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SEC Adopts Rules To Shut Down Non-Y2K Compliant Broker-Dealers,Transfer Agents

This article was edited and reviewed by FindLaw Attorney Writers | Last reviewed March 26, 2008

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On July 27, the Securities and Exchange Commission ("SEC") adopted a series of rules requiring the "mission critical" systems (i.e., systems necessary to the firm's core business) of broker-dealers and non-bank transfer agents to be Year 2000 compliant by August 31, 1999. Under the new rules, a "material" Year 2000 problem exists if a mission critical system incorrectly identifies any date in the Year 1999 or the Year 2000, and the error impairs or, if uncorrected, is likely to impair, any of the firm's mission critical systems. Moreover, a "material" Year 2000 problem will be presumed to exist if at any time on or after August 31, 1999 a firm:

  • does not have written procedures designed to identify, assess and remediate Year 2000 problems in its mission critical systems; or
  • has not verified Year 2000 remediation efforts through reasonable internal testing of its mission critical systems; or
  • has not complied with any applicable Year 2000 testing requirements imposed by self-regulatory organizations (applicable to broker-dealers only); or
  • has not remediated all exceptions related to mission critical systems contained in any public independent accountant's report that is required to be filed (see Cadwalader Counsellor, Vol. 1, Issue 1 (Nov. 1998)).

If a firm has a "material" Year 2000 problem in its mission critical systems, it must notify its examining authority and the SEC immediately, and have ceased operations by August 31, 1999. Such a firm may continue to operate past August 31, 1999, however, if its CEO has certified that any problems will be remedied and testing completed by November 15, 1999. If any broker-dealer or non-bank transfer agent that submitted such certification is not Year 2000 compliant by November 15, 1999, then it must cease carrying out business by December 1, 1999, or the SEC will bring enforcement action against the firm. *

Year 2000 Operational Capability Requirements for Registered Broker-Dealers and Transfer Agents, SEC Release No. 34-41661; File No. S7-8-99, 64 Fed. Reg. 42012 (Aug. 3, 1999)(to be codified at 17 C.F.R. Part 240). See also Cadwalader Counsellor, Vol. 1, Issue 5 (April 1999) regarding the SEC's initial proposal of the above rules.

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