IP: TheStreet.com: SEC Battles Y2K, Members Battle SEC

[Dave Farber <farber () cis upenn edu>]

Date: Wed, 13 Jan 1999 21:32:58 -0700
To: farber () cis upenn edu
From: "Spencer E. Ante" <seante () earthlink net>

Hey Dave,

This piece reports on a skirmish between the SEC and transfer agents--an
obscure yet vital part of the stock market.

http://www.thestreet.com/tech/y2k/644091.html (Subscription required.)


SEC Battles Y2K, Members Battle SEC

By Spencer E. Ante (sante () thestreet com)
Staff Reporter
1/13/99 4:25 PM ET

The Securities and Exchange Commission thinks Y2K problems have
grown big enough to fine some members it deems unprepared. But its
efforts have met with unexpected opposition and even criticism that
the commission is grandstanding at the expense of the alleged
dawdlers.

The SEC took the unprecedented step last week of fining nine stock
transfer agents $7,500 that it claims failed to file their Y2K
disclosure reports on time. While far from hefty, the fines are
meant to show that the SEC takes the Y2K threat seriously. But some
of the agents charged last week are contesting the enforcement
action, claiming it's little more than an unfair publicity stunt.

"This whole thing is PR work for the SEC," said the president of one
accused transfer agent company who asked not to be identified.
"They're dragging me in there on a technicality."

Transfer agents are one of the nearly invisible yet essential cogs
in the stock market. Essentially, agents keep tabs on the millions
of trades executed each day, maintaining shareholder records and
issuing and canceling stock certificates when shares are bought and
sold. Agents also direct employee stock purchase plans and manage
proxy mailing and tabulation records. Left unfixed in the agents'
computers, the millennium bug could screw up shareholder records,
throw off dividend and bond interest calculations or cause stock
owners to lose their ability to exercise warrants. In the worst-case
scenario, investments could vanish into thin air.

Last year the SEC began requiring nonbank transfer agents to file a
form detailing their preparations to exterminate the millennium bug.
The first round of forms were due on Aug. 31, 1998, but the SEC
accused nine firms of failing to file all or part of the form by the
deadline. The SEC says five firms have settled charges, with the
remaining four contesting them.

[...]

The four firms that the SEC says are contesting the charges include
Alpha Tech Stock Transfer Trust of Draper, Utah; Greenfield Fund of
Old Greenwich, Conn.; Manor Investment Funds of West Chester, Penn.;
and United Stock Transfer Trust of Englewood, Colo.

James Farrell, trustee of Alpha Tech, says he now plans to pay the
fine. "Our counsel told us we could probably win this in court but
it would cost $20,000 to fight the damn thing," says Farrell. "We've
been Y2K compliant since 1988."

Under the adopted rule, the SEC required all no-bank transfer agents
to file a check-box style report. These forms ascertained the status
of an agent's Y2K remediation efforts, including the existence and
scope of a Y2K plan, and the progress of testing its own systems and
the firm's business partners. But large agents were required to file
a more detailed and time-consuming second form, chronicling in
narrative form their efforts to address Y2K.

For the firms contesting the charges, this second form is the bone
of contention. These firms, all of whom are small companies, argue
that they weren't required to fill out the second form. "We're happy
to fill out the first form," says Farrell, who said he ignored a SEC
letter requesting that they fill out the second. "We probably should
have responded to the letter, but fining us $7,500 to not respond to
the letter is abusive."

SEC officials say their records indicate that the four firms
contesting the charges were required to file both parts of the form.
"Their claim of exemption with Part 2 is inconsistent with their
filings with the SEC," says Addleman.

Jack Donnely, president of United Stock Transfer, confirms that his
company is contesting the charges. Donnely, who along with Farrell
agrees with the spirit of the SEC requirement, says he filed all of
the appropriate forms. "One point was overlooked and we've been
going back and forth ever since," says Donnely, who claims that
United is Y2K compliant. Nevertheless, Donnely adds that "there are
lot of transfer agents who are not capable of preparing."

The SEC would not release data on the preparedness of the entire
transfer agent industry. But Michael Foley, VP of EquiServe, the
largest transfer agent in the U.S., which maintains records of 24
million shareholders for 1,400 publicly traded companies, says the
majority of shares aren't held by transfer agents. Rather, Foley
says most shareholder records are indirectly maintained by
broker-dealers for so-called streetholders, which include
401(k)-plan participants and many individual investors.

"There is a small likelihood that original records could be lost,"
says Foley, who claims that EquiServe's core computer systems have
been renovated. "But I can't promise you anything because I'm not an
expert."

[...]

The five firms that accepted the charges and agreed to pay the
$7,500 include CSJ of Houston; Davidson Trust of Great Falls, Mont.;
and Ivy MacKenzie Services of Boca Raton, Fla. The remaining two
firms -- Corporate Planners of Fountain Hills, Ariz.; and National
Stock Transfer and Accounting of Palm Beach Gardens, Fla. -- agreed
to be censured, but they won't be fined because of an inability to
pay.

A hearing will be held to sort out the allegations between the
contesting firms and the SEC and to determine if any further
remedial action is necessary. No date has been set for the hearing,
but the SEC says the burden of proof is on the accused transfer
agents to demonstrate that they qualify for the small-firm
exemption.

"The securities industry has to be ready for the Year 2000," says
Addleman, who noted that transfer agents must file a follow-up
report by April 30, 1999. "There are a lot of harms that can be done
to shareholders of companies if [agents] aren't ready."


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