FAQs About Investment Advisers and the Year 2000 Problem
Form ADV-Y2K, and the General Instructions to the form, contain helpful information about completing the form. We have prepared these FAQs to respond to questions we have received about the form.
Who Must File the Form?
Q: Who has to file Form ADV-Y2K?
A: You must file the form if you are an SEC registered investment adviser that has $25 million or more of assets under management as reported on Schedule I of your most recently filed form ADV (or your most recent amendment to Form ADV), or you advise an investment company registered under the Investment Company Act of 1940.
Q: I have already filed Form ADV-Y2K once. Do I have to file it again?
A: Yes. All registered advisers described in Question 1 above are required to file the form twice. The second report must be filed between May 24, 1999 and June 7, 1999.
Q: Do we have to file the form if we did not receive it in the mail?
A: Yes, if you meet the description in Question 1 above, you are required to file the form. If your address has changed, you should amend Items 1 and 2 of Part I of your Form ADV as soon as possible. For more information on how to obtain the form, see questions 15 and 16 below.
Q: Our firm registered as an investment adviser after December 7, 1998, and we have not previously filed the form. Do we have to file the form by the June 7, 1999 deadline?
A: If you expect your registration to be effective before June 7, 1999, you must file the form.
Q: Our firm is a newly registered adviser under the 120-day exemption and the only client we advise is a newly registered investment company. The registration of the investment company is not yet effective. Do we have to file the form?
A: You must file the form if you expect the registration of the investment company to become effective by June 7, 1999.
Q: Our firm has withdrawn our registration as an investment adviser by filing an ADV-W. Do we still have to file the form?
A: If your withdrawal is effective by June 7, 1999, you do not need to file the form. Generally, a withdrawal is effective 60 days after the filing of the ADV-W.
Q: Our firm is a dual registrant -- we are registered as a broker-dealer and as an investment adviser. We already filed a BD-Y2K with the SEC. Do we have to file Form ADV-Y2K as well?
A: Yes. If your advisory business meets the criteria in Question 1, you must file Form ADV-Y2K even if you filed another Year 2000 form with the Commission.
Q: Our firm is a registered investment adviser subsidiary of a broker-dealer. The broker-dealer takes care of our computer requirements. Do we have to file Form ADV-Y2K if the broker-dealer has already filed Form BD-Y2K?
A: Yes. You may be able, however, to base your answers on the preparations made by the broker-dealer to the extent that you use the same systems.
Q: I do not use any computers in my business. Do I still have to file the form?
A: Yes. In addition to any systems advisers use directly, the form asks for information on the readiness of third-parties relied upon in their business.
What Must Be Filed?
Q: There are two parts to the form. Do we have to file both parts?
A: All advisers filing the form must file Part I. If you advise a registered investment company, you may be required to file Part II. For more information, see questions 36-38 below and review Instruction 1 to Part I of the form and Instruction 2 to Part II of the form.
Q: I have over $25 million in assets under management, but I don't advise an investment company. What should I do with Part II?
A: You should discard Part II. Do not file a blank Part II with the SEC.
Q: We noticed that the form is available in the Federal Register. Can we file that version of the form?
A: No. You must file the version of the form that you receive from us, or that you download from our web site. For more information on how to obtain the form, see questions 15 and 16 below.
When Must the Form Be Filed?
Q: What is the deadline for filing the form?
A: You should have already filed the form for the first time on or before December 7, 1998. You must file your second, updated form by June 7, 1999.
Q: How soon can I file the form?
A: The form should not be filed any earlier than two weeks before the June 7, 1999 deadline.
Completing and Filing the Form
Q: How can we obtain a copy of the form?
A: There are three ways to get the form:
Q: We would like to use the version of the form that is on the SEC's web site. How do we fill out this version?
A: To download the form from our web site, you need Adobe ReaderTM and Adobe Forms Fill-InTM on your computer. If these programs are not currently on your computer, they can be downloaded from our web site at no cost. Once you have these programs on your computer, you can download the form. After you download the form, complete it on your computer by pointing to and clicking on the answers, or typing answers when necessary. You can then print the completed form and mail it to the SEC (you cannot send the completed form to us electronically). For further information, please review the instructions on the web site carefully.
Q: Can we offer explanations for some of our answers?
A: Yes. You may attach additional information. Do not, however, write next to the questions on the form.
Q: What if we don't have all the information we need to complete the form because the information is with people or companies outside of our firm?
