Year 2000 Readiness Reports To Be Made by Transfer Agents
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Federal Register › Vol. 63 › 63 FR 12062
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-39726; File No. S7-8-98]
RIN 3235-AH42
Year 2000 Readiness Reports To Be Made by Transfer Agents
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
soliciting comment on proposed temporary Rule 17Ad-18 under the
Securities Exchange Act of 1934 (``Exchange Act''). The proposed
temporary rule would require all non-bank registered transfer agents to
file with the Commission at least one report regarding its Year 2000
readiness. The initial report would be due no later than 45 days after
the Commission adopts this rule. The follow-up reports would be due on
August 31, 1998, and on August 31, 1999. The follow-up reports would
include an attestation by an independent public accountant that would
give the Independent Public Accountant's opinion whether there is a
reasonable basis for the transfer agent's assertions in the reports.
Additionally, the Commission is issuing an advisory notice on its
transfer agent record retention and recordkeeping requirements relating
to the Year 2000.
DATES: The comment period will expire on April 13, 1998.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Comments also may be submitted
electronically at the following E-mail address: [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, N.W., Washington,
D.C. 20549. Electronically submitted comment letters will be posted on
the Commission's Internet web site (http://www.sec.gov).
etters 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, N.W., Washington,
D.C. 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 S. Mooney, Special Counsel, 202/942-4174, Division of
Market Regulation, Securities and Exchange Commission,
450 Fifth Street, N.W., Mail Stop 2-2, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION:
Introduction
At midnight on December 31, 1999, unless the proper modifications
have been made, the program logic in 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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onship 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 is evaluating the ability of participants in the
U.S. securities industry to manage and prevent Year 2000 Problems. The
Commission has identified six stages involved in the preparation for
Year 2000: (1) Awareness of potential Year 2000 Problems; (2)
assessment of what steps the transfer agent must take to avoid Year
2000 Problems; (3) implementation of the steps needed to avoid Year
2000 Problems; (4) internal testing of software designed to avoid Year
2000 Problems; (5) integrated or industry-wide testing of software
designed to avoid Year 2000 Problems (including testing with other
financial institutions and customers); and (6) implementation of tested
software that will avoid Year 2000 Problems. The internal and
integrated testing stages are the most difficult, and likely will
require the most resources. At the time of the Commission staff's June
1997 ``Year 2000 Report'' to Congress, most members of the securities
industry were engaged in the assessment and remediation phases of the
Year 2000 effort.2 Additionally, beginning in the third
quarter of 1996, the Commission's Office of Compliance Inspections and
Examinations has included a Year 2000 examination module in its
examinations of broker-dealers and transfer agents.
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rities
industry were engaged in the assessment and remediation phases of the
Year 2000 effort.2 Additionally, beginning in the third
quarter of 1996, the Commission's Office of Compliance Inspections and
Examinations has included a Year 2000 examination module in its
examinations of broker-dealers and transfer agents.
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\2\ At the request of Congressman Dingell, in June 1997, the
Commission staff prepared a comprehensive report to Congress
describing, in part, the extent to which the securities industry is
preparing to avoid Year 2000 Problems. See Report to the Congress on
the Readiness of the United States Securities Industry and Public
Companies to Meet the Information Processing Challenges of the Year
2000, (June 1997), available at http://www.sec.gov/news/studies/
yr2000.htm. The Commission staff will prepare similar reports in
1998 and 1999. See also Testimony of Arthur Levitt, Chairman, U.S.
Securities and Exchange Commission, Concerning the Readiness of the
United States Securities Industry and Public Companies to Meet the
Information Processing Challenges of the Year 2000 Before the
Subcomm. on Financial Services and Technology of the Senate Comm. on
Banking, Housing, and Urban Affairs (July 30, 1997).
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This release focuses on the readiness of registered transfer agents
to address the Year 2000 date change. Because accurate output from
computer programs is vital to a transfer agent's operations, every
transfer agent currently should be taking steps to avoid Year 2000
Problems. For example, a transfer agent with Year 2000 Problems could
experience, among other things, computer programs not accepting
securities transfers, and difficulty calculating dividend payment dates
for equity securities and interest payment and maturity dates for debt
securities
to a transfer agent's operations, every
transfer agent currently should be taking steps to avoid Year 2000
Problems. For example, a transfer agent with Year 2000 Problems could
experience, among other things, computer programs not accepting
securities transfers, and difficulty calculating dividend payment dates
for equity securities and interest payment and maturity dates for debt
securities.
