37688 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations

[FR Doc. 98–18292 Filed 7–10–98; 8:45 am] a transfer agent that may not be Year The Commission views the Year 2000 BILLING CODE 8010±01±E 2000 compliant. problem as an extremely serious issue. EFFECTIVE DATE: August 12, 1998. A failure to assess properly the extent of the problem, remediate systems that are SECURITIES AND EXCHANGE FOR FURTHER INFORMATION CONTACT: Jerry not Year 2000 compliant, and then test COMMISSION W. Carpenter, Assistant Director, 202/ those systems could endanger the 942–4187; Thomas C. Etter, Jr., Special nation’s capital markets and place at 17 CFR Part 240 Counsel, 202/942–0178; or Jeffrey risk the assets of millions of investors. Mooney, Special Counsel, 202/942– In light of this, both transfer agents and [Release No. 34±40163; File No. S7±8±98] 4174, Division of Market Regulation, the Commission are working hard to Securities and Exchange Commission, address the industry’s Year 2000 RIN 3235±AH42 450 Fifth Street, NW., Mail Stop 10–1, Problems. Washington, DC 20549. As part of its ongoing efforts relating Year 2000 Readiness Reports To Be SUPPLEMENTARY INFORMATION: to the Year 2000 on March 5, 1998, the Made by Certain Transfer Agents Commission requested comment on I. Introduction proposed Rule 17Ad–18 that would AGENCY: Securities and Exchange At midnight on December 31, 1999, require transfer agents to file at least one Commission. unless the proper modifications have report with the Commission regarding ACTION: Final rule. been made, the program logic in many its Year 2000 compliance.2 The of the vast majority of the world’s proposed rule noted that transfer agents SUMMARY: The Securities and Exchange computer systems will start to produce Commission (‘‘Commission’’) is present special considerations for the erroneous results because, among other adopting Rule 17Ad–18 under the Commission because unlike other things, the systems will incorrectly read Securities Exchange Act of 1934 entities regulated under the Exchange the date ‘‘01/01/00’’ as being January 1 (‘‘Exchange Act’’) to require certain Act transfer agents have no self- of the year 1900 or another incorrect transfer agents to file with the regulatory organization (‘‘SRO’’) to date. In addition, systems may fail to Commission two reports regarding their assist them and the Commission in detect that the Year 2000 is a leap year. 3 Year 2000 compliance. The reports will addressing Year 2000 issues. Therefore, Problems also can arise earlier than increase transfer agent awareness of the the Commission’s only information from January 1, 2000, as dates in the next specific steps they should be taking to non-bank transfer agents is directly from millennium are entered into non-Year prepare for the Year 2000; help the transfer agent themselves. 2000 compliant programs. Year 2000 The Commission received 26 coordinate industry testing and Problems could have negative comment letters in response to the contingency planning; supplement the repercussions throughout the world’s proposed rule.4 The majority of the Commission’s examination module for financial systems because of the Year 2000 issues and identify potential extensive interrelationship and 2 Release No. 34–39726, (March 5, 1998), 63 FR Year 2000 compliance problems; and information sharing between U.S. and 12062 (March 12, 1998). provide information regarding the 3 foreign financial firms and markets.1 SRO is defined in Section 3(a)(26) of the securities industry’s preparedness for Exchange Act, 15 U.S.C. 78c(a)(26). the Year 2000. The reports are designed 4 All comment letters and a summary of the 1 International Organization of Securities comments are available in File No. S7–8–98 at the to be available to the public, which will Commissions, Statement of the IOSCO Technical Commission’s Public Reference Room, 450 Fifth enable issuers and other parties to Committee on Year 2000 (1997), available at http:/ Street, NW., Washington, DC 20549. The comment assess the risks of doing business with /www.iosco.org. period closed on April 27, 1998. See also Release Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations 37689 commenters generally supported the III. Discussion of Significant Issues similar body, is responsible for spirit of the Commission’s proposed executing the plans; A. Reporting Threshold rule with some commenters making (3) Whether its Year 2000 remediation suggestions on how they believed one or The Office of Thrift Supervision plans address all domestic and more aspects of the proposed rule could (‘‘OTS’’) requested that the Commission international operations, including the be improved. However, the majority of extend the exemption in the proposed activities of its subsidiaries, affiliates, commenters objected to the requirement rule for bank transfer agents to include and divisions; for an independent accountant’s report savings associations regulated by the (4) Whether it has assigned existing and objected to the Year 2000 reports OTS. The OTS stated that savings employees, hired new employees, or submitted by the transfer agents and associations, unlike other non-bank engaged third parties to execute its Year transfer agents, are subject to related accountant’s report being made 2000 remediation plans; and comprehensive examinations by a available to the public. Based on the (5) Whether it has conducted internal Federal banking agency, using the same comments received, the Commission is and external testing of its Year 2000 uniform examination standards solutions and whether the results of adopting the proposed rule with developed under the oversight of the those tests