April 16, 1997
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: File Nos. S7-7-98, S7-8-98
Dear Mr. Katz:
Charles Schwab & Co., Inc. ("Schwab") submits this comment letter in response to the SECs recent proposals to impose new, temporary reporting requirements on broker-dealers and transfer agents regarding their Year 2000 compliance efforts. Schwab is the largest broker-dealer in the United States in some important market segments, for example electronic brokerage and mutual fund supermarkets. An affiliate of Schwab, Mayer & Schweitzer, Inc. is a major Nasdaq market-maker. Schwab and two of its affiliates, The Charles Schwab Trust Co. and Schwab Retirement Plan Services, Inc., are registered as transfer agents in order to service certain of our mutual fund, trust and retirement plan customers. Charles Schwab Investment Management, Inc., is an investment adviser and manages the SchwabFunds family of investment companies.
Schwab Supports the Commissions Efforts to Raise Year 2000 Awareness and to Monitor Year 2000 Compliance
Schwab commends the Commissions important efforts to raise awareness about the critical need to remediate computer systems to address the Year 2000 problem. We believe the Commission has been a very important catalyst both for securities firms and also for issuers to become Year 2000 compliant.
As the Commission is aware from its recent Year 2000 examination of Schwab, we are devoting extensive resources to this issue. Because of the many electronic connections among participants in the securities markets, Schwab continues to be concerned that failures at other firms and entities (including the U.S. government, many parts of which reportedly are not on schedule to become Year 2000 compliant) could have a ripple effect on our customers as well as investors generally. Schwab appreciates that the Commission has postponed the implementation of some important initiatives, such as decimalization and the NASDs Order Audit Trail System, to allow securities firms time and resources to address Year 2000 compliance issues. We urge the SEC to devote significant resources to examining the Year 2000 compliance efforts of firms in the securities industry. Based on our experience, we believe these examinations both will give the Commission valuable information about the state of industry compliance and may help focus the efforts of the firms being examined.
Given the importance of the Year 2000 issue, Schwab does not object to a limited Year 2000 reporting obligation for broker-dealers and transfer agents. However, we have several suggestions, discussed below, which we hope may improve the proposed rules.
The Reports Should Address Efforts as of a Date After The Rules Take Effect
As currently proposed, the first reports under the rules would concern the status of each firms efforts as of December 31, 1997. By the time the comment period ends, the Commission has considered the comments and has adopted final rules and made those rules effective, it will be (at the earliest) mid-1998. The first reports would be due 45 days after the rules become effective. By that time, we believe the state of industry compliance as of December 31, 1997, will be only of antiquarian interest. At Schwab, as at many firms, the status of Year 2000 remediation efforts by mid-year 1998 will be significantly advanced beyond that at year-end 1997. For example, the bulk of the remediation of our major trading systems is scheduled to occur in the first half of 1998.
Moreover, because these proposed reporting requirements did not exist at the time, Schwab did not take a comprehensive "snapshot" as of December 31, 1997, and we would have some difficulty in going backwards and recreating the precise status as of December 31, 1997. If the Commission believes that it is desirable to have reports due in mid-year 1998, then Schwab suggests that these reports address the firms status "as of" a date subsequent to the effective date of the rules. For instance, if the rules become effective June 15, 1998, then the first report should document the firms status as of June 30, 1998, and should be due July 30, 1998. 1
If the Reports Are to Be Made Public, the Commission Should Provide Safe Harbor Protection for Forward Looking Statements Made in Good Faith
The proposing release suggests that firms reports be publicly available. Schwab sees some possible benefit from this requirement. For example, the reports may assist us in assessing the state of Year 2000 compliance at firms with which we do business. However, if the Year 2000 reports are to be public, we urge the Commission to provide a safe harbor from private liability for statements made in good faith in the reports.