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 achieving Year 2000
objectives.3 Therefore, information about progress in
dealing with Year 2000 Problems must be obtained from the transfer
agents. All transfer agents for securities registered pursuant to
Section 12 of the Exchange Act must register with the
Commission.4 However, the federal banking agencies are the
``appropriate regulatory agency'' (``ARA'') for registered bank
transfer agents.5 The Commission is coordinating its Year
2000 activities with the banking regulators to achieve complete
coverage of transfer agents, but avoid duplication of efforts.
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\3\ See Section 3(a)(26) of the Exchange Act, 15 U.S.C.
78c(a)(26), for the definition of an SRO.
\4\ See Section 17A(c) of the Exchange Act, 15 U.S.C. 78q-1(c).
\5\ See Section 3(a)(34)(B) of the Exchange Act, 15 U.S.C.
78c(a)(34)(B), for the definition of ARA. Transfer agents that also
are 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.
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II. Proposed Temporary Rules
e 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.
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II. Proposed Temporary Rules
To monitor the steps that transfer agents are taking to manage and
avoid Year 2000 Problems, the Commission is proposing temporary
Exchange Act Rule 17Ad-18.6 The proposed temporary rule
would require registered non-bank transfer agents that do not qualify
for an exemption under Rule 17Ad-13 to file with the Commission three
reports regarding its Year 2000 readiness. These reports will: (1)
Assist the Commission Staff to report to Congress in 1998 and 1999
regarding the industry's preparedness; (2) supplement the Commission's
examination module for Year 2000 issues; (3) help the Commission
coordinate with SROs on Year 2000 industry-wide testing,
implementation, and contingency planning; and (4) increase transfer
agent awareness that they should be taking specific steps now to
prepare for the Year 2000.
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\6\ Proposed 17 CFR 240.17Ad-18.
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A. Initial Report
ear 2000 industry-wide testing,
implementation, and contingency planning; and (4) increase transfer
agent awareness that they should be taking specific steps now to
prepare for the Year 2000.
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\6\ Proposed 17 CFR 240.17Ad-18.
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A. Initial Report
Proposed paragraph (a) of temporary Rule 17Ad-18 will require each
registered non-bank transfer agent to file with the Commission a report
describing the transfer agent's preparations for the Year 2000 and the
steps the transfer agent is taking to avoid Year 2000 Problems
(``Initial Report''). In this report the transfer agent would evaluate
its actions regarding the Year 2000 as of December 31, 1997. This
report also would describe the transfer agent's future plans and
preparations for the Year 2000, including the areas discussed in
paragraph II.C. below. The Initial Report would be required to be filed
no later than 45 days after the Commission adopts this rule.
B. Transfer Agent's Follow-Up Reports
Proposed paragraph (b) of temporary Rule 17Ad-18 would require
registered transfer agents that do not qualify for an exemption under
existing Rule 17Ad-13(d) to file reports with the Commission describing
their progress in addressing Year 2000 Problems (``Follow-Up
Reports'').7 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. Therefore, bank
transfer agents would not be required to submit either the Initial
Report or the Follow-Up Reports. The Follow-Up Reports would be due on
or before August 31, 1998, and on or before August 31, 1999, as of June
30, 1998, and June 30, 1999, respectively. The Follow-Up Reports would
include, but not be limited to, the
agents exempt
under Rule 17Ad-4(b); and bank transfer agents. Therefore, bank
transfer agents would not be required to submit either the Initial
Report or the Follow-Up Reports. The Follow-Up Reports would be due on
or before August 31, 1998, and on or before August 31, 1999, as of June
30, 1998, and June 30, 1999, respectively. The Follow-Up Reports would
include, but not be limited to, the
areas discussed in paragraph II.C. below.
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\7\ 17 CFR 240.17Ad-13(d).
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Because transfer agents that qualify for the exemption under Rule
17Ad-13(d) are typically small transfer agents or are bank transfer
agents subject to the primary supervision of one of the federal banking
agencies, the Commission believes that it would be too burdensome to
subject these transfer agents to both reporting requirements. The
Commission cautions, however, that all transfer agents must take
necessary and appropriate actions to address Year 2000 Problems.
C. Areas Addressed in Initial and Follow-Up Reports
Both the Initial Report and the Follow-Up Reports would be required
to discuss the following areas:
(1) Whether the board of directors (or similar body) of the
transfer agent has approved and funded plans for preparing and testing
the transfer agent's computer systems for potential computer problems
caused by Year 2000 Problems; 8
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\8\ Transfer agents should have all their hardware and software
changes in place by December 1998, if not before, so that they can
conduct testing, including industry-wide testing, during 1999.