indicate that the non-bank changes discussed below. Federal Financial Institutions transfer agent has modified its software II. Description of the Proposed Rule Examination Council. The OTS also to correct Year 2000 problems. noted that it is subject to similar The American Institute of Certified The Commission proposed Rule Congressional oversight on Year 2000 Public Accountants (‘‘AICPA’’) 17Ad–18 to require non-bank transfer issues as the Commission and the other commented that the required attestation agents to file at least one report with the Federal bank regulatory agencies. The report would be difficult for Commission regarding their Year 2000 OTS believes that it would be independent public accountants to compliance. Under the proposed rule, a duplicative and inconsistent to require provide.9 The AICPA explained that non-bank transfer agent was a transfer savings associations to file the reports some of the required assertions are not agent whose appropriate regulatory with the Commission exempting banks appropriate for accountant attestation agency (‘‘ARA’’) was the Commission.5 from the requirement. because the assertions are not capable of Transfer agents that were also banks and The Commission agrees with the OTS. reasonably consistent measurement whose ARA was one of the federal Accordingly, the rule as adopted against established criteria. Currently, banking agencies would have been excludes from its reporting there are no established criteria related exempt from the proposed rule. The requirements transfer agents that are to Year 2000 remediation efforts. The initial report would have been due no savings associations regulated by the lack of established criteria would likely later than 45 days after the Commission OTS. Therefore the term ‘‘non-bank result in significant variation in the adopted the rule. Non-bank transfer transfer agent’’ used in the rule and in examination procedures performed by agents that did not qualify for an the remainder of this release means a independent public accountants and exemption under existing Rule 17Ad– transfer agent whose: (i) Appropriate thus reduce the usefulness of the regulatory agency, as that term is 13(d) would have been required to attestation reports. In addition, the defined by 15 U.S.C. 78(c)(34)(B), is the submit follow-up reports to the AICPA expressed concern that the Commission; but (ii) is not a savings Commission on August 31, 1998, and purpose and conclusions of the association, as defined in Section 3 of August 31, 1999.6 The follow-up reports attestation report could be the Federal Deposit Insurance Act, 12 misunderstood. The AICPA was also would have included an attestation U.S.C. 1813, which is regulated by the primarily concerned that uninformed by an independent public accountant as OTS. Because the Commission will users of the attestation reports would to whether there was a reasonable basis continue to be the ARA for these non- place undue reliance on them. for the non-bank transfer agent’s bank transfer agents, the Commission The AICPA suggested that an ‘‘agreed- assertions in the reports. will continue to consult with the OTS upon procedures’’ engagement, instead As noted in the proposed rule, the about the results of their examinations. of an attestation engagement, would Commission has advised all transfer B. Attestation Requirement more effectively meet the Commission’s agents that if a transfer agent’s computer goals. Pursuant to such an engagement, systems have Year 2000 Problems, the The proposed rule would have non-bank transfer agents would engage transfer agent’s record may be required transfer agents that did not independent public accountants to inaccurate or not current and therefore qualify for an exemption under existing perform and to report on specific be in violation of Rules 17Ad–6 and Rule 17Ad–13(d) to make assertions procedures designed to meet the 17Ad–7 under the Exchange Act.7 about their efforts to address Year 2000 Commissions objectives. This would problems and to engage an independent eliminate the variability of examination public accountant to attest to their procedures performed by independent No. 34–39859; (April 14, 1998), 63 FR 19430 8 (extending the comment period from April 13, assertions. As proposed, each non-bank public accountants and thus increase 1998, to April 27, 1998). transfer agent would have been required the consistency of the reports the 5 ARA is defined in Section 3(a)(34)(B) of the to assert: Commission would receive. The Exchange Act, 15 U.S.C. 78c(a)(34)(B). Transfer (1) Whether it has developed written AICPA’s letter outlined elements of an agents that are also banks have either the Board of plans for preparing and testing its Governors of the Federal Reserve System, the Office agreed upon procedures report and of the Comptroller of the Currency, or the Federal computer systems for potential Year offered to follow-up with the Deposit Insurance Corporation as their ARA. 2000 Problems; Commission staff regarding the Approximately 1,360 transfer agents are registered (2) Whether the board of directors, or with the Commission, and the Commission is the development of specific procedures for similar body, has approved these plans, a Year 2000 engagement. ARA for approximately 740 of them. and whether a member of the non-bank 6 17 CFR 240.17Ad–13(d). Generally, the Rule 17Ad–13(d) exemption applies to issuer transfer transfer agent’s board of directors, or 9 Letter from Alan W. Anderson, Senior Vice- agents, small transfer agents exempt under Rule President, Technical Services and Deborah D. 17Ad–4(b), and bank transfer agents. 8 The attestation report would have only been Lambert, Chair, Auditing Standards Board, AICPA 7 17 CFR 240.17Ad–6 and 17Ad.7. required to be filed with the follow-up reports. (April 13, 1998). 37690 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations

