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

[Federal Register: October 5, 1998 (Volume 63, Number 192)]

[Proposed Rules]

[Page 53326-53349]

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

[DOCID:fr05oc98-27]

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: Proposed rule.

SUMMARY: The Department of the Treasury (``Department'' or ``Treasury'')

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is publishing for comment a proposed 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 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. This proposed amendment by the Department parallels the SEC's final Y2K reporting rules.

\1\ 15 U.S.C. 78o-5.

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

DATES: Comments must be received on or before November 4, 1998.

ADDRESSES: Hardcopy comments should be sent to: Government Securities Regulations Staff, Bureau of the Public Debt, 999 E Street N.W., Room 515, Washington, D.C. 20239-0001. Comments may also be sent via the Internet to the Government Securities Regulations Staff at govsecreg@bpd.treas.gov. When sending comments via the Internet, please use an ASCII file format and provide your full name and mailing address. Comments received will be available for public inspection and downloading from the Internet and for public inspection and copying at the Treasury Department Library, Room 5030, Main Treasury Building, 1500 Pennsylvania Avenue, N.W., Washington, D.C. 20220.

This proposed amendment has also been made available for downloading from Public Debt's web site at the following address: www.publicdebt.treas.gov.

FOR FURTHER INFORMATION CONTACT: Kerry Lanham (Acting Director) or Chuck Adreatta (Government Securities Specialist), Bureau of the Public Debt, Government Securities Regulations Staff, (202) 219-3632.

SUPPLEMENTARY INFORMATION:

1. Background

   On March 12, 1998, the SEC published for comment proposed temporary amendments to Rule 17a-5 that would require certain broker-dealers to file two reports regarding their year 2000 readiness.\3\ Each report is to be filedwith the SEC and the appropriate designated examining authority.

   \3\ Securities Exchange Act Release No. 34-39724 (March 5, 1998), 63 FR 12056 (March 12, 1998).

   In developing its proposed 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.\4\ The reports require broker-dealers to address these six stages of preparation.

   \4\ Id. at 12057.

   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.\5\

   \5\ Id.

   The SEC received 35 comment letters in response to its proposed amendments. The majority of the commenters generally supported the SEC's proposals. However, the majority of the commenters objected to: (1) the ``attestation'' requirement, a provision that would have required each broker-dealer to have an independent certified accountant attest to specific assertions included in the second Y2K report; and (2) the $100,000 minimum net capital threshold that would have triggered the Y2K reporting requirement. Some other commenters objected to the SEC's proposed plan to make Y2K reports and the accountant's attestation publicly available.

   Based on the comments received, the SEC made certain changes in the final rule, which was published on July 13, 1998.\6\ The primary changes pertained to the attestation requirement and the net capital reporting threshold. One commenter noted that the required attestation would be difficult for independent public accountants to provide because of the absence of established, consistent criteria to measure readiness. As a result, the SEC announced in its final rule that it is deferring a decision on the attestation requirement (the SEC issued a companion release to solicit comments on this issue, including commentary on the feasibility and desirability of an ``agreed-upon procedures'' engagement instead of an ``attestation'' engagement).\7\

   \6\ Securities Exchange Act Release No. 34-40162, (July 2, 1998) 63 FR 37668 (July 13, 1998).

   \7\ Securities Exchange Act Release No. 34-40164, (July 2, 1998) 63 FR 37709 (July 13, 1998).

   The proposed rule would have required broker-dealers with at least $100,000 in net capital to submit Y2K reports. Several commenters contended that this threshold excludes 72 percent of all registered broker-dealers from the Y2K reporting requirement. The commenters argued that the failure of a large number of these firms to adequately prepare for Y2K could have adverse systemic results on the world's financial markets. As a result, the SEC created a two-tiered net capital threshold. Broker-dealers with at least $5,000 in minimum net capital must file only Part I of the report. Those with at least $100,000 in minimum net capital must file Part II.

2. Analysis

   The Department agrees with the SEC that broker-dealers should be taking steps to avoid Y2K problems because accurate output from computer programs is vital to a broker-dealer's recordkeeping and operations. To underscore the importance that it places on this issue, the Department, along with the Federal Reserve Bank of New York and the Bond Market Association, presented a conference on year 2000 testing for the U.S. Treasury securities market on June 17, 1998, in New York

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   City. The Department also agrees that the required reports will heighten broker-dealer awareness and help regulators monitor the steps these firms are taking to manage and address Y2K problems.

   Treasury's proposed Y2K rules incorporate the SEC's final rules at Sec. 240.17a-5(e)(5), with minor modifications. The same two reports (Form BD-Y2K Parts I and II) required under the SEC's rules would be required under the Treasury's rules. These reports would be required to be submitted to the SEC and the broker-dealer's designated examining authority (``DEA'').

   Part I is a check-the-box report that would be required from all registered government securities broker-dealers. It would be filedby December 31, 1998, and would reflect the status of a firm's Y2K efforts as of November 15, 1998. Based on field testing of Part I of the form, the SEC estimates that on average a broker-dealer would spend approximately two hours completing it.