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(2) Whether the transfer agent's plans exist in writing and address
all of the transfer agent's computer systems wherever located
throughout the world;
have all their hardware and software
changes in place by December 1998, if not before, so that they can
conduct testing, including industry-wide testing, during 1999.
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(2) Whether the transfer agent's plans exist in writing and address
all of the transfer agent's computer systems wherever located
throughout the world;
(3) Whether the transfer agent has assigned existing employees,
hired new employees, or engaged third parties to provide assistance in
avoiding Year 2000 Problems; and if so, the work that these individuals
have performed as of the date of each report;
(4) What is the transfer agent's current progress on each stage of
preparation for potential computer problems caused by Year 2000
Problems. These stages are: (i) Awareness of potential Year 2000
Problems; (ii) assessment of what steps the transfer agent must take to
avoid Year 2000 Problems; 9 (iii) implementation of the
steps needed to avoid Year 2000 Problems; (iv) internal testing of
software designed to avoid Year 2000 Problems, including the number and
the nature of the exceptions resulting from such testing; (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), including the number
and the nature of the exceptions resulting from such testing; and (vi)
implementation of tested software that will avoid Year 2000 Problems;
10
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ing of software designed to avoid Year
2000 Problems (including testing with other transfer agents, other
financial institutions, customers, and vendors), including the number
and the nature of the exceptions resulting from such testing; and (vi)
implementation of tested software that will avoid Year 2000 Problems;
10
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\9\ In addition to assessing what steps it should make to its
computer systems Year 2000 compliant, the transfer agent must
communicate with its vendors and significant customers about their
Year 2000 readiness.
\10\ In addition, the transfer agent's contingency plan should
provide for the failure of external systems that interact with the
transfer agent's computer systems. For example, the transfer agent's
plan 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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(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; 11 and
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\11\ Contingency planning should provide for adequate
protections to ensure the success of critical systems if interfaces
fail or unexpected problems are experienced with operating systems
and infrastructure software.
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ear 2000 Problems; 11 and
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\11\ Contingency planning should provide for adequate
protections to ensure the success of critical systems if interfaces
fail or unexpected problems are experienced with operating systems
and infrastructure software.
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(6) Identify what levels of the transfer agent's management are
responsible for addressing potential computer problems caused by Year
2000 Problems, including a description of these individuals'
responsibilities regarding the Year 2000 and an estimate of the
percentage of time that each individual has spent on Year 2000 issues
during the preceding twelve month period; in each report, the transfer
agent shall identify a contact person regarding Year 2000 matters.
The list above is the minimum criteria that should be addressed in
the Initial Report. The Follow-Up Reports should also address the above
criteria as well as make certain specific assertions described in
paragraph II.D. below. A transfer agent should include any additional
material information concerning its management of Year 2000 Problems
that will help the Commission assess the transfer agent's readiness for
the Year 2000.
D. Independent Public Accountant's Attestation to be Attached to the
Follow-Up Reports
Transfer Agents would have to file with the Follow-Up Reports an
attestation from an Independent Public Accountant (``Attestation'').
The Attestation would take the form of a letter that would give the
Independent Public Accountant's opinion whether there is a reasonable
basis for certain of the transfer agent's assertions in the Follow-Up
Reports regarding the areas specified in proposed Rule 17Ad-18(d)(1)
through (7)
o file with the Follow-Up Reports an
attestation from an Independent Public Accountant (``Attestation'').
The Attestation would take the form of a letter that would give the
Independent Public Accountant's opinion whether there is a reasonable
basis for certain of the transfer agent's assertions in the Follow-Up
Reports regarding the areas specified in proposed Rule 17Ad-18(d)(1)
through (7). Specifically, the Follow-Up Reports will have to include
assertions responding to the following and the Independent Public
Accountant will have to attest to the following: 12
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\12\ The Commission notes that some of the areas that the
transfer agent would be required to respond to in subsection (d) of
the proposed rule overlap with the areas set forth in subsection
(c). The areas addressed in subsection (d) ask for additional
information from the transfer agent for which the Commission is not
seeking an Independent Public Accountant's attestation. The overlap
exists because the Commission wants to narrowly tailor the specific
assertions that the Independent Public Accountant must account for
in the Attestations attached to the Follow-Up Reports.