The Commission is deferring transfer agent efforts as of June 30, 1998 indicate if they have written consideration of whether to adopt a and June 30, 1999, and would have been contingency plans to deal with Year requirement that the second report be due August 31, 1998, and August 31, 2000 problems that may occur;13 and (v) evaluated by an independent public 1999, respectively. identify what levels of management are accountant. The Commission, however, Some commenters expressed concerns responsible for Year 2000 remediation will consider such a requirement if the about making reports based on old data. efforts. accounting industry recommends a These commenters explained that non- One commenter suggested certain standard which can be used by public bank transfer agents might not have changes to the specific reporting accountants in connection with the retained the information needed to requirements to better clarify the second report.10 prepare the reports and would require information sought by the Commission. non-bank transfer agents to provide data C. Public Availability For example, the proposed rule would that was outdated and misleading. have required non-bank transfer agents In the proposed rule, the Commission In light of these concerns, the rule to discuss the extent to which it has expressed its preliminary view that it adopted today by the Commission assigned existing employees, or engaged should make publicly available non- requires non-bank transfer agents to file third parties in the Year 2000 effort. In bank transfer agent reports regarding the initial report with the Commission addition, non-bank transfer agents their Year 2000 remediation efforts. by August 31, 1998. This report should would have been required to identify Certain commenters expressed the reflect the status of the non-bank the levels of management involved in following concerns: (i) Members of the transfer agent’s Year 2000 efforts as of the Year 2000 efforts, discuss the public could place undue reliance on July 15, 1998. The rule requires transfer specific responsibilities of these the reports, (ii) the technical nature of agents to submit only one follow-up managers, and provide an estimate of the reports may confuse investors, (iii) report, which must be filed with the detailed testing reports could be Commission by April 30, 1999, and the time they have spent on Year 2000 misleading and unnecessarily alarming, should reflect the status of the transfer efforts. The commenter explained that and (iv) the reports could contain agent’s Year 2000 efforts as of March 15, these proposed requirements may be confidential proprietary information. 1999. very burdensome, particularly for those However, the Commission believes The rule adopted today also requires firms that have comprehensive, that the public’s interest is best served a non-bank transfer agent whose complex-wide Year 2000 plans. Fixing by requiring full and open disclosure. registration with the Commission Year 2000 problems may require the Allowing the public, particularly other becomes effective between the adoption dedicated efforts of a significant number non-bank transfer agents and of this rule and December 31, 1999, to of employees and consultants. In counterparties, to have access to the file Part I of Form TA–Y2K with the addition, the tasks and responsibilities information reported by non-bank Commission no later than 30 days after involved are detailed, extensive, and transfer agents will enable interested their registration becomes effective constantly changing. persons to assess the Year 2000 describing their Year 2000 compliance The Commission agrees that some readiness of a non-bank transfer agent as of the date of their registration. New modification and clarification of the with which they are doing business. For transfer agents whose registration with reporting requirements is warranted. example, after receiving a non-bank the Commission becomes effective The rule adopted today requires non- transfer agent’s report, an issuer might between January 1, 1999, and April 30, bank transfer agents to provide a request additional information or 1999, would be required to file the summary of the efforts of individuals or assurances if the non-bank transfer second report due on April 30, 1999. groups of individuals assigned to work agent does not appear to be taking the on the Year 2000 Problem. The non- E. Reporting Requirements steps necessary to be Year 2000 bank transfer agent will not have to compliant. In the absence of such As previously discussed, the provide an estimate of the time that its assurances, the issuer could determine proposed rule would have required management has spent on Year 2000 whether it wishes to continue its certain non-bank transfer agents to efforts. Finally, the non-bank transfer dealings with that non-bank transfer discuss the steps they have taken to agent must report the number and agent. Accordingly, the final rule address Year 2000 Problems. More description of material exceptions provides that these reports will be specifically, non-bank transfer agents identified during the internal and available to the public. would have been required to (i) indicate external testing of its software that are whether their board of directors or D. Timing unresolved as of the report date. The similar body has approved and funded Commission is leaving the Under the proposed rule, the initial written Year 