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SEC Adopts Temporary Y2K Operational Capability Rules
Washington, DC, August 12, 1999 - The SEC recently adopted a series of temporary rules under the Securities Exchange Act of 1934 that establish Y2K operational capability standards for registered broker-dealers and transfer agents. The rules were adopted largely as proposed. Specifically, Exchange Act Rules 15b7-3T and 17a-9T, for broker-dealers, and 17Ad-21T, for non-bank transfer agents, require such entities to ensure their mission-critical computer systems are Y2K compliant by August 31, 1999, or to certify that any material Y2K problems in their mission-critical systems will be remediated no later than November 15, 1999, or else cease operating their business by December 1, 1999. The temporary rules, which become effective August 30, 1999, also impose special recordkeeping requirements.
Definition of "Material Y2K Problem”
Under the adopted rules, a broker-dealer or transfer agent would be presumed to have a "material Y2K problem" if, at any time on or after August 31, 1999, it:
- does not have written procedures reasonably designed to identify, assess, and remediate any Y2K problems in mission-critical systems under its control;
- has not verified its Y2K remediation efforts through reasonable internal testing of its mission-critical systems under its control and reasonable testing of external links under its control;
- has not remediated all exceptions related to its mission-critical systems contained in any independent public accountant’s report prepared on behalf of the broker-dealer or transfer agent pursuant to Exchange Act Rules 17a-(5)(e)(5)(vi) and 17Ad-18(f), respectively; and
- for broker-dealers, has not verified its Y2K remediation efforts by satisfying Y2K testing requirements imposed by its SRO.
Prohibition on Non-Compliant Broker-Dealers and Transfer Agents and Certification
The adopted rules require a registered broker-dealer or non-bank transfer agent that has, or is presumed to have, a material Y2K problem after August 31, 1999, to notify the Commission, and in the case of a broker-dealer, its designated examining authority (DEA), and cease operations. The rules permit the entity to continue operating until December 1, 1999, however, if its chief executive officer (or an individual with similar authority) certifies and demonstrates that it will fix the problem by November 15, 1999. In that case, the firm would also have to submit a second signed certificate stating either that the firm has remediated its Y2K problem or that it intends to cease operations. In addition, after August 31, 1999, if the firm discovers a new material Y2K problem, it must promptly notify the SEC (and applicable DEA) and submit a certificate in accordance with the rule. Any broker-dealer or transfer agent that continues to have a material Y2K problem after November 15th will be required to cease operations by December 1, 1999. These notices and certifications will be made available to the public.
The adopted rules impose special recordkeeping requirements for broker-dealers and non-bank transfer agents. For broker-dealers, temporary Exchange Act Rule 17a-9T requires certain broker-dealers to make a separate copy of their trade blotter and their securities record or ledger for the last three business days of 1999. These records must be stored in an easily accessible place for at least one year, but may be preserved in any format that is acceptable and in compliance with the Exchange Act recordkeeping rules.
Similarly, for transfer agents, temporary Exchange Act Rule 17Ad-21T requires every non-bank transfer agent, beginning on August 31, 1999, and ending on March 31, 2000, to maintain daily segregated backup records for all master securityholder files, which must be preserved for a rolling five business day period in a manner that will allow for the transfer and conversion of the records to a successor transfer agent. From December 27 through December 31, 1999, the transfer agent must make a backup copy for all master security holder files and preserve these records for at least one year.