Third Report on the
|I.||Progress of the Industry Toward Meeting the Year 2000 Challenge|
|B. Self-Regulatory Organizations|
|C. The Broker-Dealer and Non-Bank Transfer Agent Communities|
|D. Investment Advisers and Investment Companies|
|E. Industry Testing|
|F. Contingency Planning|
|II.||International Year 2000 Efforts|
|A. When is Disclosure Required|
|B. What Should be Disclosed|
|C. Safe Harbor Protection|
|D. Municipal Securities|
|E. Accounting Year 2000 Financial Statement Conditions|
|F. Frequently Asked Questions|
|G. Public Company Disclosure|
|H. Investment Company Disclosure|
|I. Public Utility Holding Company Disclosure|
|IV.||Accounting and Auditing Considerations|
|V.||Commission Internal Systems|
|A. Progress Toward Year 2000 Compliance|
|B. Contingency Planning for the Commission's Internal Systems|
|VI. Investor Education|
|A. Investor Complaints and Inquiries|
|B. Investor Town Meetings and Seminars|
|C. Financial Facts Tool Kit|
|D. The SEC's Year 2000 Web Page|
|E. Searchable Database of Year 2000 Readiness Information|
This Third Report on the Readiness of the United States Securities Industry and Public Companies to Meet the Information Processing Challenges of the Year 2000 presents the Securities and Exchange Commission (SEC or Commission) staff's current findings on the securities industry's readiness for the Year 2000. The report includes the Commission's position on issuer disclosure obligations, analysis of Year 2000 disclosure to date, and discusses actions the Commission and its staff are taking to address the Year 2000 problem. The Commission staff prepared this report at the request of Congressman John Dingell, and expects to share the report's findings with Congressional committees, the General Accounting Office (GAO), the Office of Management and Budget (OMB), and industry participants. The report will also be available on the Commission's website.1
The "Year 2000 problem" is well understood: many computerized systems are programmed to use a two-digit rather than four-digit number to represent the year. The "19" that precedes dates in this century was assumed. Systems programmed in this fashion will treat the Year 2000, stored in their system as "00," as the year 1900. As a result, systems or applications using dates in calculations, comparisons, or sorting may generate incorrect results when working with years after 1999. For example, a securities firm with a system that is not compliant may be unable to receive or process payment information in January 2000 for a transaction that took place in December 1999.
In the securities industry, three factors magnify the scope of the Year 2000 problem:
The Commission continues to view the Year 2000 problem as an extremely serious issue. Failing to assess properly the extent of the problem, remediate systems that are not Year 2000 compliant, and then test those systems could endanger the nation's capital markets and the assets of millions of investors. Chairman Levitt and the other Commissioners continue to emphasize that both the Commission and the industry must take all necessary steps to minimize the potential impact of the Year 2000 problem. Their message is clear: the Year 2000 problem will not be tolerated as an excuse for failing to protect investor assets. In light of the scope and the magnitude of the problem, the industry and the Commission staff are working hard to address the industry's Year 2000 problems.
The Commission's approach to the Year 2000 has five primary components.
If the nation's securities markets are to continue functioning during the Year 2000 transition and beyond, the computer systems used by the industry to make, process, and track securities trades and ownership must be Year 2000 compliant. The Commission, acting together with the SROs, industry trade groups, and other interested parties, oversees the industry's program to remediate its computer systems and to minimize potential problems caused by the date transition. The industry made substantial progress in the last twelve months.
SROs play a key role in operating the nations securities markets and in overseeing the companies and individuals that participate in those markets.
The following charts provide an overview of the progress of the SROs.
|Milestone Date||March 31, 1998||April 30, 1999||May 31, 1999||June 30, 1999|
|% Completed To Date||100%||97%||87%||75%*|
|Milestone Date||Jan 1998||March 1999||June 1999||June 1999|
|% Completed To Date||100%||99%||95%||95%*|
*The NASD, exchanges, and clearing agencies expect to meet the June 1999 target date to complete implementation.
