August 10, 1998 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Washington DC 20549 RE: SEC File No. S7-20-98; Proposed Rule for Investment Adviser Year 2000 Reports; 63 Federal Register 36632 (July 7, 1998). Dear Mr. Katz: The American Bankers Association ("ABA") is pleased to offer comments on proposed Rule 204-5 and proposed Form ADV- Y2K, both promulgated under the Investment Advisers Act of 1940. The proposed rule would, among other things, require most registered investment advisers to file with the Securities and Exchange Commission ("Commission") status reports regarding preparation for the Year 2000 ("Y2K") computer conversion. The American Bankers Association ("ABA") brings together all categories of banking institutions to best represent the interest of this rapidly changing industry. Its membership - which includes community, regional, and money center banks and holding companies, as well as savings associations, trust companies, and savings banks - makes ABA the largest banking trade association in the country. Under the proposal, a new Form ADV-Y2K would have to be filed at least twice --- first, within 30 days of the effective date of the rule, plus a second filing due eight months later. Among the information to be reported in the new form: 1) Scope and status of the adviser's Y2K compliance plan; 2) Summary of resources, personnel and consultants committed to addressing Y2K issues; 3) Identification of systems that may be affected by the Y2K problem; 4) Report on progress made following SEC's six-step Y2K preparedness plan; 5) Summary of Y2K contingency plans; 6) Readiness of third parties upon whom the adviser relies for critical systems. The reports are intended to serve several purposes. First, the reports will enable the Commission staff to report to Congress regarding the industry's preparedness. Second, the reports will supplement the Commission's examination module for Y2K issues, and, third, will help the Commission coordinate self-regulatory organizations on industry-wide testing, implementation, and contingency planning. Finally, the reports will help increase awareness among registered investment advisers concerning specific steps that should be taken now to prepare for the Y2K conversion. The ABA acknowledges that the Y2K transition has the potential to disrupt the flow of goods and services in virtually all segments of the global economy. Accordingly, the banking industry is responding with a tremendous commitment of resources. Taken as a whole, there is ample evidence that Y2K readiness is the top priority of the U.S. banking industry. By effectively combining the expertise of internal project teams and outside vendors, banks are determined to prepare Y2K-ready systems and processes, and to minimize any potential disruptions to banking and financial services. Cost Benefit Analysis and Duplicative Reporting The proposed rule envisions a process of self-reporting by registered investment advisers which, in the case of bank-affiliated advisers, would supplement the Y2K exams being conducted by the bank regulatory agencies. One of the goals of government agencies should be to avoid redundant reporting, and instead limit the reporting burden by coordinating the format and content of Y2K information requested. For example, there will be significant costs incurred in gathering Y2K information for both the bank regulatory agencies and the Commission reports. These data will have to be compiled by the financial institution's Y2K team, and there will be costs incurred to tailor the information for the separate formats required by the bank regulatory agencies versus the Commission's format in Form ADV-Y2K, and then repeating the process eight months later. The same Y2K team will be called upon to prepare responses to Form BD-Y2K, in addition to periodic reports for auditors and bank examiners. The time and effort involved in redundant reporting in different formats may be a distraction and diversion of resources from the core effort. Each of the referenced reports will require the careful compiling of information on a separate set of mission- critical systems, plus specific testing and contingency planning updates. Ultimately, the information reported is only a snapshot of the ongoing Y2K preparedness process. As soon as the report is circulated, the information becomes outdated and possibly misleading to investors and other parties who rely upon the information. The greater potential cost to financial institutions stems from the public disclosure of the reported information by the Commission. By putting this information in the hands of potential litigants (i.e., class action attorneys), the financial institution is undertaking an uncertain legal risk. Such a risk could be limited or restricted if there were legislative or regulatory protection, which would prevent such information from being used in legal claims against the financial institution. Congress has not yet enacted "Good Samaritan" legislation proposed by the President, so the Commission should consider regulatory provisions to prevent misuse of the disclosed information. Adequacy of Existing Reporting The ABA and supports the Commission's efforts to monitor industry Y2K compliance. Indeed, in January 1998, the Commission issued helpful guidance to corporate issuers, including publicly-traded financial institutions, on disclosure relating to Y2K readiness, in the form of Staff Legal Bulletin No. 5 (Corporate Finance and Investment Management) ("CF-IM No. 5"), which was updated in July 1998. The initial guidance was welcomed by the banking industry. The ABA does not believe, however, that further disclosures concerning Y2K readiness are necessary, at least with respect to registered investment advisers affiliated with financial institutions. As financial institutions, our members are already subject to extensive reporting and examination concerning their Y2K compliance. In just the last few years, the federal banking agencies have issued more than a dozen policy statements, alerts, questionnaires and examination procedures alerting banks to their responsibilities vis-a-vis Y2K. Among the releases, the Federal Financial Examination Council ("FFIEC") issued Interagency Statements on bank due diligence responsibilities with respect to Y2K readiness of service providers and software vendors, and the impact of Y2K on bank customers. Exemption for Bank-Affiliated Investment Advisors Banking organizations are required to file with the banking regulators quarterly reports outlining their progress regarding Y2K readiness. Bank-affiliated registered financial advisers would be included in these reports. The ABA and our members are hard-pressed to understand why bank affiliated registered financial advisers should be required to assist in the preparation and filing of yet another federally mandated report outlining Y2K readiness. Moreover, information necessary to complete the proposed reports would be maintained, compiled, and reported by the same individuals charged with responsibility for conducting the bank's extensive Y2K remediation, testing, and