Proposal for New Rules 15b7-2, 15b7-3T, 17Ad-20, 17Ad-21T and 17a- 9T (Operational Capability Rules and Y2K Rules) Fact Sheet 3/2/1999 Broker-dealers, transfer agents, and other market participants have increasingly relied on computer technology to perform their functions in recent years. Some of the many automated processes include order entry, execution, maintenance of customer accounts, recording changes in ownership, and distributing dividends. Record volume and significant price volatility in recent months have, at times, challenged some of these automated systems. Generally, the markets have been able to withstand occasional stresses on capacity and past problems have been corrected quickly. It is crucial, however, that our markets and market participants be thoroughly prepared for future challenges. The upcoming Year 2000 (Y2K) is one such challenge that markets, market participants and the Commission must address. Unless proper modifications have been made, many computer systems will start to produce erroneous results because they will incorrectly read dates past January 1, 2000. The Commission views the Y2K problem as an extremely serious issue and has already taken various steps to address it. The industry has made significant progress in resolving the Y2K problem and the rules proposed advance the Commission's role in that process. These proposals would permit the Commission to more effectively address those isolated instances where problems may occur. The proposed rules are designed to reduce the potential systemic risk to the securities markets as a result of recurring operational failures in general, and in particular, computer systems failures related to the Year 2000 at registered broker- dealers and transfer agents. The proposed rules would specifically require broker-dealers and transfer agents: ú to have the operational capability to assure the prompt and accurate processing of securities transactions; ú to be Y2K compliant by October 15, 1999 to be able to continue their business; and ú to keep certain records to help facilitate the identification of securities positions, or the transfer to and conversion of records to a Year 2000 compliant entity. General Operational Capability Rules The proposed rules are aimed at overall capacity and mission critical systems, and take into consideration the nature of the business of each entity. Thus, isolated systems problems unrelated to the core business would not violate the proposed rule. But, if delays occur on a regular basis due to insufficient systems capacity that result in customer orders not receiving timely executions, then a broker-dealer could be violation of the rule and it would need to take appropriate actions before resuming its normal operation. If the proposed rules are adopted, in addition to being able to bring enforcement actions after the fact, they would allow the Commission to take preventive measures before serious operational problems adversely affect customers. Year 2000 Rules Registered broker-dealers and non-bank transfer agents would not be considered operationally capable if they have a material Year 2000 problem, which would be determined based on the specific facts and circumstances. Generally, a broker-dealer or a transfer agent would have a material Y2K problem if its computer system incorrectly reads any dates in the Year 1999 and thereafter, and such error is likely to impair any of its mission critical computer systems. The rules would presume the existence of a material Y2K problem if any of the four (three for transfer agents) specified conditions is not satisfied. These conditions include: ú lack of written procedures to identify, assess and remediate Y2K problems ú no verified remediation through reasonable internal testing ú no compliance with applicable Self Regulatory Organization testing requirements (only for Broker dealers -- transfer agents don't have an SRO) ú no remediation all exceptions contained in any public accountants report The broker-dealer and transfer agent would have to come forward with sufficient evidence to rebut such a presumption. If a broker-dealer or a transfer agent has a material Y2K problem on or after August 31, 1999, it would have to file a notice with the Commission and its designated examining authority and would need to cease its business. The rule would allow, however, such a broker-dealer or a transfer agent to continue to operate if it files with the Commission a certificate signed by its CEO certifying, among other things, that it is in the process of fixing the problem, including scheduling of testing its mission critical systems. Even if a broker-dealer or a transfer agent has filed such a certificate, the Commission or a court can order the broker-dealer to cease its business if it is in the public interest or for the protection of investors. In all cases, every broker-dealer that is not Y2K compliant by October 15, 1999 must cease doing business. There would also be recordkeeping requirements that would, in the event of a corrupted database, enable broker-dealers, transfer agents and the Commission to identify securityholder files and all securities positions.