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(1) Whether the transfer agent has developed written plans for
preparing and testing the transfer agent computer systems for potential
Year 2000 Problems;
(2) Whether the board of directors (or similar body) of the
transfer agent has approved the plans described in (1) above;
(3) Whether a member of the transfer agent's board of directors (or
similar body) is responsible for the execution of the plans described
in (1) above;
developed written plans for
preparing and testing the transfer agent computer systems for potential
Year 2000 Problems;
(2) Whether the board of directors (or similar body) of the
transfer agent has approved the plans described in (1) above;
(3) Whether a member of the transfer agent's board of directors (or
similar body) is responsible for the execution of the plans described
in (1) above;
(4) Whether the transfer agent's plans described in (1) above
address the transfer agent's domestic and international operations,
including the activities of each of the firm's subsidiaries,
affiliates, and divisions. (Subsidiaries, affiliates, and divisions
that are regulated by U.S. or foreign regulators other than the
Commission are exempted from these provisions);
(5) Whether the transfer agent has assigned existing employees,
hired new employees, or engaged third parties to implement the transfer
agent's plans described in (1) above;
(6) Whether the transfer agent or third party has conducted
internal testing, whether such testing is on schedule in accordance
with the plan described in paragraph (1) above, and whether the
transfer agent has determined as a result of the internal testing that
the transfer agent has modified its software to correct Year 2000
Problems; and
(7) Whether the transfer agent has conducted external or industry-
wide testing, whether such testing is on schedule in accordance with
the plan described in paragraph (1) above, and whether the transfer
agent has determined as a result of the external or industry-wide
testing that the transfer agent has modified its software to correct
Year 2000 Problems.
The Attestation only pertains to the areas discussed above. The
Commission does not expect the Attestation to address assertions in the
Follow-Up Reports that are not pertinent to proposed Rule 17Ad-18(d)(1)
through (7). The Attestation would be required to be filed with the
Follow-Up Reports.
III. Notice Regarding Recordkeeping and Record Retention
Requirements
correct
Year 2000 Problems.
The Attestation only pertains to the areas discussed above. The
Commission does not expect the Attestation to address assertions in the
Follow-Up Reports that are not pertinent to proposed Rule 17Ad-18(d)(1)
through (7). The Attestation would be required to be filed with the
Follow-Up Reports.
III. Notice Regarding Recordkeeping and Record Retention
Requirements
Rule 17Ad-6 under the Exchange Act requires every registered
transfer agent to make and keep current certain information regarding
its operations.13
Exchange Act Rule 17Ad-7 sets forth the time periods for which a
transfer agent must retain the records required by Rule 17Ad-
6.14 The required records facilitate the delivery of
transfer agent services to issuers and security holders, and are an
integral part of the Commission's regulatory program. Among other
things, these records help the Commission to assess whether a transfer
agent is operating properly. A transfer agent whose computer systems
have not been modified to address Year 2000 Problems may have records
that as of January 1, 2000, will be inaccurate or not current, and
therefore in violation of Rules 17Ad-6 and 17Ad-7. Because a transfer
agent essentially is a system of records, a failure to have accurate
records could threaten the transfer agent's viability and have serious
consequences for issuers and security holders. The Commission advises
transfer agents that a failure to adequately prepare for the Year 2000
will not be considered a valid excuse for noncompliance with the
requirements of Rules 17Ad-6 and 17Ad-7.15
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\13\ 17 CFR 240.17Ad-6.
\14\ 17 CFR 240.17Ad-7.
\15\ Cf. Lowell H. Listrom, 50 SEC 883, 887, n.7 (1992).
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IV. Request for Comments
000
will not be considered a valid excuse for noncompliance with the
requirements of Rules 17Ad-6 and 17Ad-7.15
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\13\ 17 CFR 240.17Ad-6.
\14\ 17 CFR 240.17Ad-7.
\15\ Cf. Lowell H. Listrom, 50 SEC 883, 887, n.7 (1992).
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IV. Request for Comments
The Commission solicits commenters' views on any aspect of the
proposed temporary Rule 17Ad-18. In particular, the Commission seeks
comment on whether the Attestation should be prepared by the same
Independent Public Accountant who prepares the annual audit of the
transfer agent's 1998 fiscal year-end financial statements. As
proposed, the Initial Report and the Follow-Up Reports would be
publicly available. The Commission seeks comment on whether certain
sections of these reports, or the entire reports, should not be
publicly available. The Commission also seeks comment on whether the
term ``Year 2000 Problems'' should be modified to account for any other
specific potential computer problems that may occur directly or
indirectly due to the Year 2000. Additionally, the Commission seeks
comment on the areas that will be addressed in the three reports (i.e.,
the Initial Report and the two Follow-Up Reports). For example, should
the reports include any additional material information specific to an
individual transfer agent's management of Year 2000 Problems? If so,
what additional material information should be included? For example,
should transfer agents report whether their Year 2000 plans are on
schedule and, if not, the reasons for the delay? Should the Commission
establish a materiality threshold for determining whether the number
and the nature of the exceptions resulting from internal and integrated
or industry-wide testing needs to be reported? If so, how should the
Commission determine such a threshold? Regarding management
responsibility for Year 2000 plans, should a particular officer
nd, if not, the reasons for the delay? Should the Commission
establish a materiality threshold for determining whether the number
and the nature of the exceptions resulting from internal and integrated
or industry-wide testing needs to be reported? If so, how should the
Commission determine such a threshold? Regarding management
responsibility for Year 2000 plans, should a particular officer of the
transfer agent be required to sign the reports on behalf of the
transfer agent?
