April 27, 1998
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Release No. 34-39724; IC-23059; IA-1704; File No. S7-7-98
Dear Mr. Katz:
CREDIT SUISSE FIRST BOSTON CORPORATION ("CSFB") appreciates the opportunity to comment on the above referenced proposal to amend, on a temporary basis, Rule 17a-5 under the Securities Exchange Act of 1934 (the "Exchange Act") that would require certain broker-dealers to file with the Commission and their designated examining authority ("DEA") two reports regarding Year 2000 Compliance. CSFB supports the goals of the proposed temporary rule amendments, and is in favor of reasonable measures designed to enable the Commission to monitor the steps broker-dealers are taking to manage and avoid Year 2000 problems. CSFB further believes that the Commissions goals could constitute an important step in maintaining the integrity of the U.S. financial system, and the continued functioning of the national market system, and therefore generally supports the proposed modifications suggested by the Securities Industry Association ("SIA") in its comment letter on this topic, dated April 24, 1998. We write separately to comment on three areas of specific concern.
Attestations as to Status and Adequacy of Broker-Dealer Preparation for the Year 2000
The rule, as proposed, envisions an attestation in the form of a letter that would give an independent public accountants opinion as to whether there is a reasonable basis for the broker-dealers assertions in the Second Report regarding the areas specified in the proposed Rule 17a-5(e)(5)(v)(A) through (G). In response to the Commissions request for comment, CSFB refers to the comment letter filed by the American Institute of Certified Public Accountants ("AICPA"), dated April 13, 1998 as to the limited feasibility, advisability and efficacy of an accountants report. Similarly, we do not believe that other professionals such as, for example, law firms who could provide opinions of counsel would be willing to render the proposed attestations. This hesitancy or opposition to provide the proposed attestations would make broker-dealer compliance with the proposed rule difficult, if not impossible. Consequently, CSFB respectfully requests that the proposed requirements for attestations be removed from the rule, if adopted.
The $100,000 Capital Threshold for Compliance
The Commission also seeks comment on the proposed $100,000 net capital threshold, and whether that amount is the appropriate threshold to meet the Commissions compliance objectives. The Commission has proposed this threshold on the ground that broker-dealers above that level "likely have substantial financial exposure to the market and to customers," and because "broker-dealers below this level likely rely on broker-dealers with minimum capital levels above $100,000 to facilitate their business operations (i.e., clearing functions)." Exchange Act Release 39724, Section II. A. The Commission estimates that the $100,000 minimum net capital threshold would exclude nearly 70% of registered broker-dealers from the proposed reporting requirements. (See Exchange Act Release 39724, n.4).
CSFB believes that there should be no minimum net capital threshold to the reporting requirements and related compliance, because, individually or collectively, broker-dealers below the proposed minimum are still likely to have substantial financial exposure to the market, and certainly will have substantial exposure to their own customers. They are also likely to have significant business operations or internal computer systems for which they do not use a larger broker-dealer to provide services, and will need to take steps on their own to prepare such systems for the Year 2000. In addition, smaller companies may well lag behind larger companies in terms of awareness, preparation and implementation of Year 2000 remediation requirements.
Moreover, relying on compliance by clearing firms is less than adequate because the available case law is quite clear in not imposing any duties or financial responsibilities on clearing firms for the actions or inactions of an introducing firm towards its customers 1 , and clearing firms generally restrict their contractual liability for failures resulting from the operations of introducing firms. As such, investor protection needs would be significantly neglected if over 70% of U.S. broker-dealers were exempted from the requirements of the proposed rule because of an ill-placed reliance on clearing firms that act as service providers to address the Year 2000 problems of smaller broker-dealers. Lastly, imposing the requirements of the rule on a minority of market participants would be unnecessarily anti-competitive and in violation of the provisions of the Section 23(a)(2) of the Exchange Act. Requiring all broker-dealers to file the proposed reports will further the Commissions stated objectives in proposing the Rule, by allowing it to report more comprehensively to Congress on the preparedness of the industry as a whole, to prepare better for its examination of Year 2000 issues, and, perhaps most importantly, to increase smaller broker-dealers awareness that they should be taking specific steps now to prepare for the Year 2000.
