The Securities and Exchange Commission ("SEC") recently proposed a series of new rules that would require broker-dealers and non-bank transfer agents to be operationally capable within the context of Year 2000 by August 31, 1999 in order to continue doing business. The proposed rules would require broker-dealers and non-bank transfer agents to have the operational capacity to assure prompt and accurate processing of securities transactions. A firm would not be considered operationally capable under the proposed rules if it has a "material" Year 2000 problem. While materiality generally would require a fact-specific determination, the proposed rule would create the presumption that a "material" Year 2000 problem exists if a firm:
- does not have written procedures designed to identify, assess and remediate Year 2000 problems in its "mission critical" systems, i.e., systems necessary to the firm's core business;
- has not verified Year 2000 remediation efforts through reasonable internal testing of its mission critical systems;
- 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 contained in any public independent accountant's report that is required to be filed (see Cadwalader Counsellor, Vol. 1, Issue 1 (Nov. 1998)).
If the proposed rules are adopted, broker-dealers and transfer agents would be required to notify their examining authority and the SEC immediately of any material Year 2000 problem, including the presumed Year 2000 problems described above, existing on or after August 31, 1999. Firms that are not operationally capable because of a Year 2000 problem would be prohibited from doing business after August 31, 1999 unless they provide a certificate from their CEO stating that the Year 2000 problem will be remediated and testing completed by a date no later than October 15, 1999, and that, based on inquiries and to the best of his or her own knowledge, the firm does not anticipate that the existence of the material Year 2000 problem will impair its ability to ensure prompt and accurate processing of securities transactions. This certification would be made public. Firms that are not operationally capable because of a Year 2000 problem by October 15, 1999 would be prohibited from doing business after that date. The SEC will be accepting comments on the proposed rules through April 12, 1999.
Operational Capability Requirements of Registered Broker-Dealers and Transfer Agents and Year 2000 Compliance, SEC Release No. 34-41142; File No. S7-8-99, 64 Fed. Reg. 12127 (Mar. 11, 1999).