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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks to the President’s Council on
Year 2000 Conversion

by Chairman Arthur Levitt

U.S. Securities & Exchange Commission

Financial Sector Group Year 2000 Summit
Washington, D.C.

September 17, 1999

Good afternoon. It is a pleasure to be with you today.

Let me begin by thanking John Koskinen, Chairman of the President's Council on Year 2000 Conversion, and Steve Malphrus, Chairman of the Financial Sector Group. Their leadership and vigilance have played a critical role in what we are able to assert today; and that is that the financial sector is ready to meet the challenge of the millennium date change.

Today, I have a very simple but important message to every investor in America: I am confident that the first day of trading after the New Year will be business as usual. Systems have been tested and re-tested for Y2K compliance. Exchanges, mutual funds, securities firms, depositories, clearing corporations and transfer agents have worked together to check and re-check networks. Comprehensive contingency plans are being developed.

As a result, I see no reason why fear of a Year 2000 problem should cause investors to alter their investment or trading habits. In fact, actions taken by investors based on unreasonable fear or bad information pose a greater threat to our economy than potential Year 2000 computer problems.

Now, there may be isolated, and I emphasize isolated problems. But thanks to the tireless efforts of the financial industry, the disasters that some originally predicted will not get even an honorable mention in the history books.

The securities industry and its regulators have taken extensive and effective efforts to ensure a smooth transition into the Year 2000. Let me begin with what the Commission has done in the area of disclosure by publicly traded companies.


Full and honest disclosure, as you know, is the backbone of securities regulation. Our industry flourishes in the sunlight of disclosure. Investors simply cannot make informed decisions in the dark. The glare of the spotlight has given companies a strong incentive to implement thorough and meaningful Year 2000 plans. To spur this process along, the Commission last year issued an interpretive release outlining how public companies, investment companies, investment advisers, and municipal securities issuers should meet their Year 2000 disclosure obligations. The interpretive release provides specific guidance to public companies about disclosing how the Year 2000 issue will affect their financial condition and operations.

I believe that most issuer disclosure shows that public companies are generally ready for the millennium date change. Many of these reports are available to investors on EDGAR – which, I am happy to note, is, itself, Y2K compliant. Investors can also go to the SEC's website at www.sec.gov and read the Year 2000 reports in which issuers or their own broker or mutual fund describe the steps they have taken to be ready for the millennium.

I'd like to turn now for a moment to discuss how broker-dealers, exchanges and mutual funds prepared themselves.

Oversight of Industry Readiness

The Commission, with the invaluable assistance of the self-regulatory organizations, the Securities Industry Association, and the Investment Company Institute has monitored the Year 2000 readiness of broker-dealers and mutual funds through testing, disclosure, independent monitoring, and examinations. Early industry-wide testing results were phenomenal. In April 1999, the SIA sponsored testing involving almost 400 participants – the largest ever undertaken by the securities industry. It was an overwhelming success. The test revealed only four Year 2000 systems errors, accounting for less than one percent of all test results. And, those errors were quickly corrected. The NYSE and NASD particularly have done an excellent job in directly monitoring the Year 2000 progress of broker-dealers. Since 1997, the NYSE has monitored the Year 2000 progress of all its member firms. On a quarterly basis, these firms must report on their progress in meeting certain key milestones, and these milestones apply to all systems, not just certain mission critical systems. In fact, all NYSE firms – and this includes the large, internationally active institutions – have certified that they are ready.

The NASD has also made it a top priority to monitor the Year 2000 progress of its 5,000 plus firms. It has used all the tools available to look for any clues suggesting that a firm may be behind in its Year 2000 progress. All NASD members must have a Year 2000 written compliance plan to identify, assess, and upgrade all mission critical systems. Any firm that fails to meet the NASD's milestones or otherwise raises concern regarding its ability to become compliant is closely monitored by the NASD.

The mutual fund industry has been equally diligent. Based on filings with the Commission, 90 percent of funds reported in June that they were complete or nearly complete with preparations for mission-critical systems. Based on our discussions with the industry, we believe that this number will be close to 100 percent before the end of the year.