The Commission believes that the Attestation could be rendered in
accordance with the accounting profession's Statements on Standards for
Attestation Engagements.16 The Commission seeks commenters'
views on that issue and on any alternative means that would provide the
Commission with an independent assessment of the status and adequacy of
a transfer agent's preparation for possible Year 2000 Problems.
Specifically, the Commission seeks commenters' views on whether the
Commission's desire to receive an Independent Public Accountant's
attestation of a transfer agent's preparation for possible Year 2000
Problems can be combined with, or would already be part of, the
Independent Public Accountants' responsibilities, in accordance with
Generally Accepted Accounting Principles, to opine on whether a
transfer agent can continue as a going concern.
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\16\ American Institute of Certified Public Accountants
Professional Standards, Vol. 1, pp. 2491-2800.
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V. Costs and Benefits of the Proposed Amendment and Its Effect on
Competition
on whether a
transfer agent can continue as a going concern.
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\16\ American Institute of Certified Public Accountants
Professional Standards, Vol. 1, pp. 2491-2800.
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V. Costs and Benefits of the Proposed Amendment and Its Effect on
Competition
The Commission requests that commenters provide analyses and data
relating to costs and benefits associated with the proposal herein.
This information will assist the Commission in its evaluation of the
costs and benefits that may result from the proposed temporary rule.
The Commission understands that the reports regarding the transfer
agent's readiness for the Year 2000 would impose some costs on transfer
agents.17 Transfer agents are not required to engage
additional employees or consultants to prepare the Initial Report.
Although transfer agents must engage an accountant to prepare the
Attestation to accompany the Follow-Up Reports, the Commission believes
that these costs will be significantly outweighed by the benefits the
Commission will gain from learning about the preparations transfer
agents are taking to avoid Year 2000 Problems. The Commission also
believes that reporting requirements will help Transfer agents
understand that they should be taking specific steps now to prepare for
Year 2000.
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\17\ See infra Section VII for the Commission's estimate of the
costs that proposed temporary Rule 17Ad-18 will impose on affected
transfer agents.
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sfer agents
understand that they should be taking specific steps now to prepare for
Year 2000.
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\17\ See infra Section VII for the Commission's estimate of the
costs that proposed temporary Rule 17Ad-18 will impose on affected
transfer agents.
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In addition, Section 23(a)(2) of the Exchange Act requires the
Commission, in amending rules under the Exchange Act, to consider the
anti-competitive effects of such rules, if any.18 The
Commission has considered the proposed temporary rule in light of the
standards cited in Section 23(a)(2), and believes that, if adopted,
they would not likely impose any significant burden on competition not
necessary or appropriate in furtherance of the Exchange Act. Indeed,
the Commission believes that the proposed temporary rule will enable
the Commission to monitor the steps transfer agents are taking to
manage and avoid Year 2000 Problems. The Commission solicits
commenters' views regarding the effects of the proposed temporary rule
on competition, efficiency, and capital formation. The Commission also
seeks comments on the proposed rule's potential impact on the economy
on an annual basis, including any empirical data.
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\18\ See 15 U.S.C. Sec. 78w(a)(2).
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VI. Initial Regulatory Flexibility Analysis
, and capital formation. The Commission also
seeks comments on the proposed rule's potential impact on the economy
on an annual basis, including any empirical data.
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\18\ See 15 U.S.C. Sec. 78w(a)(2).
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VI. Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA''), in accordance with the provisions of the
Regulatory Flexibility Act,19 regarding the rules contained
in the proposed temporary Rule 17Ad-18 under the Exchange Act. As
discussed more fully in the analysis, some of the transfer agents that
the proposed temporary rule would affect are small entities, as defined
by the Commission's rules.
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\19\ 5 U.S.C. 603.
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The IRFA states that the purpose of the proposed temporary rule is
for the Commission to monitor that transfer agents are taking proper
steps to manage and avoid Year 2000 Problems. 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.20 For
example, a transfer agent with Year 2000 Problems could experience,
among other things, computer programs not accepting securities
transfers, and
difficulty calculating dividend payment dates for equity securities and
interest payment and maturity dates for debt securities.
