Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Year 2000 Readiness Reports to Be Made by Certain Brokers and Dealers
File No. S7-7-98
Comment letter prepared in MS Word 7.0
Dear Mr. Katz:
I am writing to comment on the Securities and Exchange Commissions proposed temporary rule amendment to Rule 17a-5 of the Securities Exchange Act of 1934 that would require all registered broker-dealers with a minimum net capital requirement of $100,000 or more to file an initial and follow-up report regarding Year 2000 readiness. I am a law student at Chicago-Kent College of Law in Chicago, Illinois, and am submitting this comment in connection with an Administrative Law class I am currently enrolled in.
Overall, I think the proposed rule amendment will be an effective tool in evaluating the ability of broker-dealers to manage and prevent problems associated with the Year 2000. The problems associated with the Year 2000 could have extremely damaging effects on the securities industry. The additional costs broker-dealers will incur as a result of preparing the initial and follow-up reports are justified, particularly in light of all the other costs broker-dealers are incurring in addressing the issue. Plus, these costs will only be incurred once. I do not think that this requirement will be unduly burdensome on broker-dealers in terms of the amount of time it will take to prepare the reports. The information required to be included in the reports should be readily available, since broker-dealers should already have well-developed plans to address potential computer problems. In fact, many broker-dealers have already had to respond to the National Associations of Securities Dealers Year 2000 required member survey.
In the Request For Comment section of the proposal, the SEC asks if the initial and follow-up reports should include a statement by the broker-dealer stating whether its Year 2000 plans are on schedule and, if not, the reasons for the delay. I think this should be required. A comprehensive Year 2000 plan is only the first step towards compliance. Staying on schedule is equally as important. The SEC should be alerted as to the number of broker-dealers who are on schedule and the number who are not. I also think a senior officer of the broker-dealer should be required to sign the initial and follow-up reports. This will insure that the reports are created with utmost care.
The SEC has proposed that the initial and follow-up reports on Year 2000 readiness be made publicly available. I agree with this approach. Prudent investors will be concerned about the Year 2000 readiness of securities industry participants. They should be able to obtain the same information the SEC receives in the initial and follow-up reports. Making this information available to investors may help to decrease public anxiety about the Year 2000. With the knowledge that their reports will be publicly available, broker-dealers should view this as an opportunity to maintain investor confidence. It may also provide an additional incentive for broker-dealers to prepare for the Year 2000 for fear of losing investors.
I would like to propose three modifications to the proposed temporary rule amendment. A uniform form for reporting would be very helpful, attestation by an independent public account should not be required, and additional reporting regarding industry-wide testing should be mandatory.
First, I think more guidance is needed on the format broker-dealers should use for their reports. Broker-dealers need more information regarding the desired format and level of detail to include in their reports. Perhaps the SEC could create a uniform form to be completed. Since the initial report would be required to be filed no later than 45 days after the SEC adopts the final rule amendment, a form would also assist broker-dealers in completing the reports on time. Uniformity in the reporting format would make it easier for the SEC to analyze the responses. Without a form, I think some broker-dealers will file lengthy and detailed reports while other broker-dealers will report the absolute minimum amount of information required.
Second, the proposed rule amendment would require that the follow-up report, which is to be filed within 90 days after the date of the broker-dealers 1998 fiscal year-end financial statements, include an attestation by an independent public accountant stating its opinion on whether there is a reasonable basis for the broker-dealers assertions in the follow-up report. I think this requirement is unnecessary and unduly burdensome on both the accountant and the broker-dealer. The broker-dealer will have already undertaken a thorough review of its computer systems and operations in order to formulate its Year 2000 plan and prepare its initial and follow-up reports. The public accountant would also have to undertake the same thorough review of the broker-dealers systems and operations in order to form an opinion of the broker-dealers readiness. The public accountant is likely not qualified to undertake such a review of the broker-dealers systems. A public accountant would probably not be familiar with the broker-dealers technical systems. A public accountant is responsible for preparing financial audits and does not have the expertise required to audit a broker-dealers technical plans for dealing with the Year 2000. Requiring the public accountant to undertake such a review would take an immense amount of time and would not add to the broker-dealers preparedness for the Year 2000. It could also be very expensive for the broker-dealer to pay for the public accountants additional fees for performing the Year 2000 audit.
Third, since industry-wide testing of software designed or modified to avoid Year 2000 problems is an essential step in the preparation for the Year 2000, broker-dealers should have to file an additional report in mid to late 1999 regarding their results of participating in such testing. This testing will include testing with other broker-dealers, other financial institutions, and customers. This third report could include details of the testing procedures followed and results of the testing, including additional modifications that the broker-dealer learns it must make.
I appreciate the opportunity to comment on this proposed temporary rule amendment.
Janet L. McWilliams
cc: Dean Henry Perritt, Chicago-Kent College of Law