Government Securities Act; implementation: Brokers and dealers reporting requirement; Year 2000 compliance,

[Federal Register: January 12, 1999 (Volume 64, Number 7)]

[Rules and Regulations]

[Page 1735-1757]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr12ja99-7]

DEPARTMENT OF THE TREASURY

17 CFR Part 405

RIN 1505-AA74

Office of the Assistant Secretary for Financial Markets; Government Securities Act Regulations: Reports and Audit

AGENCY: Office of the Assistant Secretary for Financial Markets, Treasury.

ACTION: Final rule.

SUMMARY: The Department of the Treasury (``Department'' or ``Treasury'') is publishing an amendment to the reporting requirements in Sec. 405.2 of the regulations issued under the Government Securities Act of 1986 (``GSA''), as amended.\1\ 17 CFR 405.2 of the GSA regulations requires entities registered with the Securities and Exchange Commission (``SEC'') as specialized government securities brokers and dealers (``registered government securities brokers and dealers'') under section 15C(a)(2) of the Securities Exchange Act of 1934 (the ``Exchange Act'') \2\ to comply with the requirements of section 240.17a-5 of the Exchange Act (SEC Rule 17a-5). On July 13, 1998, the SEC issued an amendment to SEC Rule 17a-5 that requires general purpose broker-dealers to file two reports regarding their year 2000 (``Y2K'') readiness. The Department then published proposed Y2K reporting rules on October 5, 1998, that essentially parallel the SEC's Y2K reporting rules.\3\

\1\ 15 U.S.C. 78o-55

\2\ 15 U.S.C. 78o-5(a)(2).

\3\ 63 FR 53326 (October 5, 1998).

EFFECTIVE DATE: February 11, 1999.

ADDRESSES: This final rule is available for downloading from the Bureau of the Public Debt's Internet site at the following address: www.publicdebt.treas.gov. It is also available for public inspection and copying at the Treasury Department Library, FOIA Collection, Room 5030, Main Treasury Building, 1500 Pennsylvania Avenue, NW, Washington, DC 20220. To visit the library, call (202) 622-0990 for an appointment.

FOR FURTHER INFORMATION CONTACT: Kerry Lanham (Acting Director) or Chuck Andreatta (Senior Financial Advisor), (202) 219-3632, Government Securities Regulations Staff, Bureau of the Public Debt, 999 E Street, NW, Room 315, Washington, DC 20239-0001.

SUPPLEMENTARY INFORMATION:

1. Background

   On July 13, 1998, the SEC issued an amendment to SEC Rule 17a-5 \4\ that requires general purpose broker-dealers to file two reports regarding their year 2000 (``Y2K'') readiness.\5\ Each report is to be filedwith the SEC and the appropriate designated examining authority.

   \4\ 17 CFR 240.17a-5.

   \5\ Securities Exchange Act Release No. 34-40162, (July 2, 1998), 63 FR 37668 (July 13, 1998).

   In developing its amendment, the SEC identified six stages involved in preparing for the year 2000: (1) awareness of potential Y2K problems; (2) assessment of what steps the broker-dealer must take to avoid Y2K problems; (3) implementation of the steps needed to avoid Y2K problems; (4) internal testing of software designed to avoid Y2K problems; (5) integrated or industry-wide testing of software designed to avoid Y2K problems (including testing with other broker-dealers, other financial institutions, and customers); and (6) implementation of tested software that will avoid Y2K problems.\6\ The reports require broker-dealers to address these six stages of preparation.

   \6\ Securities Exchange Act Release No. 34-39724 (March 5, 1998) 63 FR 12057 (March 12, 1998).

   For purposes of its amendment, the SEC identified ``year 2000 problems'' basically as 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 (1), (2), or (3). A failure by the securities industry to prevent or minimize these types of errors could endanger the nation's capital markets and place at risk the assets of millions of investors.

   The reports will enable the SEC to monitor the steps broker-dealers are taking to manage and avoid Y2K problems. The reports will also: (1) enable the SEC staff to report to Congress in 1998 and 1999 regarding the industry's preparedness; (2) supplement the SEC's examination module for year 2000 issues; (3) help the SEC coordinate self- regulatory organizations on industry-wide testing, implementation, and contingency planning; and (4) help increase broker-dealer awareness that they should be taking specific steps now to prepare for the year 2000.‹SUP›7‹/SUP›

   \7\ Id.

   Treasury's final Y2K rules incorporate the SEC's final rules at Sec. 240.17a-5(e)(5), with minor modifications. The same report (Form BD-Y2K, Parts I and II) required under the SEC's rules is also required under Treasury's rules. This report is required to be submitted to the SEC and to the broker-dealer's designated examining authority. In addition, the Department requests that a copy of the report be provided directly to the Government Securities Regulations Staff.