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\20\ 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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report would be due no
later than 45 days after the Commission adopts this rule. The follow-up
reports would be due on August 31, 1998, and on August 31, 1999. The
follow-up reports would include an attestation by an Independent Public
Accountant that would give the independent public accountant's opinion
whether there is a reasonable basis for the transfer agent's assertions
in the reports. These reports will: (1) Assist the Commission Staff to
report to Congress in 1998 and 1999 regarding the industry's
preparedness; (2) supplement the Commission's examination module for
Year 2000 issues; (3) help the Commission coordinate with SROs on Year
2000 industry-wide testing, implementation, and contingency planning;
and (4) increase transfer agent awareness that they should be taking
specific steps now to prepare for the Year 2000.
The IRFA sets forth the statutory authority for the proposed
temporary rule. The IRFA also discusses the effect of the proposed rule
on transfer agents that are small entities pursuant to Rule 0-10 under
the Exchange Act.22 For purposes of the proposed temporary
rule, a small entity is 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 and would
be subject to the requirements of proposed Rule 17Ad-18.23
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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 and would
be subject to the requirements of proposed Rule 17Ad-18.23
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\22\ 17 CFR 240.0-10.
\23\ See infra Section VII, the Commission estimates that, on
average, small transfer agents will incur 50 hours of employee time
to complete the initial report.
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The IRFA states that the proposed temporary rule would impose new
reporting requirements because certain transfer agents would have to
file three reports regarding the transfer agents' readiness for the
Year 2000 with the Commission. The IRFA also states that the proposed
temporary rule would not impose any other reporting, recordkeeping, or
compliance requirements and that the Commission believes that no rules
duplicate, overlap, or conflict with the proposed temporary rule.
The analysis discusses the various alternatives which were
considered by the Commission in connection with the proposed temporary
rule, that might minimize the effect on small entities, including: (a)
The establishment of differing compliance or reporting requirements or
timetables that take into account the resources of small entities; (b)
the clarification, consolidation, or simplification of compliance and
reporting requirements under the proposed temporary rule for small
entities; (c) the use of performance rather than design standards; and
the effect on small entities, including: (a)
The establishment of differing compliance or reporting requirements or
timetables that take into account the resources of small entities; (b)
the clarification, consolidation, or simplification of compliance and
reporting requirements under the proposed temporary rule for small
entities; (c) the use of performance rather than design standards; and
(d) an exemption from coverage of the rule or any part thereof, for
small entities.
Under the proposal, taking into account the burden that would be
imposed on small transfer agents, the Commission is proposing that non-
bank transfer agents that meet the definition of a small entity be
required to submit only the Initial Report, which does not require an
Attestation from an Independent Public Accountant. Bank transfer
agents, regardless of size, would not be required to submit any
reports. Therefore, small entities would be subject to a minimal amount
of compliance cost under the proposal. Accordingly, the Commission has
determined that it is not feasible to further clarify, consolidate, or
simplify the proposed temporary rule for small entities. The Commission
also believes that it would be inconsistent with the purpose of the
Exchange Act to exempt small entities from the proposed temporary rule
any further or to use performance standards to specify different
requirements for small entities.
The Commission encourages the submission of written comments with
respect to any aspect of the IRFA. Those comments should specify costs
of compliance with the proposed temporary rule, and suggest
alternatives that would accomplish the objective of proposed temporary
rule. A copy of the IRFA may be obtained by contacting Jeffrey S.
Mooney, Office of Risk Management and Control, Division of Market
Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Mail Stop 5-1, Washington, D.C. 20549, (202) 942-4174.
VII. Paperwork Reduction Act
roposed temporary rule, and suggest
alternatives that would accomplish the objective of proposed temporary
rule. A copy of the IRFA may be obtained by contacting Jeffrey S.
Mooney, Office of Risk Management and Control, Division of Market
Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Mail Stop 5-1, Washington, D.C. 20549, (202) 942-4174.
VII. Paperwork Reduction Act
Proposed temporary Rule 17Ad-18 contains ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995,24 and the Commission has submitted
them to the Office of Management and Budget for review in accordance
with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection
of information is: ``Proposed Temporary Rule 17Ad-18.''
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\24\ 44 U.S.C. Sec. 3501 et seq.
