Year 2000 Update (July)

July 1999

Year 2000: Will Your Firm Be Compliant?

Recognizing the importance of ensuring the Year 2000 readiness of the securities industry, the Securities and Exchange Commission (SEC) has taken key steps to encourage active compliance efforts by broker/dealers. The first of these actions required broker/dealers to submit two Form BD-Y2K progress reports under Rule 17a-5 of the Securities and Exchange Act of 1934. These progress reports were generally intended to:

• increase firm awareness of the Year 2000 issue;



• facilitate coordination of industry-wide testing, implementation, and contingency planning; and



• provide information on the overall readiness of the securities industry with respect to the Year 2000 issue.

The first of the Form BD-Y2K reports was due on August 31, 1998, and disclosed a firm's individual progress as of July 15, 1998. An updated Form BD-Y2K report was due on April 30, 1999, and, for certain firms, included a "Part III" Public Accountant's Report requesting external attestation of the firm's Year 2000 efforts. Preliminary selected summary results of this information will be available on the Year 2000 Web Pages of www.nasd.comand www.nasdr.com.

Also, in March 1999, the SEC published for comment proposed rules relating to operational capability. The proposed rules address the meaning of operational capability in the context of Year 2000 and would require a firm with a material Year 2000 problem on or after August 31, 1999, to file a notice with the National Association of Securities Dealers, Inc. (NASD^®) and the SEC. A firm would be presumed to have a material Year 2000 problem if the firm:

• does not have procedures designed to identify, assess, and remediate Year 2000 problems in mission-critical systems;



• has not conducted reasonable testing of its missioncritical systems;



• has not completed applicable Year 2000 testing requirements imposed by the NASD or other selfregulatory organizations; and



• has not remediated all exceptions noted by the independent public accountant in Part III: Statement of Position of the Form BD-Y2K.

A firm filing notice of a material Year 2000 problem would be prohibited from conducting business, unless it also provided the NASD and the SEC with a certificate stating, among other things, that it is remediating the problem. The proposed rules would require the firm to be Year 2000 compliant by October 15, 1999 in order to remain in business. The comment period for the SEC's proposed rules expired on April 12, 1999.

While the SEC has not yet adopted the proposed operational capability and Year 2000 compliance rules, there are several points that firms should consider when reviewing their business operations, not only in anticipation of any SEC Year 2000 rulemaking, but also to ensure that all firms promptly achieve Year 2000 readiness.

Point-To-Point Testing

Broker/dealers with electronic interfaces to exchanges, utilities, or service providers should test the "point-to-point" information transfer between their firms and their service providers in a Year 2000 environment. Point-to-point testing is important in gauging a particular service provider's compatibility after January 1. It also alerts the firm to any potential problems that may require attention over the next several months. If your firm has not yet completed this stage of preparation, suggested steps in this process include:

Internal Testing

Any mission-critical system with an embedded chip is likely to be date-sensitive and should be tested to ensure its Year 2000 compatibility. Examples of systems with embedded chips include:

• Trading and Quotation Systems



• Heating, Cooling, and Ventilating Systems



• Application Software



• Security and other Building Systems



• Personal Computers and Hardware



• Fax Machines and Telephones



• Telephone Exchanges and Switches (PBXs)



• Other Firm-Specific Systems

These systems, particularly those that perform missioncritical functions, should be tested in a Year 2000 environment. Reconfigure the product's date to simulate a date after January 1, 2000, and check to see that the product functions, and that expected outputs are accurate. Testing methods range from in-house testing to externally developed software applications and specialized third-party consultants. For vendor-supplied systems, you should check with the appropriate vendor to verify that testing has been completed. During the internal testing process, remember these tips:

Contingency Planning

Contingency plans document alternative procedures, strategies, and operations to be used to continue normal business functions in the event of Year 2000 complications. Depending upon the size and complexity of a given firm, an appropriate contingency plan can range from two to 200 pages. However, all plans should generally include the following:

• Senior level approval;



• Areas of responsibility and communication;



• Prioritized failure scenarios and alternative business plans for each scenario;



• Trigger dates or situations that will activate alternative business plans;



• Infrastructure issues such as power, building, and security; and



• Target compliance dates for critical third parties.