Since 1998, the Commission conducted nearly 4,500 on-site reviews, which included investment advisers, investment companies and investment company complexes. Only 3 percent of these entities had deficiencies in their Year 2000 programs. And we are keeping a close eye on them to make sure they're ready for the millennium.

In addition to our own examination efforts, the Commission has taken a number of other steps to enhance the SRO's and SIA's efforts. Let me highlight just one: In July of this year, the Commission adopted a rule requiring all broker-dealers and non-bank transfer agents to ensure that their mission-critical computer systems were Y2K compliant by August 31st. If they weren't, they must certify that any material problem in a mission critical system will be fixed no later than November 15th.

I am pleased to announce that all major broker-dealers report that they are in compliance. Recently, thirteen other broker-dealers and one non-bank transfer agent filed notices with the Commission indicating non-compliance. These thirteen explained that they are finalizing testing and implementation of their systems in September and October and will be ready for the Year 2000 transition with time to spare. If these firms are not ready by November 15th, we will require them to cease doing business.

Contingency Planning

But no matter how much progress the industry makes in preparing for the Y2K challenge, prudent planning calls for us to put our focus over the remaining 3 months on contingency planning.

Of course, the exchanges have been conducting contingency planning for market disturbances for years. This is a key part of what they do. While the resources needed to address the Y2K problem are much greater than anything we've seen in the past, the infrastructure to evaluate and manage already exists.

And while we are not expecting major complications, the Commission is also developing a coordinated plan to respond to any problems that arise. Along with most major market participants and financial regulators, we will establish information coordination centers during the transition to monitor market activity. The SROs and the Commission will collect information about the status of the exchanges, the broker-dealers, large mutual funds and other market participants from December 29th to January 7th.

We will use this information to identify and assess problems that may arise. Then, in coordination with other regulators and market participants, we'll be in a position to take action to solve a problem and minimize its impact on the markets and investors.

International Risk Management

We cannot, of course, just focus on our domestic preparedness. Technology and globalization are recasting the face of the markets, and counterparties of our U.S. firms are more geographically and culturally diverse than ever before.

Large, internationally active securities firms – accounting for most of the financial exposures and relationships with foreign financial institutions and markets – are prepared to mitigate the risks their international activities pose to their operations.

The management tools to address these counterparty risks have been refined over years of experience. In 1994, for example, the Derivatives Policy Group was formed by the major Wall Street firms. This Group provides a voluntary framework to disseminate information and analyses to the SEC and the CFTC on risks associated with OTC derivatives products. Both firms and the agencies, in turn, are in a better position to evaluate risks more systematically and vigorously in this area.

Building on this experience, the industry has taken steps to evaluate the operational, credit, market, and counterparty risk posed by their international activities over the millennium date change. And the industry is taking specific measures to ensure that adequate liquidity and funding are available during the transition period. These include establishing prudent and reasonable liquidity pools, renewing any committed credit facilities that expire before year-end, and reducing balance sheet levels.

As a result, we do not anticipate that problems that may occur in other countries will have a significant impact on major U.S. securities firms' operations.


Thomas Edison once said, "What man's mind can create, man's character can control. "Few endeavors have exemplified this more than the imperative to prepare for the Year 2000 problem. The efforts of the industry have been nothing less than Herculean.

Now, all of this success in combating the Y2K bug has not come cheaply. Recent filings with the Commission indicate that the top eight broker-dealer holding companies alone have spent over $1 billion on Y2K remediation.

But, the level of coordination and communication between securities firms and banks, between the exchanges and broker-dealers, between the industry, as a whole, and the government has been extraordinary.

While I'm confident we won't encounter any major problems associated with the date change, I hope and expect that we will carry into the next century the dedication, the diligence, the cooperation, and the professionalism which was displayed by all market participants in the course of this challenge. Millions of our investors who have come to expect fair, efficient and trust-worthy markets would expect nothing less.

Thank you very much.