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The proposed temporary rule would require information collection
because non-bank transfer agents would have to file either one or three
reports with the Commission, depending primarily on their size. The
initial report would need to be filed no later than 45 days after the
Commission adopts this rule. Transfer agents that do not qualify for an
exemption under existing Rule 17Ad-13(d) would file follow-up reports
with an Independent Public Accountant's attestation and subsequent
accountant's reports on or before August 31, 1998, and August 31, 1999,
as of June 30, 1998, and June 30, 1999, respectively. Generally, Rule
17Ad-13(d) exempts small transfer agents, issuer transfer agents, and
bank transfer agents. Therefore, bank transfer agents would not be
required to submit the initial report or the follow-up reports. These
reports are necessary for the Commission to monitor the steps transfer
agents are taking to manage and avoid Year 2000 Problems
e 30, 1998, and June 30, 1999, respectively. Generally, Rule
17Ad-13(d) exempts small transfer agents, issuer transfer agents, and
bank transfer agents. Therefore, bank transfer agents would not be
required to submit the initial report or the follow-up reports. These
reports are necessary for the Commission to monitor the steps transfer
agents are taking to manage and avoid Year 2000 Problems. While the
amount of time needed to comply with the temporary rule will vary from
a minimum of 8 hours to a maximum of 150 hours, the Commission
estimates that, on average, each respondent will devote approximately
50 employee hours of preparation time to each report and 30 employees
hours of discussion time with the Independent Public Accountant who
prepares the Attestation. Additionally, a transfer agent would have to
pay additional fees for preparation of the Attestation. While the
Commission estimates that the amount of additional accounting fees to
comply with the rule amendment would
vary from a minimum of $5,000 to a maximum of $200,000, the Commission
estimates that, on average, a respondent would spend approximately
$25,000 for the preparation of each Attestation. Although, there are
approximately 1,360 transfer agents registered with the Commission, the
Commission is the ARA for approximately 740 of them. All of these non-
bank transfer agents would be required to file the initial report
described in the proposed temporary rule. However, only non-bank
transfer agents that are not (1) Small transfer agents or (2) issuer
transfer agents would be required to file the follow-up reports.
Therefore, the Commission estimates that approximately 330 transfer
agents would be required to submit the follow-up reports.
As proposed, all reports filed under the temporary rule would not
be kept confidential. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid control number.
Pursuant to 44 U.S.C. Sec
e, the Commission estimates that approximately 330 transfer
agents would be required to submit the follow-up reports.
As proposed, all reports filed under the temporary rule would not
be kept confidential. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid control number.
Pursuant to 44 U.S.C. Sec. 3506(c)(2)(B), the Commission solicits
comments to:
(i) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility;
(ii) Evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information;
(iii) Enhance the quality, utility, and clarity of the information
to be collected; and
(iv) Minimize the burden of collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms for information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the following persons:
Desk Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, Office of Management and Budget,
Room 3208, New Executive Office Building, Washington, D.C. 20503; and
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and refer to File No. S7-8-
98. OMB is required to make a decision concerning the collection of
information between 30 and 60 days after publication of this release in
the Federal Register, so a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days of this publication.
VIII. Statutory Basis
change Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and refer to File No. S7-8-
98. OMB is required to make a decision concerning the collection of
information between 30 and 60 days after publication of this release in
the Federal Register, so a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days of this publication.
VIII. Statutory Basis
Pursuant to the Securities 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 proposes to adopt Sec. 240.17Ad-18 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.
Text of Proposed Amendment
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The general authority citation for Part 240 is revised to read
in part as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 78k-1,
78l, 78m, 78n, 78o, 78p, 78q, 78s, 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 transfer agent, except for those transfer
agents whose appropriate regulatory agency is the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, or the
Federal Deposit Insurance Corporation, must file a report with the
Commission describing the transfer agent's preparation for Year 2000
Problems. The report shall address each topic in paragraph (c) of this
section. The report shall be filed no later than 45 days after the
Commission adopts this section.
omptroller of the
Currency, the Board of Governors of the Federal Reserve System, or the
Federal Deposit Insurance Corporation, must file a report with the
Commission describing the transfer agent's preparation for Year 2000
Problems. The report shall address each topic in paragraph (c) of this
section. The report shall be filed no later than 45 days after the
Commission adopts this section.
(b) Each registered transfer agent, except for those transfer
agents exempt under paragraph (d) of Sec. 240.17Ad-13, must file with
the Commission follow-up reports on the transfer agent's preparations
for Year 2000. The reports must be filed on or before August 31, 1998,
and August 31, 1999, as of June 30, 1998, and June 30, 1999,
respectively.
(c) The reports prepared pursuant to paragraphs (a) and (b) of this
section shall include a discussion of the following: A transfer agent
should include any additional material information in both reports
concerning its management of Year 2000 Problems that will help the
Commission assess the transfer agent's readiness for the Year 2000.