   [[Page 1736]]

2. Comments Received in Response to Proposed Rules

   The Department received one comment letter in response to its proposed amendments, from The Bond Market Association (``Association'').‹SUP›8‹/SUP› The Association supports the Department's proposals. The Association, however, asked for clarification regarding the proposed exemption provided to a specialized government securities broker-dealer (``15C firm,'' i.e., registered with the SEC under Section 15C of the Exchange Act) that has an affiliated registered broker-dealer that files reports under the SEC's Y2K reporting rules. The proposed rule said that such 15C firms would be exempt from the Department's Y2K rules if the affiliate's reports encompass Y2K issues that include the 15C firm's transactions in, and holdings of, government securities. Specifically, the Association was concerned about how the SEC and Treasury would know if a 15C firm was relying on the exemption. The Association therefore recommended that Treasury consider requiring 15C firms relying on the exemption to write a letter to the SEC, Treasury and their designated examining authority stating their reliance on the exemption, the name of the affiliate that filedthe report encompassing the information on government securities transactions, and the date the report was filed. This final rule basically adopts this recommendation.

   \8\ Letter from Paula H. Simpkins, Vice President and Assistant General Counsel, The Bond Market Association, to Kerry Lanham, Acting Director, Government Securities Regulations Staff, dated November 4, 1998. The letter can be downloaded from the Bureau of the Public Debt's website at www.publicdebt.treas.gov. It is also available for inspection and copying at the Treasury Department Library at the address provided earlier in the rule.

   The Association also asked for further clarification on which firms would qualify for this exemption. Specifically, the Association said that firms are concerned whether the reports already filedin August 1998 under the SEC's Y2K reporting rules would be deemed sufficient to satisfy the conditions of the exemption. Such reports would be deemed sufficient by the Department. If the affiliated firm fileda Form BD- Y2K prior to the August 31, 1998 SEC deadline (either Part I or both Parts I and II) and the report encompassed the 15C firm's government securities transactions and holdings, that 15C firm is exempt from the Department's Y2K reporting rules and will only be required to submit a letter as discussed above. If the 15C firm does not have such an affiliate that has already fileda Y2K report with the SEC, then the 15C firm must complete Form BD-Y2K under the Department's Y2K reporting rules.

   In a footnote to its comment letter, The Bond Market Association informed the Department of its understanding that some 15C firms have already completed and filedtheir Y2K readiness reports even though they were not required to do so under the SEC's Y2K reporting rules. Any such 15C firms will be viewed by the Department as having filed their reports and will not have to file again. However, such firms should submit a letter to the SEC and their designated examining authority stating the date that the reports were submitted.

   Finally, the Association recommended that Treasury consider finalizing and publishing its final rule in the Federal Register before November 15, 1998. The principal concern was that it would be difficult to report ``as of'' a date that was prior to the publication date in the Federal Register. To avoid this problem, the Department is requiring the reports to be filedby February 28, 1999, to reflect the status of a firm's Y2K readiness as of January 15, 1999.

3. Additional Analysis

   At the same time that the SEC published its final Y2K reporting rules for general-purpose broker-dealers, it also issued a companion release to solicit comments on the feasibility of having an independent public accountant perform an ``agreed-upon procedures engagement.'' The proposed engagement would follow certain established procedures as an independent check on a broker-dealer's assertions in its second filing of Form BD-Y2K, which is due April 30, 1999.‹SUP›9‹/SUP› The SEC subsequently adopted the proposed amendment for engagement of an independent public accountant, with some modifications.‹SUP›10‹/SUP›

   \9\ Securities Exchange Act Release No. 34-40164, (July 2, 1998) 63 FR 37709 (July 13, 1998).

   \10\ Securities Exchange Act Release No. 34-40608, (October 28, 1998) 63 FR 59208 (November 3, 1998).

   Although the Department reserves the right to require that Y2K reports be submitted again sometime during 1999, at this time the reports will be required to be filedonly once, by the February 28, 1999 deadline, with no independent accountant involvement. The Department would expect, however, that an independent public accountant's required ``material inadequacies'' letter would include a discussion of Y2K issues if any potential problems in this regard were to be found.

   Copies of Form BD-Y2K are available in the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549, or copies can be obtained from the SEC's Internet website at the following address: www.sec.gov.