A: You must attempt to obtain the information you need to complete the form. The Commission expects that you will make reasonable inquiries to obtain the necessary information. For more information, review the General Instructions to the form.
Q: Our firm mainly uses systems provided by third parties. Can we rely on the answers we get from these third parties when we complete the form? What if the information turns out to be wrong?
A: You may rely on information that you receive from a third party unless you have reason to believe that the information is erroneous.
Q: We have many different computer systems. How should we provide a single answer to these questions?
A: If you have different systems, you should answer the questions by using a qualitative average of your systems. Give greater weight to mission-critical systems, and the systems used for a large number of clients than to other systems. Also if your firm has different lines of business, base your responses only on the computer systems that support your advisory business, not the other lines of business. For more information, review Instructions 4 and 5 to Part I of the form, and Instruction 2 to Part II of the form.
Q: The form asks questions about the status of testing our systems. Is there a deadline for completing testing?
A: The requirement to file the form does not include any particular requirement to test your systems, or to complete your testing by a particular date. Depending on the nature of your business, however, testing may be a material element of your Year 2000 preparations. If you need to test, don't wait until the last minute. The purpose of testing is to identify problems and address them well in advance of the Year 2000.
Q: The form asks questions about internal testing and point-to-point testing. What do you mean by "point-to-point" testing?
A: Point-to-point testing, also called external testing, is testing the ability of your computer systems to communicate accurately with the systems of third-parties that you rely upon, such as broker-dealers, custodians, transfer agents and distributors.
Q: The form asks if I have a contingency plan. What should be included in a contingency plan?
A: There is no single answer to this question. Many advisers already have a plan to continue their operations in case of power or telephone failures. These "business continuity" or "disaster recovery" plans, as they are often called, contain many of the same components as Y2K contingency plans. For example, a contingency plan should include a means to back up important computer data before January 1, 2000, and plans for communicating with important third parties, such as clients, custodians, and vendors, in the event of temporary systems failures.
The General Accounting Office (GAO) has issued guidelines for Y2K contingency plans in a publication called "Year 2000 Computing Crisis: Business Continuity and Contingency Planning," GAO/AIMD-10.1.19 (Aug. 1998). These guidelines provide a useful overview of an effective Y2K contingency plan.
Q: I am concerned that my responses to certain questions may trigger an exam by the Commission. What answers will increase my likelihood of being examined?
A: There are no "wrong" answers to any of the questions. Since the purpose of the form is for you to tell us about the status of your Y2K preparations, the only obligation created by the form is to answer all of the questions truthfully. We will look at all of the questions on the form in their totality and use a common-sense approach to identify advisers for possible exams. For example, an adviser that fails to respond to questions, has no plan, or indicates that material elements of its preparations will not be completed by July 1, 1999, may be examined by the staff.
Q: Do we have to document our responses to Form ADV-Y2K?
A: There is no requirement that an adviser document its responses to Form ADV-Y2K. Good business practices and good internal controls, however, generally require some documentation. The Commission examination staff, therefore, may want to see what documentation or support you have for your responses.
Q: How should we send the form to the SEC?
A: You must deliver a signed original and two copies of the form to the Commission office at 450 Fifth Street, N.W., Washington, D.C. 20549. You can use the U.S. Mail or any delivery service. Please do not forget to send in the signed original and two additional copies.
Q: Does our firm have to disclose anything about the Year 2000 problem to our clients?
A: If the failure to address the Year 2000 issue could materially affect your business, or if you are unable or uncertain about your ability to address material Year 2000 issues, you must disclose this information to your clients and prospective clients.
For more information, review the SEC's Interpretive Release regarding disclosure obligations that can be accessed at: http://www.sec.gov/rules/interp/33-7558.htm. You can also review the staff's Legal Bulletin No. 5 on the same subject. The Legal Bulletin is available at: http://www.sec.gov/interps/legal/slbcf5.htm.
Q: When does our firm have to make Year 2000 disclosures to our clients? Can we wait until we next amend the firm's Form ADV?
A: The Commission has stated that disclosure must be made in a timely manner so that the clients and prospective clients may take steps to protect their interests. You should not assume that you can wait until you make your next amendment to Form ADV.
Q: Should our firm give a copy of our completed Form ADV-Y2K to clients and prospective clients?
A: You do not have to provide a copy of your completed form to prospective and current clients, although you are free to do so.
