Secretary
Mail Stop 0609
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
The Commission identifies several concerns the proposed Y2K rules are meant to address, namely the "potential systemic risk as a result of operational failures," and the need for "accurate entry of customer orders, execution, comparison, allocation, clearance and settlement of securities transactions, the maintenance of customer accounts, and the delivery of funds and securities." Further, "the rule is aimed at overall capacity and mission critical systems that affect processing of customer securities transactions." (All emphasis added.)
These concerns are valid. However, they are in the direct realm of clearing firms and transfer agents, to which the Commission should direct its attention. Therefore, proposed Temporary Rule 17a-9T, for larger firms, and proposed rule 17Ad-21T for transfer agents, might be justified.
But small correspondent b/ds should be completely exempt from all Y2K reporting, and specifically from any further Y2K-related rules. The proposal specifically relating to shutting firms down should be shelved.
The SEC is proposing with these rules a grand new regulatory scheme with which to trap the little guy. The proposal says, that "If an introducing broker-dealer becomes aware that its clearing broker-dealer is experiencing operational difficulty, the introducing broker-dealer should promptly make other arrangements to assure appropriate processing of its trades." But this is easier said than done. The wholesale changing of clearing firms, quickly, as the Y2K deadline approaches, and transferring accounts in bulk to a new clearing firm (which may itself have problems), is not likely to help the industry as a whole meet the Y2K challenge. Indeed, as the Commission knows, transferring customer accounts (let alone negotiating a new clearing arrangement) is not always easy. [1]
Further, clearing firms may not know, or admit, they have problems. Correspondents are limited in what they can find out or be sure of. These smaller b/ds are not technology experts, and must essentially rely on assurances from their clearing firms. Even if a correspondent firm knew of a problem, that firm cannot be expected to ascertain in each case whether the problem was small, large, typical or unusual, or the best course of action for its customers. That should be the Commission's job in overseeing the major players.
Holding all firms accountable for their clearing firms' Y2K preparedness is almost as silly as the SEC's Y2K rule for advisers, upon which was tacked an 11th hour requirement that advisers attest to the Y2K preparedness of issuers of the hundreds or thousands of securities the adviser might recommend to clients.
Apparently, when it comes to Y2K issues, commons sense has departed the Commission. Advisers do not exist to surveil corporate America, nor do smaller broker-dealers exist to oversee clearing firms. This is the SEC's job.
Nevertheless, the Commission is threatening to shut firms down if they don't do its job. All dealers would, under the proposals, "be presumed to have a material Year 2000 problem (and will therefore be presumed to not be operationally capable) if, at any time [they do not] have written procedures designed to identify, assess, and remediate any Year 2000 problems [or have not] verified ...Year 2000 remediation efforts through reasonable internal testing," or "Have not verified ... Year 2000 remediation efforts by satisfying any applicable Year 2000 testing requirements imposed by a self-regulatory organization."
"Material problems" would also be defined by bureaucrats working from the proposals' vague definitions.
The SEC's proposed rules, combined with equally vague and subjective SRO rules, will create an "open season" on small b/ds who run afoul of these convoluted proposals--or simply fail to properly fill out the right form.
Rest assured, major clearing firms and major dealers who self-clear will have some Y2K problems. So might some small b/ds. Clearly, the Commission will not be shutting down Merrill Lynch and Bear Stearns for Y2k problems. It's another story, though, for Mom and Pop Securities Co., whose two PC's are incidental to their business, but whose owners neglected to have a written plan. As with so many other rules, the burden of enforcement will fall upon the weakest target.
Indeed, the Commission asks whether there are any practical concerns regarding chief executive officers (or individuals with similar authority) signing the certificate attesting to Y2K fixes. While such a CEO- signed certificate might be useful for, say, the general ongoing compliance condition of a firm, the use of such a certificate is overkill for Y2K issues. Again, any enforcement targets are likely to be the CEOs of the Mom and Pops, not the majors. [2]
The Commission also solicits comments regarding the effects of the proposed rules on competition, efficiency, capital formation and consumers. The proposals would harm all these areas. Smaller firms would be placed under further unnecessary burdens and in some cases be closed. More needless paperwork does not help efficiency or capital formation. And consumers can hardly benefit by having the government unilaterally decide that the firm they have chosen to do business with has been shut down and their accounts transferred to a strange business.
Finally, the Commission says it best when it writes: "This obligation [of operational functionality] is not new. Broker-dealers and transfer agents have always been expected under the federal securities laws to have the ability to properly handle customer transactions, whether manually or electronically."
Therefore, no further rules are needed. Rules applying to larger firms and clearing and transfer agents might be needed, but the rest should be shelved.
Sincerely,
Dan Jamieson
**FOOTNOTES**
[1]: Rather than plan how to take accounts from a b/d on a non-voluntary basis, despite customer wishes, the Commission might want to focus on an apparent lack of enforcement of existing account transfer rules. This commentator would point to, for example, the 700- plus letters the Commission has on file from customers complaining of untimely account transfers.
[2]: The entire Nasdaq scandal was settled with the regulators with not one senior executive cited. According to an SEC enforcement official, this was due to lack of a physical paper trail connecting top executives. This commentator would encourage the Commission's use of general Clean Compliance Certificates, signed by the CEOs of all firms, large and small, giving the executives' attestations that they have made reasonable efforts to ensure conformance with all rules as well as fix any problems. Such a practice could heighten the importance of effective supervision, and create the paper trail that is now apparently lacking.