Broker-dealers are the primary intermediaries between investors and the nation's securities markets, and are at the heart of much of the securities trading in our markets. The Commission's broker-dealer Year 2000 monitoring program has three elements.
The following charts provide an overview of the progress of the broker-dealer community on implementation of their Year 2000 plans as of July 15, 1998 (all firms) and March 15, 1999 (selected large firms), based on data compiled from the August 31, 1998 and April 30, 1999 BD-Y2K Reports.
This table reflects the responses of broker-dealers to question 7(b) on Form BD-Y2K ("What is your progress on implementation of the steps you will take to address Year 2000 problems with your mission critical systems?")
|Type of Firm||50% Complete or Less||51%-75% Complete||76% Through 99% Complete||100% |
A complete review of the April 30, 1999 BD-Y2K reports is currently underway. This chart reflects the responses of selected broker-dealers to question 7(b) on Form BD-Y2K (what is your progress on implementation of the steps you will take to address Year 2000 problems with your mission critical systems?) The April 30, 1999 BD-Y2K reports selected for purposes of reporting these preliminary findings to Congress include those of the 27 largest U.S. broker-dealers in terms of total capital, and all broker-dealers having total capital in excess of $50 million and 50,000 customer accounts.
|Type of Firm||50% Complete or Less||51%-75% Complete||76% Through 99% Complete||100% |
In order to minimize the disruptive effect of firms that do not correct their Year 2000 problems, the Commission recently proposed a rule that would require every registered broker-dealer not Year 2000 compliant by October 15, 1999 to cease doing business.7
Transfer agents play a key role in recording changes in securities ownership, distributing dividends, and performing other related functions.
Investment advisers assist both individuals and investment companies in making investment decisions, and investment companies are one of the most popular means through which individual investors participate in the securities markets.
The securities industry is conducting Year 2000 systems testing to evaluate the status of Year 2000 remediation and to identify areas where further work is needed. Comprehensive industry testing is vital to Year 2000 remediation because the securities industry encompasses thousands of interdependent participants.
No matter how much progress the industry makes in addressing the Year 2000 problem, it is inevitable that some problems may not be discovered or will not be remediated in time to minimize the effect of these problems. The staff is not only working with the industry on remediation efforts, but also on the development of contingency plans.11
The Commission is taking the necessary steps to assess and repair its own computer systems to deal with the Year 2000 problem and is developing contingency plans for each mission critical system to deal with any problems that do arise.
The following tables outline the Commission's progress as of June 1, 1999, in identifying and remediating those systems that pose a Year 2000 problem.
|Total||Compliant||Pending Replacement||Pending Repair||Pending Retirement|
The Office of Investor Education and Assistance (OIEA) and other staff are working to educate investors about the possible effects of the Year 2000 changeover.
The Commission and staff, SROs, industry associations, and other industry participants are devoting extraordinary time and resources to prepare for the Year 2000 transition. Based on disclosure, examinations, and information provided by the SROs, the staff believes that this industry-wide effort is proceeding satisfactorily. Industry-wide testing results are encouraging and support the conclusion that the U.S. securities industry as a whole is well positioned to achieve Year 2000 compliance. Given the complexity and interdependent nature of the securities industry, however, thorough remediation and testing do not guarantee that there will be no problems. Regardless of how successful testing and remediation efforts are, there may well be disruptions and unexpected problems. The SEC continues to take the steps necessary to achieve the highest possible industry compliance rate and minimize the effect of any disruptions that occur. In addition, the Commission and its staff continue to remind issuers of their obligation to provide disclosure on their Year 2000 programs.
This Report on the Readiness of the United States Securities Industry and Public Companies to Meet the Information Processing Challenges of the Year 2000 prepared by the Commission staff is intended to provide the Congress and others with a quantitative and qualitative assessment of the Year 2000 program of the Securities and Exchange Commission (SEC or Commission).15 The data presented in this Report are drawn from a number of sources: direct SEC staff oversight and reviews filings by regulated entities and public companies, the self-regulatory organizations with whom the SEC shares regulatory responsibilities, and broker-dealer and investment company trade associations.
