April 12, 1999
VIA FACSIMILE AND FIRST CLASS MAIL
Jonathan G. Katz, Secretary
Mail Stop 0609
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Re: Release No. 34-41142
Dear Mr. Katz:
We at the Pershing Division of Donaldson, Lufkin & Jenrette Securities Corporation (Pershing) appreciate the opportunity to comment on the rule proposals set forth in the above referenced release (the Release). As you know, Pershing acts as clearing agent for over 550 broker-dealers in the United States and abroad. As clearing agent, we interact with the securities markets on behalf of all of our correspondent broker-dealers.
Pershing has made year 2000 readiness a top priority and we have been working toward one hundred percent readiness since 1996. We understand that the participation in the market of any one broker-dealer whose systems are not year 2000 compliant can have a negative effect on hundreds or thousands of transactions. For that reason, we applaud the Securities and Exchange Commission (the Commission) for taking the lead in ensuring that all market participants are year 2000 compliant. We strongly support a rule designed to prevent an institution from participating in the marketplace unless those computer systems upon which it relies for conducting its essential business functions will be operable on and after January 3, 2000.
Proposed Rule 15b7-2
Until now, the Commission has done an exemplary job of including industry members in its rulemaking process and making use of available and willing subject matter experts. Because no one can postpone the coming of the millennium, the Commission has allowed the industry to temporarily set aside other, less time-sensitive initiatives to enable its members to focus on year 2000 readiness. However, with the Release, the Commission has completely altered this dynamic by its inclusion of proposed rules 15b7-2 and 17Ad-20, which do not relate in any way to year 2000 preparedness. The proposed operational capability requirements of proposed rule 15b7-2 go much farther than necessary in its attempt to address concerns over recent systems failures. This proposed rule, if enacted would, for the first time, set standards for the inner-workings of our industryís crucial back offices. Attaching the rule to the most significant year 2000 enforcement power available to the Commission pays short shrift to the essential role of operations in the securities industry. To exploit serious year 2000 requirements in an effort to rush the operational capability requirements past the industry ignores the hard work and cooperation by and between the industry and the Commission on the year 2000 issue itself.
This proposed rule is intended to be an enforceable standard for systemic up-time. However, it reads as a vague requirement that broker-dealers process transactions in a "prompt and accurate" manner, be generally able to maintain customer accounts and be able to receive and deliver funds and securities. We at Pershing many millions of customer accounts. We sent out over 3,100,000 customer statements for the month of March 1999, reflecting holdings in over 307,000 domestic and international classes and types of equities, mutual funds, corporate and municipal bonds, mortgage obligations, options, partnerships, investment trusts and other categories of securities. Those statements reflected hundreds of thousands of purchases and sales as well as redemptions, calls, tender offers, splits, reverse splits, reorganizations, dividend payments, dividend reinvestments and other categories of transactions. We would respectfully submit that there is more to operational capability than the rule begins to address.
To date, the Commission has recognized that the inclusion of the industry in significant rulemaking is in the best interests of all parties involved. This would be the wrong time to abandon such a philosophy and we strongly encourage the Commission to reserve proposed rules 15b7-2 and 17Ad-20 until such time as they can be given the attention they deserve.
The text of the proposal discusses occasional delays and outages, high demand and software glitches. However, the proposed rule itself does not consider those factors. The proposal mentions a duty of inquiry on introducing brokers as to their clearing agents. However, the rule does not add any specificity to that vague reference. While the proposed rule generally requires operational capability, it does not discuss broker-dealersí financial ability to perform. The Commission requests comment on whether broker-dealers should be required to document compliance with the rule. However, no discussion follows as to of how a broker-dealer would document its ability to "promptly and accurately" conduct its business, how long those documents would need to be retained, etc. Finally, while the rule requires operational capability as to transactions and customer accounts, neither the rule nor the text of the proposal discusses the ruleís interaction with current Exchange Act, New York Stock Exchange, National Association of Securities Dealers, Municipal Securities Rulemaking Board rules and the rules of other exchanges and utilities which address those operational processes. In reality, existing rules of the Commission and the rules of the various exchanges already provide adequate authority to ensure that broker-dealers are properly performing their essential functions.