Confidentiality of Reports Required by the Proposed Rule
The Commission further seeks comment on whether certain sections of the reports required by the proposed amendments or the reports in their entirety should not be publicly available. CSFB strongly urges the Commission to maintain the confidentiality of all reports submitted to it by broker-dealers complying with the requirements of Section 17. The reports, as envisioned by the Commission, may require the disclosure of highly sensitive and proprietary business information and trade secrets of broker-dealers. Examples of information that could be included in reports include, without limitation, in-house business applications, end-user applications, network, system and system software information, business vendor relationships, and descriptions of methodologies used to monitor for compliance with the proposed rule and other requirements.
CSFB believes that it is critical to maintain the confidentiality of the proposed reports in order to facilitate meaningful compliance with the proposed rule. Accordingly, CSFB requests that the Commission include language in any final rule that the reports and supporting documents submitted pursuant to the rule are to be treated as non-public records pursuant to 17 C.F.R. 145(d) and Appendix A thereunder, and submitters will be deemed to have complied with the requirements of 17 C.F.R. 145.9 for requesting confidential treatment of information submitted to the Commission. Moreover, CSFB requests that the Commission make clear that the documents and reports submitted are exempt from mandatory disclosure 2 , and that disclosure will be prohibited under applicable law and regulation. 3
CSFB appreciates the opportunity to provide its views on this important industry matter. We support the goals of the proposed rule as a means of increasing industry awareness and assisting industry participants to manage and prevent Year 2000 problems and trust that the proposed modifications outlined above will assist the Commission in pursuing its objectives. Should you have any questions or wish to discuss this matter further, kindly contact the undersigned or Mr. Gautam S. Gujral (212-325-5291), or Mr. Thomas F. Swift (212-325-5294).
Very truly yours,
Kathryn V. Natale
cc: The Honorable Arthur Levitt, Chairman;
The Honorable Norman S. Johnson, Commissioner;
The Honorable Isaac C. Hunt, Jr., Commissioner;
The Honorable Laura S. Unger, Commissioner;
The Honorable Paul Carey, Commissioner;
Dr. Richard R. Lindsey, Director, Division of Market Regulation;
Lori A. Richards, Director, Office of Compliance Inspections and Examinations;
Robert L. D. Colby, Deputy Director, Division of Market Regulation;
Michael A. Macchiaroli, Associate Director, Division of Market Regulation;
Christopher M. Salter, Staff Attorney, Division of Market Regulation
Stephen R. Greene, Global General Counsel, Credit Suisse First Boston
Joseph T. McLaughlin, General Counsel for the Americas, Credit Suisse First Boston
Desk Officer for the Securities and Exchange
Office of Information and Regulatory Affairs
Office of Management and Budget
New Executive Office Building
Washington, DC 20503
-- In the seminal case of Dillon v. Militano , 731 F.Supp. 634 (S.D.N.Y. 1990), the court granted the clearing firm’s motion for summary judgment and rejected, as a matter of law, the plaintiff customers’ allegations of primary liability against the clearing firm: "The (clearing firm) was not in a fiduciary relationship with (the introducing firm’s) customers. This being so, no primary liability may attach to the (clearing firm)." (Citation omitted). See also, Flickinger v. Harold C. Brown & Co., Inc ., 947 F.2d 595, 599 (2d Cir. 1991), where the court found "no (fiduciary) relationship existed between...the clearing firm and ...the investor." Courts have similarly rejected Exchange Act Section 20(a) controlling person liability claims against clearing firms brought by customers of introducing firms. See e.g., Dillon , supra at 638, Carlson v. Bear Stearns & Co ., 906 F.2d 315 (7 th Cir. 1990). Similarly, courts have rejected aiding and abetting claims brought against clearing firms by customers of introducing firms. See e.g. Dillon , supra at 638-9, Stander v . Financial Clearing and Services Corp ., 730 F.Supp. 1282 (S.D.N.Y. 1990).
-- See, e.g ., 5 U.S.C. § 552(b)(3), (b)(4) and (b)(6).
-- See, e.g., 18 U.S.C. § 1905.