4. Notice Regarding Current Books and Records Requirements

   Section 404.2 of the GSA regulations requires registered government securities broker-dealers, with certain modifications, to comply with SEC Rule 17a-3. This SEC rule requires registered broker-dealers to make and keep current certain books and records relating to the broker- dealer's business.‹SUP›11‹/SUP› In the preambles to its proposed and final rules, the SEC warned that a broker-dealer with computer systems that have Y2K problems may be deemed not to have accurate and current records and in violation of Rule 17a-3.‹SUP›12‹/SUP› The Department reiterates this advisory. The SEC also reminded broker-dealers that its Rule 17a-11 ‹SUP›13‹/SUP› requires every broker-dealer to promptly notify the SEC of its failure to make and keep current books and records.‹SUP›14‹/SUP› The Department reminds registered government securities broker-dealers that they have this same requirement under Sec. 405.3 of the GSA regulations.

   \11\ 17 CFR 240.17a-33.

   \12\ 63 FR 12056, 12059 (March 12, 1998) and 63 FR 37668 (July 13, 1998).

   \13\ 17 CFR 240.17a-11.

   \14\ See supra note 8.

5. Special Analyses

   This rule does not meet the criteria for a ``significant regulatory action'' under Executive Order 12866.

   In the preamble to the proposed rules, regarding the requirement under the Regulatory Flexibility Act (5 U.S.C. 601, et seq.), the Department certified that this amendment would not have a significant economic impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis was not prepared.

   The collection of information under this final amendment consists of the completion of Form BD-Y2K. This collection of information has been reviewed and approved by OMB and assigned control number 3235- 0511.

   List of Subjects in 17 CFR Part 405

   Brokers, Government securities, Reporting and recordkeeping requirements.

   For the reasons set out in the preamble, 17 CFR Part 405 is amended as follows:

   PART 405--REPORTS AND AUDIT

   1. The authority citation for Part 405 continues to read as follows:

      [[Page 1737]]

      Authority: 15 U.S.C. 78o-5(b)(1)(B), (b)(1)(C), (b)(2), (b)(4).

   2. Section 405.2 is amended by redesignating paragraphs (a)(11) and (a)(12) as paragraphs (a)(15) and (a)(16), respectively, and adding new paragraphs (a)(11) through (a)(14) to read as follows:

      Sec. 405.2 Reports to be made by registered government securities brokers and dealers.

      (a) * * *

      (11) Section 240.17a-5(e)(5)(ii) is modified to read as follows:

      ``(ii) No later than February 28, 1999, every registered government securities broker or dealer shall file Part I of Form BD-Y2K (Sec. 249.618 of this title) prepared as of January 15, 1999.''.

      (12) Section 240.17a-5(e)(5)(iii) is modified to read as follows:

      ``(iii)(A) No later than February 28, 1999, every registered government securities broker or dealer required to maintain minimum liquid capital pursuant to Sec. 402.2(b)(1) or (b)(2) of this title as of January 15, 1999, shall file Part II of Form BD-Y2K (Sec. 249.618 of this title). Part II of Form BD-Y2K shall address each topic in Sec. 240.17a-5(e)(5)(iv) as of January 15, 1999.

      ``(B) No later than April 30, 1999, every registered government securities broker or dealer that was not required to file Part II of Form BD-Y2K under paragraph (e)(12)(iii)(A) of this section but was required to maintain minimum liquid capital pursuant to Sec. 402.2(b)(1) or (b)(2) of this title at any time between January 16, 1999, and March 15, 1999, shall file Part II of Form BD-Y2K. Part II of Form BD-Y2K shall address each topic in Sec. 240.17a-5(e)(5)(iv) as of March 15, 1999.

      ``(C) Any registered government securities broker or dealer that has an affiliated registered broker or dealer that files Form BD-Y2K subject to 17 CFR 240.17a-5(e)(5) will be exempted from paragraphs (e)(11) and (12) of this section, provided the affiliate's report encompasses the registered government securities broker's or dealer's transactions in, and holdings of, government securities. Any such registered government securities broker or dealer shall submit a letter stating its reliance on the exemption, the name of the affiliated registered broker or dealer that filedthe report encompassing its government securities transactions and holdings, and the date the report was filed. The letter shall be filedwith the SEC's principal office in Washington, D.C. and with the broker's or dealer's designated examining authority.''.

      (13) The report by an independent public accountant described in Sec. 240.17a-5(e)(5)(vi) of this title, concerning a broker's or dealer's process for addressing year 2000 problems, is not required.

      (14) References to Form BD-Y2K mean Form BD-Y2K in Sec. 249.618 of this title. * * * * *

      Dated: December 28, 1998. Gary Gensler, Assistant Secretary for Financial Markets.

      Note: Form BD-Y2K does not appear in the Code of Federal Regulations. Form BD-Y2K is attached as Appendix A to this document as follows:

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      [FR Doc. 99-654Filed1-11-99; 8:45 am]

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