the public to the Adopting

Release for more detailed information about the reporting

requirements and Form.

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III. Independent Public Accountant Review

her financial institutions, customers,

and vendors); and (vi) implementation of tested software that will

avoid Year 2000 Problems.

\6\ The Commission refers members of the public to the Adopting

Release for more detailed information about the reporting

requirements and Form.

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III. Independent Public Accountant Review

When the Commission originally proposed Rule 17Ad-18,\7\ the rule

would have required each transfer agent to have an independent public

accountant attest to several specific assertions included in its

follow-up reports, now Part II of Form TA-Y2K.\8\ In reposnse to the

proposing release, 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 said that some of the required assertions are not appropriate

for accountant attestation because the assertions are not capable of

reasonably consistent measurement against reasonable 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 easily

misunderstood. The AICPA was primarily concerned that uninformed users

of the attestation reports would place undue reliance on them.

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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 easily

misunderstood. The AICPA was primarily concerned that uninformed users

of the attestation reports would place undue reliance on them.

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\7\ Securities Exchange Act Release No. 39726 (March 5, 1998),

63 FR 12062 (March 12, 1998).

\8\ As proposed, each transfer agent would have been required to

assert (i) whether it has developed written plans for preparing and

testing its computer systems for potential Year 2000 Problems; (ii)

whether the board of directors, or similar body, has approved these

plans, and whether a member of the transfer agent's board of

directors, or similar body, is responsible for executing the plans;

(iii) whether its Year 2000 remediation plans address all domestic

and international operations, including the activities of its

subsidiaries, affiliates, and divisions; (iv) whether it has

assigned existing employees, hired new employees, or engaged third

parties to execute its Year 2000 remediation plans; and (v) whether

it has conducted internal and external testing of its Year 2000

solutions and whether the results of those tests indicate that the

transfer agent has modified its software to correct Year 2000

problems.

\9\ This point was echoed by a number of other comment letters.

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ute its Year 2000 remediation plans; and (v) whether

it has conducted internal and external testing of its Year 2000

solutions and whether the results of those tests indicate that the

transfer agent has modified its software to correct Year 2000

problems.

\9\ This point was echoed by a number of other comment letters.

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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, a transfer agent

would engage an independent public accountant to perform and report on

specific procedures designed to meet the Commission's objectives. This

would eliminate the variability of examination procedures performed by

independent public accountants and thus increase the consistency of the

reports received by the Commission. 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.

In light of the above, the Commission has deferred consideration of

the appropriate accountant's review of Part II of Form TA-Y2K that

transfer agents that do not qualify for an exemption under existing

Rule 17Ad-13(d) will be required to file by April 30, 1999, reflecting

the status of the transfer agent's Year 2000 efforts as of March 15,

1999. Accordingly, the Commission is reopening the comment period to

obtain additional views, including comments on the feasibility and

desirability of an agreed-upon procedures engagement. The public file

(No. S7-8-98) contains the AICPA's original comment letter, received in

the original comment period, the Commission's Initial Regulatory

Flexibility Analysis, and will contain any subsequent letters submitted

for the Commission's consideration.

Dated: July 2, 1998.

ditional views, including comments on the feasibility and

desirability of an agreed-upon procedures engagement. The public file

(No. S7-8-98) contains the AICPA's original comment letter, received in

the original comment period, the Commission's Initial Regulatory

Flexibility Analysis, and will contain any subsequent letters submitted

for the Commission's consideration.

Dated: July 2, 1998.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-18295 Filed 7-10-98; 8:45 am]

BILLING CODE 8010-01-P