2000 remediation plans determination of what constitutes a report would have evaluated the efforts that address all major computer of non-bank transfer agents as of systems; (ii) describe their Year 2000 designed to avoid Year 200 Problems (including December 31, 1997, and would have staffing efforts and the work performed testing with other transfer agents, other financial been required to be filed no later than by Year 2000 dedicated staff;11 (iii) institutions, customers, and vendors); and (vi) 45 days after the Commission adopted discuss their progress on each stage of implementation of tested software that will avoid Year 2000 Problems. the proposed rule. The follow-up 12 preparation for the Year 2000; (iv) 13 Contingency planning should provide for reports would have evaluated non-bank adequate protections to ensure the success of 11 This includes whether the transfer agent has critical systems is interfaces fail or unexpected 10 In light of the AICPA’s comment letter and assigned existing employees, has hired new problems are experienced with operating systems ongoing efforts, in a companion release also issued employees, or has engaged third parties to provide and infrastructure software. In addition, today the Commission is re-opening the comment assistance in avoiding Year 2000 Problems. contingency plans should provide for the failure of period with respect to the proposal to have an 12 These stages are: (i) awareness of potential Year external systems that interact with the transfer independent public accountant review a non-bank 200 Problems; (ii) assessment of what steps must be agents’ computer systems. For example, transfer agent’s second Year 2000 report. The public taken to avoid Year 2000 Problems; (iii) contingency plans should anticipate the failure of file (No. S7–8–98) will include both the AICPA’s implementation of the steps needed to avoid Year a vendor that services mission critical applications original comment letter and any follow-up letter 2000 Problems; (iv) internal testing of software and should provide for the potential that a submitted by the AICPA for the Commission’s designed to avoid Year 2000 Problems; (v) significant customer experiences difficulty due to consideration. integrated or industry-wide testing of software Year 2000 problems. Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations 37691 material exception to the non-bank Washington DC 20549 or copies can be suggested that all transfer agents, transfer agent’s judgment. obtained from the Commission’s regardless of size or being regulated by internet web site at the following other authorities, should provide the F. Report Format address: www.sec.gov. reports required by the proposed rule. The proposed rule would have Three commenters suggested that the IV. Costs and Benefits of the Rules and required certain non-bank transfer Commission also should require transfer Their Effects on Competition, agents to discuss, in narrative format, agents to obtain certifications from their Efficiency, and Capital Formation their efforts to address Year 2000 vendors. No commenter addressed the Problems. The National Association of Section 23(a) of the Exchange Act 15 issue of whether the proposed rule Securities Dealers Regulation requires the Commission, in adopting would affect competition or regarding (‘‘NASDR’’) commented that the rules under the Exchange Act, to the proposed rule’s affect on efficiency Commission should prescribe an consider the competitive effects of such and capital formation. objective format, such as a check-the- rules and to not adopt a rule that would box questionnaire, for non-bank transfer impose a burden on competition not A. Cost Benefit Analysis agents to use when reporting on their necessary or appropriate in furtherance Based on comments received, the Year 2000 efforts. The NASDR of the purposes of the Exchange Act. Commission has revised the proposed explained that an open narrative format Furthermore, Section 3(f) of the rule to lower the aggregate cost of might lead to great disparity in the Exchange Act 16 provides that whenever compliance with the rule. As discussed nature and detail of the reports the non- the Commission is engaged in above, the Commission is adopting new bank transfer agents would submit. rulemaking and is required to consider Form TA–Y2K, eliminating one of the Providing an objective reporting format or determine whether an action is reporting dates, and expanding the would produce consistent results, necessary or appropriate in the public reporting requirement for certain non- improve the accuracy and comparability interest, the Commission also shall bank transfer agents. Under the final of reports received, and reduce the time consider, in addition to the protection of rule, all non-bank transfer agents are required to summarize, track, analyze, investors, whether the action will required to file Part I of Form TA–Y2K, and report the information received. promote efficiency, competition, and a less burdensome check-the-box report, The Commission agrees that the capital formation. twice. The proposed rule required an checklist format suggested by the The Commission has considered the initial report from all non-bank transfer NASDR may be a more efficient way of amendments to Rule 17Ad–18 in light of agents and two follow-up reports from collecting certain information and the standards cited in Sections 3 and 23 those non-bank transfer agents that did believes that prescribing such a format (a)(2) of the Exchange Act. In the not qualify for an exemption under Rule would decrease the burden the Year proposed rule, the Commission 17Ad–13(d). Under