   Part II would be required of every registered government securities broker or dealer that was required to maintain minimum liquid capital pursuant to Sec. 402.2(b)(1) or (b)(2) as of November 15, 1998. Section 402.2(b)(1), which applies to broker-dealers that carry customer accounts and hold funds or securities for those accounts, requires that liquid capital after deducting for total haircuts be at least $250,000. Section 402.2(b)(2) requires liquid capital after haircuts of at least $100,000 for broker-dealers that carry customer accounts but do not generally hold customer funds or securities. Like Part I, Part II of the form would be filedby December 31, 1998, and would reflect the status of a firms' Y2K readiness as of November 15, 1998. Registered government securities brokers or dealers who are not required to file Part II by December 31, 1998, but who become subject to Sec. 402.2(b)(1) or (b)(2) at any time between November 16, 1998 and March 15, 1999 would also be required to submit Part II by April 30, 1999, to reflect the firm's Y2K status as of March 15, 1999. The SEC estimates that on average a broker-dealer will spend 35 hours completing Part II of Form BD-Y2K, which requires a narrative discussion of its efforts to address Y2K problems.

   The Department reserves the right to require that Y2K reports be submitted again sometime during 1999. This determination would be based on the responses received on the Y2K reports. To assist the Department in making this determination, the Department will request that a copy of the report be provided directly to the Department in addition to being filedas required with the SEC and the broker-dealer's DEA.

   The Department's provisions will exempt any registered government securities broker or dealer if it has an affiliated registered broker or dealer that files reports under the SEC's Y2K reporting rules, and that affiliate's reports encompass Y2K issues that include the registered government securities broker-dealer's transactions in, and holdings of, government securities.

   Because the reports required under this rule will be received and reviewed by the SEC, the SEC will make the reports available in whatever way it deems to be appropriate. In its final rule, the SEC states that the reports required under its rule will be made available to the public. We expect that the reports required under this proposed rule would be made available to the public by the SEC as well.

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

3. 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.\8\ 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.\9\ The Department reiterates this advisory. The SEC also reminded broker-dealers that its Rule 17a-11 \10\ requires every broker-dealer to promptly notify the SEC of its failure to make and keep current books and records.\11\ The Department reminds registered government securities broker-dealers that they have this same requirement under Sec. 405.3 of the GSA regulations.

   \8\ 17 CFR 240.17a-3.

   \9\ 63 FR 12056, 12059 (March 12, 1998) and 63 FR 37668 (July 13, 1998).

   \10\ 17 CFR 240.17a-11.

   \11\ See supra note 8.

   The Department would expect 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.

4. Special Analyses

   This proposed rule amendment does not meet the criteria for a ``significant regulatory action'' pursuant to Executive Order 12866. The Administrative Procedure Act (``APA'') (5 U.S.C. 553) generally requires that prior notice and opportunity for comment be afforded before the adoption of rules by federal agencies.

   In addition, pursuant to the Regulatory Flexibility Act,\12\ it is hereby certified that the proposed regulations, if adopted, will not have a significant economic impact on a substantial number of small entities. There are currently about 20 active registered government securities broker-dealers, only two of which would be considered ``small'' under the SEC's definition of ``small entity.'' \13\ Accordingly, the number of small entities that would be required to complete Form BD-Y2K is not significant. As a result, a regulatory flexibility analysis is not required.

   \12\ 5 U.S.C. 601, et seq.

   \13\ 63 FR 37688, 37672 (July 13, 1998).

   Although the proposed amendment to section 405.2 contains ``collection of information'' requirements within the meaning of the Paperwork Reduction Act of 1995,\14\ the Department has determined that no submissions of the requirements to the Office of Management and Budget (``OMB'') are necessary. The collection of information under this proposed amendment would consist solely of the completion of Form BD-Y2K. This collection of information has already been reviewed and approved by OMB and was assigned control number 3235-0511.

   \14\ 44 U.S.C. 3501 et seq.

   List of Subjects in 17 CFR Part 405

   Brokers, Government securities, Reporting and recordkeeping requirements.

   For the reasons set out in the preamble, it is proposed to amend 17 CFR Part 405 as follows:

   PART 405--REPORTS AND AUDIT

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

      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)(14) and (a)(15), respectively, and adding new paragraphs (a)(11) through (a)(13) as follows:

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      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 December 31, 1998, every registered government securities broker or dealer shall file Part I of Form BD-Y2K (Sec. 249.618 of this title) prepared as of November 15, 1998.''.

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

      ``(iii)(A) No later than December 31, 1998, 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 November 15, 1998, 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) of this title as of November 15, 1998.

      ``(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 November 16, 1998, 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 reports encompass the registered government securities broker's or dealer's transactions in, and holding of, government securities.''

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

      Dated: September 16, 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. 98-26544Filed10-2-98; 8:45 am]

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