The Commission's approach to the Year 2000 has five primary components.
The Commission oversees the nation's securities markets and market participants and the Securities Investor Protection Corporation. The Commission has regulatory authority over approximately 5,000 registered investment companies with 7,300 mutual fund portfolios, 8,000 registered investment advisers, 8,300 registered broker-dealers, 547 registered non-bank transfer agents, and 23 SROs including the exchanges, the National Association of Securities Dealers (NASD), and 14 registered clearing agencies.18
Since the last report, the SEC has devoted significant resources to monitoring the progress of the industry's Year 2000 efforts. The principal means are through reviewing and assessing mandatory disclosure, conducting examinations, and working with the SIA, the Investment Company Institute (ICI) and the SROs to assure comprehensive testing and coordinated contingency planning.
To facilitate industry preparations and to minimize complicating factors, the Commission declared a moratorium on new rules requiring major computer reprogramming. Under this moratorium, the Commission will not issue new rules requiring major computer reprogramming between June 1, 1999 and March 31, 2000, except in unforeseen emergencies.19 Further, to minimize the effect of any failure of a broker-dealer or non-bank transfer agent, the Commission recently proposed a rule that would require any registered broker-dealer (or non-bank transfer agent) that has a material Year 2000 problem on or after August 31, 1999 to cease its securities business unless it certifies and can demonstrate that it will solve the problem by October 15, 1999. Firms unable to resolve their problems by October 15 would be required to cease doing business. Thus, as proposed, the rule would effectively require broker-dealers to be Year 2000 compliant by October 15, 1999.20
SROs play a key role both in operating the nation's securities markets and in overseeing the companies and individuals that participate in those markets. Since 1996, the staff has conducted six surveys of the SROs regarding their Year 2000 efforts for trading, clearance, and settlement systems. The staff requested that the SROs use the Office of Management and Budget (OMB) format to report the progress made in the various phases: assessment, remediation, testing, and implementation.
As noted in last year's report, each SRO has established either a program office or task force to address the Year 2000 problem, and appointed a Year 2000 coordinator or project manager to oversee the effort. The program office or task force is responsible for overseeing and monitoring the SROs' Year 2000 activities and reporting to a Steering Committee or the Board of Directors on a monthly basis. Each SRO made extensive efforts to determine the compliance of its hardware and software vendors, and is tracking the compliance of each vendor.
The SROs have committed substantial money and personnel to the Year 2000 project. The Exchanges and NASD report a substantial increase in costs over the last year, mostly due to independent verification of compliant code and contingency planning efforts.
During the past year, the SROs conducted extensive testing of their systems and of their interfaces with vendor and member systems. All SROs performed forward date testing by setting system clocks to specific dates required to verify Year 2000 compliance, and have tested trading system applications, system software, and vendor packages on dedicated test equipment. Remediated applications undergo normal regression testing and product testing before the SROs certify them as Year 2000 compliant. In addition, all SROs participated in the SIA Industry Cycle Test in March and April 1999, and conducted point-to-point and extended point-to-point testing with member firms prior to the Industry Cycle Test. The Industry Cycle Test is more fully discussed below.
The exchanges and NASD have identified 362 mission critical systems. Of these, 61 (approximately 17%) are still under repair. The clearing agencies identified 249 mission-critical systems, of which 10 (approximately 4%) are still under repair. A number of SROs expect completion of their Year 2000 efforts for mission critical systems in the second quarter of 1999; the original target date was December, 1998. As of April 1999, three SROs had some of their mission-critical systems in the remediation stage. Other SROs are in the process of testing and implementing their remaining mission-critical systems. One SRO is retesting all its systems before certifying compliance. It is the only SRO that still has a significant portion of its mission-critical systems in the testing or implementation stage.
