FED COMPUTER RULES MAY PUNCH LITTLE GUYS: A Y2KO IS THE FEAR AT SMALL BROKERAGES

When the SEC questionnaire on Y2K preparedness arrived last year, West Virginia broker-dealer Ralph Hinzman had no idea what to do. He doesn’t own a computer.

“We were asked to do the impossible,” says the 87-year-old Mr. Hinzman, who owns Allegheny Financial Programs Inc., a two-person shop in Weston, a town of 5,000. For more than 50 years his business has been selling mutual funds to earn commissions. “I don’t clear. I don’t handle anybody’s money.”

Mr. Hinzman says he tried to get help answering the questions from the Securities and Exchange Commission, but to no avail. Late last year, Allegheny was slapped with a $5,000 fine — about a quarter of Mr. Hinzman’s annual income — for failing to return the questionnaire on time.

Small brokers fear Y2KO

Allegheny is one of a number of small broker-dealers who contend they’re being unfairly singled out by regulators trying to bring the securities industry into Y2K compliance.

Late last year, the National Association of Securities Dealers and the SEC fined 96 firms, mostly tiny brokerages, between $2,300 and $25,000 for failing to file a detailed report on their Y2K readiness.

And in its latest proposal, on which it is seeking public comment through early April, the SEC would require brokerages to transfer their customer accounts to other firms if they haven’t upgraded their computer systems for Y2K by mid-October — a move some feel will further punish smaller businesses.

“The SEC, based on a lack of information, is attacking small businesses,” says Alan Davidson, who runs the Independent Broker-Dealer Association in Long Island. “It’s the equivalent of using an atom bomb to kill an ant.”

Mr. Davidson agrees with the SEC that the Y2K computer glitch could be bad for the industry, but says that most smaller broker-dealers are minimally exposed because their clients’ accounts are handled by third-party clearing firms.

“The NASD has not adequately informed the SEC of these facts,” says Mr. Davidson. “Of the 5,570 NASD member firms, about 5,000 are small businesses. Thousands of these clear through larger firms and don’t use their computers other than to access the Internet.”

NASD declined to comment on the SEC proposal, while the SEC argues it is trying to ensure all securities firms are fully operational when the calendar turns to 2000.

An SEC spokesman says the commission believes few, if any, brokerages, clearing firms or transfer agents will be affected by the proposal if it is passed, although it is awaiting a second round of reports.

The Securities Industry Association is putting more than 400 brokerages — representing 98% of U.S. securities traded — through a trading simulation test, according to a spokeswoman for the trade group.

The the tests have been going well, she says, and the SIA is “confident” it will be prepared for 2000.

Still, some fear that the proposed SEC rule could result in shutting down some small brokers that lack the economies of scale big firms have to solve the problem.

“The big firms have the staffs and the budgets, and upgrading their computer systems is part of doing their business,” says the head of a small broker-dealer in the Northeast. “We’re running around trying to take care of clients; we’re not underwriters or options traders. To treat us like a Merrill Lynch or to treat Merrill Lynch like us is the wrong way to regulate.”

He says for his small firm of about a dozen brokers, the upgrade will cost about $20,000, including labor, consultants and purchasing hardware and software.

While Mr. Davidson says the proposal could hurt a number of broker-dealers, he declined to predict just how many may be shut down.

Instead of “painting everybody with the same brush,” Mr. Davidson says, regulators need to adopt a two-tier approach to the Y2K problem. While self-clearing firms should be subjected to extraordinary policing from the SEC, he says, smaller firms should be treated with more leeway.

Another problem is that there are still a lot of unknowns, says Bill Singer, a securities industry lawyer at Singer Frumento LLD in New York and general counsel for the Independent Broker-Dealer Association.

“A firm could take the good-faith effort of having their systems upgraded by a consultant, but still wind up with problems,” he says “The problem with this type of regulation is that it’s not preventive medicine. It punishes firms after they find the problems.”

As for Mr. Hinzman, he says the NASD finally offered to help him with the questionnaire, but it was long after he had paid the fine. “They (regulators) may want me to get out of the business, but I’ve been at it a long time, and I’d like to keep doing it for a few more years.”