readiness efforts. For every layer of additional recordkeeping and reporting added, more time and resources must be diverted from fixing possible Y2K problems. Consequently, the ABA would request that bank affiliated registered financial advisers be exempt from any temporary requirement to prepare and file reports with the Commission detailing Y2K readiness efforts. Such an exemption would be consistent with the reporting exemption granted to bank- affiliated transfer agents when the Commission adopted Rule 17 Ad-18, under which bank-affiliated transfer agents are not required to undertake Form TA-Y2K reporting. Alternatively, we would suggest that the Commission permit bank-affiliated registered financial advisers to file with the Commission any applicable Y2K reports filed by their parent institution with the federal banking regulators. In this way, the Y2K regulatory reporting burden would be lessened, and the Commission would still receive relevant Y2K preparedness information. Public Disclosure of ADV-Y2K Reports Should the Commission determine not to exempt bank affiliated registered investment advisers from the proposed reporting requirements, ABA would urge the Commission to maintain as confidential any reports filed under the proposed rule. Confidentiality is absolutely essential to ensure full and frank disclosure of the material requested in proposed Form ADV-Y2K, much of which constitutes strategic business and proprietary information. Moreover, without a grant of confidentiality, banking organizations will be reluctant to disclose completely information that could be used against the organization by plaintiffs' attorneys in subsequent lawsuits. Confidentiality is necessary to safeguard continued public confidence in the banking organization and its affiliated insured depository institutions. The federal banking regulators recognize this fact by requiring financial institutions to keep the results of any Y2K examinations confidential. (See SR 98-21 issued August 3, 1998, by the Board of Governors of the Federal Reserve System.) Scope of Reporting Requirements One of the important issues for bank-affiliated advisers is distinguishing between the obligations of the advisers and those of their affiliated banks and holding companies. Many advisers contract with affiliated banks for the use of their systems. For example, an affiliated bank may act as custodian of the records of the advisory clients, or as trustee of fiduciary accounts for which the registered investment adviser provides sub-advisory services, or the registered adviser may keep its records on the trust system of the bank. In any of these cases, the adviser has no control over the systems owned and maintained by the affiliate. While a duty of inquiry may certainly exist, once the adviser has made such reasonable inquiry it should be entitled to rely on the Y2K program of its affiliates, and not have to duplicate their efforts. Bank-affiliated advisers should be permitted to disclose the fact that they are cooperating with their affiliates in a Y2K project, and simply forward the Y2K reporting materials of the bank or holding company. It would be duplicative, expensive, and probably misleading to require otherwise. It is similarly important that the reporting requirements imposed on advisers be limited to systems under the direct control of the adviser. The information required (e.g., Y2K project plan, testing schedule, contingency plans, etc.) should be limited to systems controlled or maintained by the advisory affiliate itself. Reference could be made to parallel plans and schedules being undertaken by the affiliated holding company and bank. The scope of the adviser's responsibilities should be limited to making reasonable inquiry, in the same manner as if an independent custodian were utilized. Reporting on Funds with Multiple Advisers The proposal would also require reporting by advisers to a registered fund or a group of registered funds that are advised by the adviser. This proposal is not troublesome in and of itself, and in fact most significant mutual funds are already requiring such reports. However, where there are multiple advisers, it should be made clear that advisers are not held responsible for damages or liability caused by unrelated advisers, and should not be required to monitor unrelated advisers in any way. Moreover, advisers should be entitled to reasonably rely on the information given to them by sub-advisors, including information requested to fulfill requirements as part of the regulatory reporting process. Attestation by Independent Auditors According to feedback received from ABA members, the audit community is extremely reluctant to undertake auditing the sufficiency of Y2K projects and attesting to their readiness. The most that independent auditors appear willing to do is attest to functions which have been performed, without commenting on whether such functions are sufficient to handle future transactions. Thus, an attestation by independent auditors is of very limited use. Further, in the case of investment managers affiliated with bank holding companies or banks, imposing an audit requirement could be tremendously costly, while the actual value of such an audit remains problematic. An attestation by auditors should not be required. If an audit requirement is imposed, it should be limited in scope to activities performed directly by the adviser, and should not extend to activities performed by affiliated entities. Reporting on Multiple Systems Form ADV-Y2K attempts to be objective, by asking for check-off and fill-in responses, rather than full-text explanations. In the case of status reports for multiple mission-critical systems, the rule requires financial advisers to "take a qualitative average and present the most accurate picture practicable." Although this approach is less time-consuming than reporting Y2K readiness on a system-by-system basis, it still has the potential for creating a misleading picture. The inherent problem is not simply one of cramming updates on several systems into one response item, but the underlying fact that any response is simply a snapshot in time of an evolving process. We believe that investors are better served by looking at the overall Y2K readiness of a financial institution as reported in 10-K and 10-Q filings, rather than by "snapshot" attempts to quantify readiness of specific systems. In conclusion, the ABA appreciates the opportunity to offer our views regarding the Commission's proposal. Our members remain strong in their opposition to the proposed new disclosure and reporting requirements. We believe these requirements are, at least with respect to bank affiliated registered investment advisers, unreasonable, duplicative, and counter-productive in that recordkeeping is placed ahead of remediation at a time when Y2K project resources are already stretched to the maximum. If you have any questions or wish to discuss these comments further, please contact the undersigned at 202-663- 5281. Sincerely yours, Gordon Glaza Regulatory Counsel Regulatory and Trust Affairs