Inquiries About Item 11
Q: Does Form ADV-Y2K require our firm to consider the Y2K preparedness of the issuers of securities we recommend to our clients?
A: No. Form ADV-Y2K is only a report; and the only new obligation the Commission has created on an investment adviser is to respond to all of the questions in the form truthfully and to file the form in a timely manner. As a fiduciary, however, you have a duty of care with respect to the advice you provide your clients, which may obligate you to consider the extent to which the value of a security you recommend may be materially affected by the Y2K preparedness of the issuer. These fiduciary obligations also may arise under the advisory contract you have with your clients.
Q: Will we satisfy our fiduciary obligations by obtaining and reviewing copies of the relevant sections of an issuer's annual report on Form 10-K and quarterly report on Form 10-Q?
A: We generally expect that securities professionals such as investment advisers will familiarize themselves with periodic material information about Y2K preparedness when considering recommending particular securities. The Commission has made considerable efforts to encourage issuers of securities subject to the reporting requirements of the federal securities laws to provide the market with information about their Y2K preparedness. We recognize, however, that not all issuers provide Y2K readiness in their reports with the SEC. We also recognize that not all issuers file reports with the SEC, and no current public information may be available with respect to certain securities, such as municipal securities, fixed income products, or securities of private issuers. In all cases, the nature of the inquiry that would satisfy an adviser's fiduciary obligation, or its duties under its advisory contract, would depend on a number of factors, including the size of the position it recommends clients take, the extent to which the issuer has released publicly available information, the extent to which secondary information (such as analysts' reports) about the issuer's Y2K preparedness is reasonably available, and the sensitivity of the issuer's business to Y2K issues.
Q: Can our firm still mark the "Yes" box in Item 11 even if we haven't reviewed information concerning each of our recommendations?
A: Even if you mark the "Yes" box in Item 11, there are some securities for which we would not expect you to review Y2K information, such as securities issued or guaranteed by the U.S. Government, securities maturing before January 2000, and securities in which your clients hold small positions relative to their other holdings.
Q: When would "not applicable" be an appropriate response to Item 11?
A: We expect that very few advisers would check "not applicable." You can only check "not applicable" if your fully disclosed investment style does not involve any judgments that would require you to take into account Y2K issues. For example, index investing or certain types of technical investing do not, by definition, involve any subjective judgments of factors such as Y2K effects on the underlying securities issuers.
Q: Our firm manages client portfolios on a discretionary basis. Can we answer "yes" to Item 11 if we consider Y2K issues only when we buy a new security for our clients?
A: No. Advisers having discretionary authority over client assets typically undertake to provide their clients with ongoing management services, which includes consideration of the advisability of buying, selling and continuing to hold securities and other assets. Thus, an adviser's fiduciary as well as its contractual obligations may require it to review client portfolios to evaluate the impact of Y2K preparedness of the issuers of the securities held in the portfolio and the advisability of continuing to hold those securities. This obligation is no different than the obligation of an adviser to evaluate any other material factor bearing on whether the client should sell, purchase or continue to hold securities.
Q: Does the phrase "securities of particular issuers" in Item 11 include mutual funds?
Q: Our firm is a registered investment adviser and acts as an administrator to a fund complex, but we are not an adviser to any fund in the complex. However, as the administrator, we are in the best position to complete Part II. Do we have to file Part II of the form?
A: You are only required to file Part II if you are an adviser or sub-adviser to a registered investment company. However, you are free to file Part II on behalf of the fund advisers, and if you do so, no other registered adviser is required to file Part II with respect to the funds in the complex.
Q: Our firm is a registered investment adviser to several funds in a fund complex. The administrator of the fund complex, which is not a registered investment adviser, is in the best position to file Part II of the form. Can the administrator file Part II?
A: No. The form should only be filed by a registered investment adviser. However, you should consult with the administrator about your responses.
Q: Our firm is an adviser to a fund but has no administrative responsibilities. Because the fund administrator is not a registered investment adviser, we must file Form ADV-Y2K on behalf of the fund complex, but we rely entirely on information provided by the fund administrator. Can we rely on this information?
A: In footnote 27 of the Release adopting Form ADV-Y2K, the Commission explained that if an adviser has no reason to believe that a third party's responses to an inquiry were not truthful, the Commission would not expect the adviser to inquire further. We believe that in the circumstances you describe, the fund administrator would be a third party on which you can rely.