the final rule, each 2000 reporting requirements impose on requested that commenters provide non-bank transfer agent that does not non-bank transfer agents. However, the analysis and data supporting the costs qualify for an exemption under Rule Commission is concerned that by and benefits of the proposed rule. In 17Ad–13(d) is also required to complete limiting the reporting requirements to a addition, the Commission sought Part II of Form TA–Y2K. check-the-box format, the largest, most comments on the proposed rule’s effect The Commission is also deferring significant non-bank transfer agents on competition, efficiency, and capital consideration of whether to require non- would not provide the Commission with formation. bank transfer agents to engage sufficient information to effectively Several commenters indicated that the accountants to examine their efforts to assess Year 2000 problems. Therefore, Commission’s cost estimates were too address Year 2000 Problems. The the rule as adopted requires all non- low. However, no commenters provided Commission is allowing non-bank bank transfer agents to file with the detailed information or data as to the transfer agents to summarize by group Commission Part I of Form TA–Y2K, a costs of the proposed rule. One the efforts of Year 2000 dedicated check-the-box style report.14 Part I of commenter questioned whether the individuals as opposed to requiring Form TA–Y2K requires non-bank additional regulations and their expense individual descriptions of their efforts. transfer agents to provide generally the will generate greater preparedness and Non-bank transfer agents will not have same information as the proposed rule compliance or whether they would be a to provide an estimate of the time would have required to be submitted in greater distraction and misdirect the management has spent on Year 2000 narrative form. However, non-bank focus from Year 2000 preparations. efforts. Finally, non-bank transfer agents transfer agents that do not qualify for an Another commenter noted that the are only required to report the number exemption under Rule 17Ad–13(d) will Division of Market Regulation has and description of unresolved material be required to supplement Part I by already requested information from each exceptions identified during the internal completing Part II of Form TA–Y2K, transfer agent regarding its Year 2000 and external testing of their software. which requires a narrative discussion of preparations. Therefore, the commenter Based on field testing of a virtually their efforts to address Year 2000 believed that the proposed rule was identical form, Form BD–Y2K, Problems. Because Rule 17Ad–13(d) duplicative. Another commenter conducted by the Office of Compliance generally exempts small transfer agents suggested that instead of the proposed Inspections and Examinations, the or issuer transfer agents that typically rule the Commission should issue an Commission estimates that on average a handle few issues, the potential that interpretive release under Rule 17Ad–13 non-bank transfer agent will spend these transfer agents could disrupt the that provided standards for transfer approximately two hours completing clearance and settlement process is not agent Year 2000 programs. Part I of Form TA–Y2K resulting in a as likely as larger transfer agents that Two commenters believed that total cost to the industry of $296,000.17 process more issues for more issuers. preparation of the reports required by This is based on 740 respondents Copies of Form TA–Y2K are available the proposed rule was not costly or in the Commission Public Reference difficult. One of these commenters 17 Field tests of Part I of Form BD–Y2K indicated that it could be completed in as little as 30 minutes. Room located at 450 Fifth Street, NW, However, the Commission believes that it may take 15 15 U.S.C. 78W (A)(2). longer for some broker-dealers to complete Part I of 14 For a copy of Form TA–Y2K see Appendix A. 16 U.S.C. 78c. Form BD–Y2K. 37692 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations spending four hours at $100 per hour file will increase transfer agent transfer agent awareness of the specific preparing two Part Is of Form TA–Y2K. awareness that they should be taking steps they should be taking to prepare The Commission estimates that on specific steps now to prepare for the for the Year 2000; help coordinate average a non-bank transfer agent will Year 2000; help coordinate industry industry testing and contingency spend 35 hours completing Part II of testing and contingency planning; planning; supplement the Commission’s Form TA–Y2K resulting in a total cost supplement the Commission’s examination module for Year 2000 to the industry of $1,400,000. This is examination module for Year 2000 issues and identify potential Year 2000 based upon 200 non-bank transfer issues; provide information regarding compliance problems; and provide agents spending 70 hours at $100 per the securities industry’s preparedness information regarding the securities hour preparing two Part IIs of Form TA– for the Year 2000; and (iv) enable the industry’s preparedness for the Year Y2K. Therefore, based upon the Commission to identify particular 2000. adjustments to the proposed rule, the compliance problems. The Commission received no Commission has revised its cost to the comments on the Initial Regulatory B. Efficiency, Competition, and Capital industry to a total of $1,696,000 Flexibility Analysis (‘‘IRFA’’) prepared Formation ($296,000 + $1,400,000). It is important in connection with the proposed rule, to note that the total cost estimate is not In the proposing release, the and