Integrated Management Solutions
New York, NY 10004-1609
April 13, 1998
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Via e-mail to: firstname.lastname@example.org
Re: File No. S7-7-98 Proposed rule regarding reports to be made by broker-dealers relating to the year 2000
Dear Mr. Katz,
Our firm is responding to the proposed amendments to Rule 17a-5 which would require broker-dealers to submit to the Commission reports relating to the year 2000. We regard as noteworthy the efforts of the Commission in this regard. Certainly, the Commission has issued an important wake-up call to some of the most important institutions in the financial intermediation process, the broker-dealer community. We recognize that if the key elements of the broker-dealer community are not prepared for the inevitable arrival of the year 2000, that much havoc will be wreaked upon those that depend on our financial markets. To this end, certainly the Commission should be assured that critical broker-dealers are well prepared for an event which is less that two years away.
We further recognize that there are several institutions, broker-dealers and organizations that are likely to comment on the significant impact that the rule as proposed would impose on the broker-dealer community. We would expect that much of this commentary would focus on the impact to the larger broker-dealers that typically carry the accounts of customers and others and to the burden of having independent public accountants attest to the preparedness of broker-dealers. On the other hand, we are most concerned with the financial cost and time burden that the proposed rule would impose on smaller broker-dealers that are not critical to the financial marketplace.
WHOM THE COMMISSION PROPOSES TO EXEMPT
Broker-dealers whose minimum net capital requirement is less than $100,000 would be exempt from the provisions of the proposed rule since, as the release indicates, "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)". The release stated that by exempting these firms from the additional reporting burden, that the broker-dealers that would be subject to the rule would be those that likely have substantial financial exposure to the market and to customers. We strongly agree with the Commissions stance that all broker-dealers must have in place the appropriate facilities to operate beyond the end of 1999.
THE EXEMPTION PARAMETERS ARE INAPPROPRIATE
To that end we must recognize that the readiness appropriate for each broker-dealer is not a function of its net capital requirement but rather what its business operations are and whether there are other broker-dealers or customers that would be adversely affected should the subject broker-dealer ignore the inevitable movement toward the year 2000. There are many broker-dealers that are not market-makers, do not clear their own transactions and that operate with nothing more technologically complex than a telephone and a standard quotation device. Some of these broker-dealers are subject to a $100,000 minimum net capital requirement only because they engage in more than ten principal transactions per year or that they underwrite securities on a firm commitment basis. Most of these small broker-dealers do not maintain all of their own books and records but rather rely on their clearing brokers to provide them with much of the recordkeeping that is required under Rule 17a-3.
So long as these small broker-dealers are supported by clearing broker-dealers and quotation vendors that, of necessity, are committed to be Year 2000 compliant, it is highly unlikely that they could suffer from the march of time. In case the facilities of these small broker-dealers are not properly prepared, it is only they that would suffer the consequences. After all, in many instances they do not have any customers to be concerned about!
This brings us to another point. The way the exemptions of the proposed rule are envisioned, a broker-dealer that has a $5,000 net capital requirement but which engages in substantial customer business which is introduced to a clearing broker is exempt even though public customers might likely be affected by a lack of year 2000 readiness. Similarly, though it is not clear from reading the proposed rule, an exchange specialist is probably exempt at least from the independent accountant attestation since typically it is exempt from the requirement to have an audit. We would be quite concerned if certain securities could not be traded efficiently on their primary exchange simply because the specialist was not ready to do so. These two examples were not meant to suggest that the Commission subject these broker-dealers to the proposed requirements but rather to point out that the exemptions should be revisited and revised.
WHO SHOULD BE EXEMPT
Actually, there are other, well-recognized standards that are more appropriate benchmarks to separate the larger, more critical broker-dealers from the smaller ones. The way we see it, the exemption from the proposed requirements should apply to all broker-dealers that are exempt from Rule 15c3-3 except for those that are significant market-makers. In this regard, we would categorize as a significant market-maker, a broker-dealer that makes markets in more than one hundred equity securities. Were the Commission to adopt the standard that we have suggested, the only broker-dealers that would be subjected to the impact of the proposed requirements would be those that are clearly depended upon by customers and others.
Further, to allay the Commissions concerns about the preparedness of the smaller broker-dealers, we suggest that the Commission work together with NASD Regulation, Inc. and the exchanges, which have already surveyed their members readiness for the task ahead. In this manner, needless duplication of effort and expense will be lessened or eliminated.
We would be pleased to discuss this matter with the Commission or its staff.
Very truly yours,