Investor Communication

Effective investor communication is critical to ensuring the industry's smooth transition into 2000. While not specifically addressed on the Form BD-Y2K, investor communication is an area where many individual firms have expressed concern. Effective communication challenges the firm to address its clients' increasing Year 2000 concerns while continuing to provide honest, reliable, and timely information about the Year 2000.

To help guide firms in meeting this challenge, the NASD, the SEC, and the Securities Industry Association (SIA) have developed an Investor Information Kit which provides educational information and practical guidance about the Year 2000 issue. Reprints of certain sections of this Kit are available to send to customers either separately or with other mailings, such as customer statements. Refer to www.nasdr.comor or www.nasd.comto to review the Kit online, or call the Year 2000 Program Office at (888) 227-1330.

Year 2000 Education And Events

The NASD Year 2000 Program Office is continuing to offer Virtual Workshops—conference call-in sessions. The NASD strongly encourages registration for these sessions by calling (888) 567-0578. After placing the call, listen to the greeting, and provide the following information when prompted: firm name, Broker/Dealer #, and workshop date. On the day of the session, call (800) 857-7323 and indicate the password and confirmation number provided for the specific workshop. See below for a list of these specific workshops organized by date of session, as well as a brief summary of the issues to be discussed.

July 20   Legal Issues & Year 2000

Password: Legal

Conf. #: 3117340

Issues to be covered:

• Due diligence efforts for broker/dealers



• Litigation helpful hints



• Recent developments in disclosure

July 22   Certification and Compliance

Password: Certification

Conf. #: 3117355

Issues to be covered:

• New rules pertaining to guidelines



• How the rules affect the broker/dealer community



• Helpful hints on compliance issues

July 29   Exchanges and Utilities Update

Password: Exchanges

Conf. #: 3117514

Issues to be covered:

• State of exchanges & utilities



• Upcoming developments



• Related broker/dealer developments

August 5   Contingency Strategies for Small Firms

Password: Strategies

Conf. #: 3117421

Issues to be covered:

• Overview of typical small firm contingency planning challenges



• Trends in contingency planning



• Timeline vs. impact



• External/internal contingency planning

August 10   Peer Review of Best Practices II

Password: Practices

Conf. #: 3117455

Issues to be covered:

• Case studies of broker/dealers' Year 2000 best practices

August 19   Investor Communication "Best Practices"

Password: Communication

Conf. #: 3117463

Issues to be covered:

• Frequent problems



• Disclosure issues



• Best practices

August 24   Contingency Strategies for Large Firms

Password: Strategies

Conf. #: 3117500

Issues to be covered:

• Overview of typical large firm contingency planning challenges



• Trends in contingency planning



• Timeline vs. impact



• External/internal contingency planning

Sept. 14   Certification of Year 2000 Compliance

Password: Certification

Conf. #: 3117560

Issues to be covered:

• Certification and the Year 2000 issue



• Latest developments in certification



• Best practices for all types of firms

Sept. 21   Peer Review of Best Practices III

Password: Practices

Conf. #: 3117592

Issues to be covered:

• A year review of the biggest challenges faced by broker/dealers of all sizes



• Summary of the top 10 best practices to managing the Year 2000 issue

October 12   State of Utilities and Other Critical Services

Password: Utilities

Conf. #: 3117608

Issues to be covered:

• State of utilities and recent guidelines



• Other services



• Possible impact on brokers and dealers



• Best practices in dealing with uncertainty

October 19   State of the Industry

Password: Industry

Conf. #: 3117632

Issues to be covered:

• Industry summary and overview



• A look at clearing firms



• A look at Market Makers



• A look at introducing firms



• In-depth look at where your firm should be in achieving Year 2000 readiness

October 26   Legal Review for Brokers and Dealers

Password: Review

Conf. #: 3117647

Issues to be covered:

• A review of legal issues for 1998 and 1999



• Current broker/dealer trends reviewed



• Checklist of what your firm may need to do with the little time remaining

NASD Year 2000 Event Calendar