no comment letters specifically an annual cost. Non-bank transfer agents Commission stated that the proposed addressed the IRFA. However, as will only be required to prepare and file rule should not unduly burden discussed in paragraph III.A above, two Form TA–Y2Ks. competition. No commenter addressed certain commenters expressed concern No commenters addressed the the proposed rule’s effect on about the threshold for determining potential benefits of the rule and the competition. which non-bank transfer agents are Commission has not been able to The Commission believes that it has required to report on their efforts to quantify those benefits. However, the drafted Rule 17Ad–18 so as to minimize prepare for the Year 2000, and estimated Commission believes that the benefits their impact on competition. As costs associated with obtaining the will outweigh the costs. The discussed above, the Commission has independent public accountant’s Commission is aware of the significant structured the form of the report to attestation. effort the securities industry has put differentiate between non-bank transfer As discussed more fully in the FRFA, forth and the progress its has made, but agents based upon the threat they would the rule will affect transfer agents that believes that significant progress still pose to customers and the market if they are small entities pursuant to Rule 0–10 needs to be made by the securities are not Year 2000 compliant. As under the Exchange Act.18 When used industry to be ready for the Year 2000. discussed above, non-bank transfer with reference to a transfer agent, the As noted above, because transfer agents agents that qualify for an exemption Commission has defined the term do not have an SRO, the only available under Rule 17Ad–13(d) (i.e., small ‘‘small entity’’ to mean a transfer agent information is from the transfer agents transfer agents and issuer transfer that: (1) received less than 500 items for themselves. agents) are only required to file the less transfer and less than 500 items for The Commission does not yet have burdensome Year 2000 report. Larger processing during the preceding six comprehensive information regarding non-bank transfer agents that provide months (or in the time that it has been the readiness of the transfer agent services for multiple issuers do not in business, if shorter); (2) maintained industry for the Year 2000. While the qualify for an exemption and are master shareholder files that in the federal banking agencies are examining required to provide additional aggregate contained less than 1,000 bank transfer agents, it is important for information. The Commission believes shareholder accounts or was the named the Commission to obtain complete that Rule 17Ad–18 does not impose any transfer agent for less than 1,000 information from non-bank transfer burden on competition not necessary or shareholder accounts at all times during agents to permit the Commission to appropriate in furtherance of the the preceding fiscal year (or in the time assess the risks associated with non- Exchange Act. that it has been in business, if shorter); bank transfer agents that fail to show The Commission believes that the rule and (3) is not affiliated with any person adequate Year 2000 progress. Moreover, should increase the efficiency and (other than a natural person) that is not the Commission believes that a effectiveness of the industry’s efforts to a small business or small organization requirement to file Year 2000 reports prepare for the Year 2000 by increasing under Rule 0–10. Approximately 413 should encourage non-bank transfer awareness, focusing industry efforts, registered transfer agents qualify as agents to proceed expeditiously with and providing critical information for ‘‘small entities’’ for purposes of the their efforts to prepare for the Year identifying and remedying problems. In RFA. 2000. The Commission will use the addition, the Commission believes that The Commission has drafted Rule reported information to obtain a more the rule does not adversely affect capital 17Ad–18 to minimize its impact on complete picture of the industry’s formation. However, failure on the part small transfer agents while enhancing overall Year 2000 preparations and to of the securities industry to adequately investor protection and minimizing any identify transfer agent-specific and prepare for the Year 2000 could impact on competition, in part, by industry-wide problems. Information in adversely affect capital formation at the adopting different reporting the reports will help the Commission beginning of the next millennium. requirements to take into account the focus its Year 2000-related efforts for the resources available to small non-bank rest of 1998 and 1999 on particular V. Final Regulatory Flexibility Analysis transfer agents. First, small bank transfer industry segments or non-bank transfer A final Regulatory Flexibility agents are not required to submit any agents that appear to pose the greatest Analysis (‘‘FRFA’’) concerning Rule reports. Second, while the rule requires risk of non-compliance. 17Ad–18 has been prepared in all non-bank transfer agents to report on In sum, the rule will enable the accordance with the provisions of the their efforts to address Year 2000 Commission to take a more active role Regulatory Flexibility Act (‘‘RFA’’), as problems, the Commission has adopted in assessing the Year 2000 risk to the amended by Pub. L. 104–121, 110 Stat. two reporting formats. Small non-bank securities industry. The reports non- 847, 864 (1996), 5 U.S.C. 604. The FRFA bank transfer agents will be required to notes that Rule 17Ad–18 will increase 18 17 CFR 240.0–10. Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations 37693 transfer agents are only required to file collections of information. Based upon Text of Final Rule a less burdensome check-the-box style these suggestions, the collections of In accordance with the foregoing, Year 2000 report. As noted in section information have been adjusted as Title 17, chapter II, part 240 of the Code IV.A above, the Commission estimates described in section III. above. For of Federal Regulations is amended as that it would take each non-bank example, the rule adopted today follows: transfer agent approximately four hours requires non-bank transfer agents to to complete Part I of Form TA–Y2K. The provide a summary of the efforts of PART 240ÐGENERAL RULES AND remaining non-bank transfer agents are individuals or groups of individuals REGULATIONS, SECURITIES required to provide, in addition to the assigned to work on the Year 2000 EXCHANGE ACT OF 1934 check-the-box style report, a more Problem, and the reports will not have extensive narrative discussion of their 1. The authority citation for part 240 to provide an estimate of the time continues to read in part as follows: Year 2000 efforts. These non-bank management has spent on Year 2000 transfer agents are typically larger efforts, nor the number and nature of Authority: 15 U.S.C. 77c, 77d, 77g, 77j, transfer agents that process multiple 77s, 77z–2, 77eee, 77ggg, 77nnn, 77sss, 77ttt, material exceptions identified during 78c, 78d, 78f, 78i, 78j, 78j–1, 78k, 78k–1, 78l, issues and could potentially have a the internal and external testing of its greater impact on the clearance and 78m, 78n, 78o, 78p, 78q, 78s, 78u–5, 78w, software. 78x, 78ll(d), 78mm, 79q, 79t, 80a–20, 80a–23, settlement system. Thus, by adopting An agency may not conduct or 80a–29, 80a–37, 80b–3, 80b–4 and 80b–11, different reporting requirements and by unless otherwise noted. exempting small bank transfer agents, sponsor, and a person is not required to respond to, a collection of information * * * * * the Commission has imposed no 2. By adding § 240.17Ad–18 to read as unless the agency displays a valid OMB burden, or only a very limited burden, follows: on small transfer agents. control number. The collection of The FRFA notes that it would be information under Rule 17Ad–18 is § 240.17Ad±18 Year 2000 Reports to be difficult to further simplify, consolidate, necessary for non-bank transfer agents made by certain transfer agents. or adjust compliance standards for small to comply with certain requirements (a) Each registered non-bank transfer non-bank transfer agents and be able to and is necessary to provide the agent must file Part I of Form TA–Y2K effectively monitor the securities Commission with information on the (§ 249.619 of this chapter) with the industry’s efforts to prepare for the Year security industry’s readiness for the Commission describing the transfer 2000. The Commission believes that the Year 2000. The information collected agent’s preparation for Year 2000 alternate reporting requirement adopted pursuant to Rule 17Ad–18 will be made Problems. Part I of Form TA–Y2K shall today for small non-bank transfer agents public. be filed no later than August 31, 1998, strikes the appropriate balance between and April 30, 1999. Part I of Form TA– Based upon the adjustments to the the need to protect investors and to Y2K shall reflect the transfer agent’s amendments, the Commission is minimize any impact on small non-bank preparation for the Year 2000 as of July adjusting its burden estimate. The transfer agents. The Commission also 15, 1998, and March 15, 1999, considered the use of performance Commission estimated in the proposed respectively. rather than design standards. However, rule that, on average, a non-bank (b) Each registered non-bank transfer the Commission concluded that it transfer agent would spend 50 hours agent, except for those transfer agents would be inconsistent with the purpose preparing each of the three Year 2000 that qualify for the exemption in of the rule to use performance standards reports and obtaining the two paragraph (d) of § 240.17Ad–13, must to specify different requirements for independent public accountant’s file with the Commission Part II of Form small entities. Attestations. The Commission estimates TA–Y2K (§ 249.619 of this chapter) in A copy of the FRFA may be obtained that under the final amendments, a non- addition to Part I of Form TA–Y2K. Part by contacting Jeffrey Mooney, Special bank transfer agent will, on average, II of Form TA–Y2K report shall address Counsel, U.S. Securities and Exchange spend two hours preparing Part I of the following topics: Commission, Mail stop 10–1, 450 Fifth Form TA–Y2K and 35 hours preparing (1) Whether the board of directors (or Street, NW., Washington, DC 20549. Part II of Form TA–Y2K. The total similar body) of the transfer agent has annualized burden to the securities approved and funded plans for VI. Paperwork Reduction Act industry is estimated at 8,480 hours. preparing and testing its computer As set forth in the proposed rule, Rule This is based on 740 respondents systems for Year 2000 Problems; 17Ad–18 contains collections of spending two hours preparing Part I and (2) Whether the plans of the transfer information within the meaning of the 200 respondents preparing Part II of agent exist in writing and address all Paperwork Reduction Act of 1995 Form TA–Y2K. mission critical computer systems of the (‘‘PRA’’).19 Accordingly, the collection transfer agent wherever located of information requirements were VII. Statutory Analysis throughout the world; submitted to the Office