Overpeck Centre
85 Challenger Road
Ridgefield Park
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Proposed Temporary Rule 17Ad-18 / File No. S7-8-98
Year 2000 Readiness Reports to Be Made By Transfer Agents
Dear Mr. Katz:
ChaseMellon Shareholder Services, L.L.C. ("ChaseMellon") is pleased to submit its comments on the Securities and Exchange Commission’s (the "Commission") proposed rulemaking with respect to Year 2000 Readiness Reports to be made by non-bank registered transfer agents. ChaseMellon, a non-bank transfer agent serving over 2,000 publicly traded companies (14 million shareholder accounts), is among the largest providers of shareholder services in the United States.
ChaseMellon supports the Commission’s efforts to monitor the progress of transfer agents’ Year 2000 ("Y2K") readiness. However, we do not think this proposal would facilitate Y2K readiness among transfer agents as effectively as would the issuance by the Commission of an interpretive release under Rule 17Ad-13 that provides certain standards for transfer agent Y2K compliance programs. We suspect that most large transfer agents, like ChaseMellon, have been actively engaged over the last several years in extensive Y2K remediation and testing. However, other transfer agents (whether bank or non-bank transfer agents or, for that matter, issuers that do their stock transfer in-house) might benefit more from guidance as to what the Commission considers to be the elements of an effective preparedness program, than from a new reporting obligation applicable to certain transfer agents. Such standards should include testing of mainframe, LAN and PC systems, as well as a program for determining whether essential vendors to the transfer agent will be in Y2K compliance on a timely basis and replacing them if they are not.
Additionally, as described below, ChaseMellon has the following specific comments on Proposed Temporary Rule 17Ad-18.
Depending on the effective date of the rule, 45 days after adoption could easily approach June 30, 1998. A transfer agent would then be required to begin preparation of the first Follow-Up Report almost immediately upon completion of its Initial Report. Since the information required to be included in these reports is nearly identical, ChaseMellon believes that preparation of the Initial Report with information as of December 31, 1997 is pointless. We therefore propose that the first required report be due on August 31, 1998 and that no Follow-Up Report be due on that date. The Initial Report would detail all Y2K preparations as of June 30, 1998. A single Follow-Up Report due August 31, 1999 would still be required.
Industry-Wide Testing
As proposed, the Initial Report and the Follow-Up Reports would discuss the transfer agent’s progress regarding industry-wide testing (including testing with other transfer agents, financial institutions, customers and vendors). At present, however, there are no industry-wide standards or benchmarks against which to evaluate the results of such testing. In addition, ChaseMellon believes that such standards must be set before the Commission can establish a materiality threshold for determining whether the number and nature of the exceptions resulting from internal and integrated or industry-wide testing needs to be reported.
Written Contingency Plans
As proposed, the Initial Report and Follow-Up Reports would disclose whether the transfer agent has written contingency plans in the event that it experiences Y2K computer problems. We believe that all but the very smallest transfer agents are totally dependent on computerized processes. The scope of these operations is too extensive to revert to manual processes in the event Y2K problems arise. Therefore, we believe the focus of planning should be extensive testing.
ChaseMellon’s independent public accountant (one of the "big six" accounting firms) has advised us that it will not provide a Year 2000 attestation as described by the release. This firm has also advised us that the other big six accounting firms have uniformly taken the same position. Therefore, the proposed requirement that the Follow-Up Reports contain an attestation of an independent public accountant may be impossible to satisfy. Even if not impossible, such a requirement would place an unreasonable burden on transfer agents to locate and secure the services of an additional independent public accountant willing to make such an attestation. We believe that the costs of engaging such an additional independent public accountant would be far in excess of the Commission’s estimates. Accordingly, ChaseMellon proposes that if the Commission requires any attestation at all, the signature of an officer of the transfer agent should be sufficient.
In the event that the Commission adopts some form of review requirement that is acceptable to the accounting industry, ChaseMellon believes that transfer agents should be permitted to choose whether or not to have this review made by the same independent public accountant that prepares the annual audit of its financial statements or the report required by Rule 17Ad-13. ChaseMellon’s independent auditor is familiar with our Y2K program. It would be unreasonably burdensome to require transfer agents to retain a different accounting firm in connection with the Readiness Reports .
Public Availability of Reports
ChaseMellon believes that while it and other transfer agents may communicate with their clients regarding their Y2K compliance programs, the Readiness Reports could call for proprietary information that should not be made publicly available.
Overall, ChaseMellon strongly supports the Commission’s interest in seeing transfer agents achieve Y2K compliance. However, ChaseMellon believes that the purposes of the Readiness Reports may be achieved without subjecting covered transfer agents to the burdens now associated with the Proposed Rule.
Please feel free to contact the undersigned at the above address or by telephone at (201) 329-8523 if we may be of additional assistance regarding this matter.
Very truly yours,
Hugh M. Ross
Associate Counsel
cc: Michael E. Bleier
General Counsel
Mellon Bank, N.A.
Simeon S. Amon
Vice-President
Assistant General Counsel
The Chase Manhattan Bank