The staff will continue to closely monitor the SROs' progress with their mission-critical systems through monthly surveys and schedule on-site surveys as appropriate. Based on information received on its last survey, the staff conducted one on-site review of an SRO in March 1999. The staff is scheduling at least two additional on-site SRO reviews based on its most current survey. The SEC will consider appropriate action against any SRO that has not completed its mission-critical systems by July 1999.
|Status of Mission-Critical Systems Being Repaired||Assessment||Remediation||Testing||Implementation|
|Milestones||March 1998||April 1999||May 1999||June 1999|
* The NASD, exchanges, and clearing agencies expect to meet the June 1999 target date to complete implementation.
|Milestones||January 1998||March 1999||June 1999||June 1999|
The exchanges and the NASD identified 871 non-mission critical systems; 483 (approximately 55%) are still being fixed. The clearing agencies identified 175 non-mission critical systems; 9 (approximately 5%) remain to be fixed. The exchanges and NASD have targeted September 1999 as the date by which they would complete Year 2000 efforts for their non-mission critical systems. Several report that they are ahead of schedule, and expect to finish by July 1999. The clearing agencies had originally targeted March 1999 as their completion date for non-mission-critical systems; that date has been delayed for some clearing agencies until June 1999.
|Milestones||March 1999||September 1999||September 1999||September 1999|
|Status of Non-Mission-Critical Systems Being Repaired||Assessment||Remediation||Testing||Implementation|
|Milestones||January 1998||March 1999||March 1999||June 1999|
* Non-mission critical systems are those that are not required for trade processing.
During the past year, the staff monitored the progress of the brokerdealer and non-bank transfer agent communities in two ways. First, the Commission adopted rules requiring broker-dealers and non-bank transfer agents to report their progress in preparing for the Year 2000.21 Second, the staff uses the inspection and examination program to gather additional information on specific firms.
The SEC adopted the BD- and TA-Y2K rules so that it could better evaluate the preparedness of broker-dealers and non-bank transfer agents for Year 2000. Information provided in the BD- and TA-Y2K reports was also intended to help focus the resources of the SEC's and SROs' examination staff on identifying firms whose lack of readiness may pose a risk to their customers or the markets.
The BD- and TA-Y2K reports have three parts. Part I of the report, which asks a series of "Yes/No" questions about the nature and status of the firm's Year 2000 efforts, must be filed by all broker-dealers having a net capital requirement of $5,000 or greater and all non-bank transfer agents. Broker-dealers having a net capital requirement of $100,000 or greater and larger non-bank transfer agents are also required to file Part II (a narrative description of the firm's Year 2000 plan). In 1999, any firm required to file Part II must also submit Part III, an assessment of the firm's Year 2000 compliance efforts by an independent public accountant in accordance with certain agreed upon procedures.
Compliance with the BD- and TA-Y2K rules for the August 31, 1998 filing was high. The large majority of the approximately 6,000 broker-dealers and 547 non-bank transfer agents to which the rule applies made a timely filing.22 The SEC initiated enforcement action against 37 broker-dealers and 9 non-bank transfer agents who failed to file the August 31, 1998 report, or filed it exceptionally late. The NASD filed 59 similar enforcement actions against broker-dealers. As their members all made timely filings, the New York Stock Exchange (NYSE) and other SROs did not file any enforcement actions.
In October 1998, the Commission instituted public administrative and cease and desist proceedings against 37 broker-dealers who failed to timely file all or part of the required BD-Y2K forms. Nineteen of the broker-dealers simultaneously settled with the Commission at the time of the action and several others have since settled with the Commission. An administrative hearing was held at the end of February 1999 with regard to the remaining broker-dealers. That action is still pending.
Timely compliance with the BD- and TA-Y2K rules improved significantly for the April 30, 1999 filing, perhaps in light of the heightened awareness of the filing obligation created by the 1998 enforcement actions. Nonetheless, the SEC and NASD expect to file a handful of enforcement actions against broker-dealers and non-bank transfer agents that failed to make the required filings.
The securities industry, led by the SIA, established an aggressive schedule calling for all broker-dealers to have their mission-critical systems ready in the first quarter of 1999. Broker-dealers participating in the SIA industry-wide test (approximately 350 of the largest firms) were required to have these systems ready earlier.