of Management Pursuant to the Securities Exchange (3) Whether the transfer agent has and Budget (‘‘OMB’’) for review and assigned existing employees, has hired Act of 1934 and particularly Sections were approved by OMB which assigned new employees, or has engaged third 17(a) and 23(a) thereof, 15 U.S.C. the following control number 3235– parties to provide assistance in 78o(c)(3) and 78w, the Commission is 0512. addressing Year 2000 Problems; and if adopting amendments to § 240.17Ad–18 The proposed rule solicited comments so, a description of the work that these of Title 17 of the Code of Federal on the proposed collections of groups of individuals have performed as Regulations in the manner set forth information. No comments were of the date of each report; received that specifically addressed the below. (4) The current progress on each stage PRA submission. However, as discussed List of Subjects in 17 CFR Parts 240 and of preparation for potential problems above, the Commission received 249 caused by Year 2000 Problems. These suggestions that would improve the stages are: Broker-dealers, Reporting and (i) Awareness of potential Year 2000 19 44 U.S.C. 3501 et seq. recordkeeping requirements, Securities. Problems; 37694 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations

(ii) Assessment of what steps the the transfer agent’s readiness for the (1) Appropriate regulatory agency, as transfer agent must take to address Year Year 2000. that term is defined by 15 U.S.C. 2000 Problems; (8) Part II of Form TA–Y2K (§ 249.619 78(c)(34)(B), is the Securities and (iii) Implementation of the steps of this chapter) shall be filed no later Exchange Commission; and needed to address Year 2000 Problems; than August 31, 1998, and April 30,999. (2) Is not a savings association, as (iv) Internal testing of software Part II of Form TA–Y2K shall reflect the defined by Section 3 of the Federal designed to address Year 2000 transfer agent’s preparation for the Year Deposit Insurance Act, 12 U.S.C. 1813, Problems, including the number and 2000 as of July 15, 1998, and March 15, which is regulated by the Office of description of the material exceptions 1999, respectively. Thrift Supervision. resulting from such testing that are (c) Any non-bank transfer agent that unresolved as of the reporting date; registers between the adoption of the PART 249ÐFORMS, SECURITIES (v) Point-to point or industry-wide final rule and December 31, 1999, must EXCHANGE ACT OF 1934 testing of software designed to address file with the Commission Part I of Form Year 2000 Problems (including testing TA–Y2K (§ 249.619 of this chapter) no 3. The authority citation for part 249 later than 30 days after their registration with other transfer agents, other continues to read in part as follows: becomes effective. New transfer agents financial institutions, and customers), Authority: 15 U.S.C. 78a, et seq., unless whose registration with the Commission including the number and description of otherwise noted; becomes effective between January 1, the material exceptions resulting from 1999, and April 30, 1999, would be * * * * * such testing that are unresolved as of required to file the second report due on 4. By adding § 249.619 and Form TA– the reporting date; and April 30, 1999. Y2K to read as follows. (vi) Implementation of tested software (d) For purposes of this section, the that will address Year 2000 Problems; term Year 2000 Problem shall include § 249.619 Form TA±Y2K, information required of transfer agents pursuant to (5) Whether the transfer agent has problems arising from: written contingency plans in the event section 17 of the Securities Exchange Act (1) Computer software incorrectly of 1934 and § 240.17Ad±18 of this chapter. that, after December 31, 1999, it has reading the date ‘‘01/01/00’’ as being the computer problems caused by Year 2000 year 1900 or another incorrect year; This form shall be used by every Problems; and (2) Computer software incorrectly registered transfer agent required to file (6) What levels of the transfer agent’s identifying a date in the Year 1999 or reports under § 240.17Ad–18 of this management are responsible for any year thereafter; chapter. addressing potential problems caused (3) Computer software failing to detect Note: Form TA–Y2K does not appear in the by Year 2000 Problems, including a that the Year 2000 is a leap year; or Code of Federal Regulations. Form TA–Y2K description of the responsibilities for (4) Any other computer software error is attached as Appendix A to this document. each level of management regarding the that is directly or indirectly caused by By the Commission. Year 2000 Problems; paragraph (d)(1), (2), or (3) of this Dated: July 2, 1998. (7) Any additional material section. Margaret H. McFarland, information in both reports concerning (e) For purposes of this section, the its management of Year 2000 Problems term non-bank transfer agent means a Deputy Secretary. that could help the Commission assess transfer agent whose: BILLING CODE 8010±01±P Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations 37695 37696 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations 37697 37698 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations 37699 37700 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations 37701 37702 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations 37703 37704 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations 37705 37706 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations 37707 37708 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules and Regulations

[FR Doc. 98–18296 Filed 7–10–98; 8:45 am] BILLING CODE 8010±01±C