A full discussion of these and other significant issues must precede the enactment of a rule of the magnitude of proposed rule 15b7-2. We respectfully request that the Commission extend the comment period for proposed rule 15b7-2 until a time when such a discussion can take place.
Proposed Rule 15b7-3T
We support the changes to proposed rules 15b7-3T suggested by the Securities Industry Association in their letter to you. We agree that the Commission has created a rule that appropriately provides it with the specific authority to take action to prevent market participants who are not year 2000 compliant from having a negative effect on those participants and customers who have achieved year 2000 readiness. However, like the SIA, we believe that the prohibition from conducting business should only apply to those market participants with "year 2000 problems" that would actually prevent them from doing business. A broker-dealer with a year 2000 deficiency that would not actually present a risk to its counter-parties and customers should be allowed to cure those deficiencies while continuing to do business. As such, the rule should be carefully tightened in accordance with the SIAís redrafting recommendations.
In addition, we remain concerned with a reference in the text of the rule proposal, when discussing notice received from a broker-dealer with a material year 2000 problem, to the intent of the Commission "to make this information public." Obviously, any such announcement could prove to be a death sentence for any broker-dealer who may be experiencing a problem, however slight, with any aspect of its year 2000 readiness, whether in the course of actual conversion or merely testing. We believe that publication of the problem may discourage some broker-dealers with a material year 2000 problem as of August 31, 1999 from reporting that problem out of fear of the negative impact of the resulting press release from the Commission. On the contrary, a broker-dealer would have no disincentive to be forthcoming about a year 2000 problem if it understood that it could cure that problem before October 15, 1999 without having to simultaneously handle the flood of inquiries and process hundreds of requests to transfer accounts that would result.
We suggest that, upon receipt of a report of a year 2000 problem from a broker-dealer accompanied by a certification pursuant to section (e) of the proposed rule, the Commission should first investigate the year 2000 compliance status of the broker-dealer. Only if, after that investigation, it determines that compliance by October 15, 1999 is impossible given the broker-dealerís current progress should the Commission then make the report public.
As much as any market participant, Pershing appreciates the potentially serious nature of the impact of the year 2000 on the industry. However, we also ask that the Commission take great caution in the method and context of any announcement that a broker-dealer has disclosed a material year 2000 problem, at least as to those broker-dealers who also make the good faith certification required under section (e) of the proposed rule.
Proposed Rule 17a-9T
We believe that the scope of proposed rule 17a-9T, requiring retention of additional copies of records, is misdirected. The Commission should not select broker-dealers for year 2000-related record retention requirements based on their required net capital, but on broker-dealersí record related to year 2000 compliance. The record retention requirements of the Commission (in rules 17a-3 and 17a-4), the NYSE and NASD, as well as the various states are very thorough and specific with regard to the records required to be retained, their form and their location. Broker-dealers with a net capital requirement of over $250,000 are well aware of those requirements and will continue to observe them in the ordinary course during the last two business days of 1999. The Commissionís concern is better directed toward those broker-dealers who have failed to file forms BD-Y2K, those that have failed to complete industry testing requirements and those that report material year 2000 problems after August 31, 1999. Those broker-dealers are the ones that should be asked to take special precautions for ensuring proper record keeping at the turn of the century because they have shown an inability to comply with year 2000-related requirements. As to all others, the Commission should allow a presumption that they will continue to diligently comply with existing record-keeping requirements.
In addition to our specific comments, we will take advantage of the opportunity to comment on two of the specific provisions upon which the Commission requested comment. First, in the event that the Commission enacts proposed rule 15b7-2 in any form, we do not believe that it should include a record-keeping requirement. Any records that would tend to prove a broker-dealerís operational capability are already required by existing rule 17a-3.
Second, we do not believe that any proposed rule should include a requirement that an independent third party verify remediation efforts. Such a requirement has been discussed at length and any such attestation would already be contained in Part II of a broker-dealerís form BD-Y2K.
In conclusion, we strongly urge the Commission to postpone discussion of a general operations capability rule for a time when adequate resources and attention can be devoted thereto. Instead, we suggest that the Commission continue to make and enable industry members to make year 2000 readiness their top priority.
David J. Campbell
Senior Vice President
Assistant General Counsel