By their nature, reports on Year 2000 compliance are forward-looking. The essence of any Year 2000 effort is that plans are dynamic and, thus, have to be continually updated, adjusted and modified. Inevitably, despite everyones good faith and best efforts, some statements in the reports may turn out to be erroneous (or may later become erroneous). If the reports are public, it is foreseeable that other market participants will claim to have relied on them, and will claim that the party that filed the report was negligent. Just as Congress has provided in the Securities Litigation Reform Act in connection with issuers public disclosures, the Commission should provide protection from liability for forward-looking statements in Year 2000 reports. Of course, such a safe harbor would only apply to statements that are made in good faith, and only if the statements are accompanied by meaningful cautionary language. 2
The Independent Auditor Attestation Requirement Likely Will Impose Costs Out of Proportion to its Value to the Commission or the Public
The proposing release would require attestation by an independent auditor of the year-end 1998 report. We understand that the accounting industry opposes this requirement. In our view, this requirement is not likely to be successful without their support.
We appreciate the Commissions desire to have an independent check on the accuracy of the Year 2000 reports. However, the Commissions and the SROs examinations of broker-dealers may provide the necessary level of comfort. Schwab has great regard for the major accounting firms, but we question whether they are best situated to attest on the remediation of computer code (as opposed to the reliability of financial statements). The systems consulting firms that are better situated to evaluate the status of remediation are already costly and short of resources.
Moreover, preliminary discussions with our independent auditors suggest that the procedures necessary to provide a meaningful attestation would be very time-consuming, particularly given the fact that they would have to be performed at the height of the annual audit season. As a result, we understand that it would be very expensive to provide an attestation far in excess of the average $25,000 per firm estimate contained in the Commissions proposing release, and for Schwab probably in excess of the Commissions $200,000 per firm high-end estimate. We urge the Commission to work with the accounting and securities industries to develop an approach that both will satisfy the Commissions needs and will not impose significant new costs on the companies required to file the reports. 3
Transfer Agents Affiliated with Broker-Dealers Should Not Be Subject to a Separate Reporting Requirement
Our last suggestion concerns the proposed requirement that companies such as Schwab file both broker-dealer and transfer agent reports. This requirement seems duplicative, particularly given the requirement that the independent attestation cover subsidiaries and affiliates in addition to the registered entity. (It would be even more duplicative if Schwab were required to file additional reports concerning our investment adviser and investment company businesses.) We understand the Commissions concern, expressed in the proposing release, about monitoring the Year 2000 compliance efforts of transfer agents that are not registered as broker-dealers and therefore are not members of an SRO. We suggest that if a transfer agent is also registered as a broker-dealer, or is affiliated with a broker-dealer, then it should be exempt from the separate transfer agent reporting requirement: the Commission should get all the information it needs from the report under the broker-dealer rules, and the broker-dealer would save the time and expense of separate reporting and attestation.
We commend the Commissions continued leadership on the Year 2000 issue, and in particular the Commissions willingness to work collaboratively with the regulated community to meet this important challenge. As the Commission has recognized, Year 2000 compliance is one of the most important investor-protection issues now facing the securities industry. Schwab stands willing to offer whatever assistance we can to the Commission in its ongoing effort to understand and address the Year 2000 issue.
W. Hardy Callcott
Vice President and Deputy General Counsel
cc: Dr. Richard R. Lindsey
Director, Division of Market Regulation
-- For transfer agents, this suggestion would result in a requirement for two reports (mid-year 1998 and mid-year 1999), rather than three as currently proposed.
-- The issue of whether the reports should be public is related to the issue of reporting on year-end 1997 status. If the mid-1998 reports are made public and those reports contain information that is six months out of date, then those reports will have the potential to create a misleading public impression about the status of Year 2000 compliance in the securities industry.
-- We have one concern with the substance of the reports: we concur with the ICI that the number and nature of exceptions from testing, particularly internal testing, is a level of detail that is unnecessary for the Commissionís purposes and would be difficult for members of the public to understand and put in context. As for the attestation, we believe it would be unusual for a member of a companyís board of directors (as opposed to a member of management) to be responsible for executing a Year 2000 plan.