(1) Whether the board of directors (or similar body) of the
transfer agent has approved and funded plans for preparing and testing
the transfer agent's computer systems for potential computer problems
caused by Year 2000 Problems;
(2) Whether the transfer agent's plans exist in writing and address
all of the transfer agent's major computer systems wherever located
throughout the world;
(3) Whether the transfer agent has assigned existing employees,
hired new employees, or engaged third parties to provide assistance in
avoiding Year 2000 Problems; and if so, the work that these individuals
have performed as of the date of each report;
(4) What is the transfer agent's current progress on each stage of
preparation for potential computer problems caused by Year 2000
Problems. These stages are:
ransfer agent has assigned existing employees,
hired new employees, or engaged third parties to provide assistance in
avoiding Year 2000 Problems; and if so, the work that these individuals
have performed as of the date of each report;
(4) What is the transfer agent's current progress on each stage of
preparation for potential computer problems caused by Year 2000
Problems. These stages are:
(i) Awareness of potential Year 2000 Problems;
(ii) Assessment of what steps the transfer agent must take 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, including the number and the nature of the exceptions
resulting from such testing;
(v) Integrated or industry-wide testing of software designed to
avoid Year 2000 Problems (including testing with other transfer agents,
other financial institutions, and customers), including the number and
the nature of the exceptions resulting from such testing; and
(vi) Implementation of tested software that will avoid 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) Identify what levels of the transfer agent's management are
responsible for addressing potential computer problems caused by Year
2000 Problems, including a description of these individual's
responsibilities regarding the Year 2000 and an estimate of the
percentage of time that each individual has spent on Year 2000 issues
during the preceding twelve month period; in each report, the transfer
agent shall identify a contact person regarding Year 2000 matters.
ible for addressing potential computer problems caused by Year
2000 Problems, including a description of these individual's
responsibilities regarding the Year 2000 and an estimate of the
percentage of time that each individual has spent on Year 2000 issues
during the preceding twelve month period; in each report, the transfer
agent shall identify a contact person regarding Year 2000 matters.
(d) Each report prepared pursuant to paragraph (b) of this section
shall also
include assertions in response to the following and an opinion by an
independent public accountant attesting to whether there is a
reasonable basis for the transfer agent's assertions in response to the
following:
(1) Whether the transfer agent has developed written plans for
preparing and testing the transfer agent computer systems for potential
Year 2000 Problems;
(2) Whether the board of directors (or similar body) of the
transfer agent has approved the plans described in paragraph (d)(1) of
this section;
(3) Whether a member of the transfer agent's board of directors (or
similar body) is responsible for the execution of the plans described
in paragraph (d)(1) of this section;
(4) Whether the transfer agent's plans described in paragraph
(d)(1) of this section address the transfer agent's domestic and
international operations, including the activities of each of the
firm's subsidiaries, affiliates, and divisions; (Subsidiaries,
affiliates, and divisions that are regulated by U.S. or foreign
regulators other than the Commission are exempted from these
provisions.)
(5) Whether the transfer agent has assigned existing employees,
hired new employees, or engaged third parties to implement the transfer
agent's plans described in paragraph (d)(1) of this section;
m's subsidiaries, affiliates, and divisions; (Subsidiaries,
affiliates, and divisions that are regulated by U.S. or foreign
regulators other than the Commission are exempted from these
provisions.)
(5) Whether the transfer agent has assigned existing employees,
hired new employees, or engaged third parties to implement the transfer
agent's plans described in paragraph (d)(1) of this section;
(6) Whether the transfer agent or third party has conducted
internal testing, whether such testing is on schedule in accordance
with the plan described in paragraph (d)(1) of this section, and
whether the transfer agent has determined as a result of the internal
testing that the transfer agent has modified its software to correct
Year 2000 Problems; and
(7) Whether the transfer agent has conducted external or industry-
wide testing, whether such testing is on schedule in accordance with
the plan described in paragraph (d)(1) of this section, and whether the
transfer agent has determined as a result of the external or industry-
wide testing that the transfer agent has modified its software to
correct Year 2000 Problems.
(e) The transfer agent shall file two copies of each report
prepared pursuant to paragraphs (a) and (b) of this section with the
Commission's principal office in Washington, D.C. The reports required
by paragraphs (a) and (b) will be publicly available.
(f) For purposes of this section, the term Year 2000 Problem shall
include any erroneous result caused by:
(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
(f) For purposes of this section, the term Year 2000 Problem shall
include any erroneous result caused by:
(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 (f)(1), (2), or (3) of this section.
Dated: March 5, 1998.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-6341 Filed 3-11-98; 8:45 am]
BILLING CODE 8010-01-P
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