SEC Brings Year 2000 Enforcement Actions

(October 21, 1998)  The Securities and Exchange Commission (SEC) charged thirty-seven brokerage firms yesterday with failing to report their Year 2000 preparedness, as required under recently amended SEC regulations.

SEC Chairman Arthur Levitt stated in a press release that,

"Customers of brokerage firms have the right to know what steps their brokers have taken to address possible computer failures that could affect their investments. The Commission takes the Year 2000 computer problem very seriously and has required broker-dealers to do the same."

On July 2, 1998, the SEC adopted an amendment to its Rule 17a that requires certain brokers and dealers to file reports with the SEC regarding their preparedness for the Year 2000 conversion problem.  The first reports were due by August 31.

Under the new Rule 17a, brokers and dealers must file a form "BD-Y2K" with both the SEC and the firms' appropriate self regulatory organizations.  The SEC brought these actions against broker-dealers which failed to file all or part of this form.

These enforcement actions were brought in conjunction with the National Association of Securities Dealers Regulation Inc. (NASDR)

Broker-dealers must also file an updated form BD-Y2K by April 30, 1999.

SEC Commissioner Laura Unger, who is spear heading the Commission's Year 2000 efforts, said, "Broker-dealers should disclose how they are working to ensure that their computer systems are ready for the Year 2000. Firms are required to make public disclosure of their progress. Today's cases make clear that we will not tolerate firms who keep customers in the dark in this vital area."

SEC Enforcement Director Richard Walker said, "These are the first cases the Enforcement Division has brought concerning Year 2000 disclosure. We will continue to be vigilant in policing Year 2000-related disclosure and will not wait until the new millennium to bring additional enforcement actions."

Under the new rule, broker-dealers must disclose on the BD-Y2K forms the steps they have taken to address Year 2000 problems, including information about their remediation and contingency plans in case they are not ready in time.

According to the SEC's press release, "Nineteen of the 37 firms charged agreed to settlement offers, which consist of a cease-and-desist order, a censure, and a civil penalty. Firms that were required to file Part I of the form and failed to do so will pay a $5,000 penalty. Firms that were required to file both Parts I and II of the form and failed to file Part II (a narrative) will pay $15,000. Firms that were required to file both Parts I and II of the form and filed neither part will pay $25,000. Fines from the settled cases total $235,000."