The SEC is coordinating closely with the SROs, particularly the NASD and NYSE, to monitor broker-dealer progress through the review of BD-Y2K disclosure, independent SRO reviews, and SEC and SRO examinations. Information from the SROs, preliminary industry-wide testing results, and our own review of selected 1999 BD-Y2K reports indicates that the overwhelming majority of broker-dealers remain on target to achieve Year 2000 compliance.
The first BD-Y2K Reports were due on August 31, 1998. The staff compiled the overall results of the first BD-Y2K reports, which reflect the firms' self-reported progress as of July 15, 1998. The data below were derived from the responses received from over 6,139 broker-dealers to Part I of the August 31, 1998 report.23
|Implementing Steps to Address Year 2000 Problems24||Internal Testing25||Point -to- Point Testing26||Implementation Of Tested Software27||Contingency Planning28|
|Firms Reporting Less Than 51% Complete||33%||44%||53%||45%||50%|
|Firms Reporting 51-75% Complete||13%||10%||6%||9%||4%|
|Firms Reporting 76-99% Complete||18%||13%||8%||12%||12%|
|Firms Reporting 100% Complete||33%||30%||28%||30%||29%|
The second BD-Y2K Reports were due April 30, 1999. Most of the second BD-Y2K reports were received in late April 1999 and are currently being reviewed by the SROs and the staff. As part of its contingency planning and risk assessment program, however, the staff compiled an overview of the answers from selected BD-Y2K reports, which reflect the firms' self-reported progress as of March 15, 1999. The data below were derived from the responses received from selected large broker-dealers to Part I of the April 30, 1999 report.29
|Implementing Steps To Address Year 2000 Problems||Internal Testing||Point -to- Point Testing||Implementation Of Tested Software||Contingency Planning Progress30|
|Firms Reporting Less Than 51% Complete||0%||1%||11%||3%||19%|
|Firms Reporting 51-75% Complete||2%||8%||35%||12%||14%|
|Firms Reporting 76-99% Complete||42%||62%||40%||66%||0%|
|Firms Reporting 100%
The staff's examination program complements its efforts to obtain information from the BD-Y2K and TA-Y2K reports. By focusing on firms that may have Year 2000 problems, the staff is able to obtain a clearer picture of potential problems facing the industry.
During 1996 and 1997, the Commission's examination program focused on enhancing the securities industry's awareness of the Year 2000 problem. Beginning in 1998, examiners conducted more in-depth reviews of selected broker-dealers' Year 2000 efforts. The staff's reviews focused on the subject firm's timetable for completing its Year 2000 program. Because the Commission stated that broker-dealers should complete their corrections by December 31, 1998, reserving 1999 for testing,32 the examination staff focused on whether firms were on schedule to meet this deadline.
Commission examiners conducted 29 on-site reviews of medium and large broker-dealers. These firms were selected because they were representative of various segments of the industry. All the firms stated they were taking steps to identify and correct their potential Year 2000 problems, and all but four indicated that their remediation efforts would be completed by December 1998. In one review, the staff was sufficiently concerned about the milestone dates that the firm identified for having its Year 2000 problems corrected that it cited the firm with deficiencies.33
In 1999, the staff formed special Year 2000 examination teams in its headquarters and in each of the Commission's regional and district offices. The Year 2000 examination teams were provided with specialized training in January 1999, including an intensive two-day program at the SEC's headquarters training center. Representatives from the NASD and the NYSE also attended. These specialized teams conduct cause examinations of high-risk firms.
Following adoption of the disclosure requirements in Form BD-Y2K, the staff and SROs have reviewed the forms looking for red flags'possible indicators that the firm is failing to take appropriate remedial actionand then followed-up with telephone interviews or on-site reviews. To date, the NASD has conducted more than 254 follow-up telephone interviews, and 30 on-site examinations. The NYSE has reviewed all of its members BD-Y2K filings and has followed up as needed. It also continues its practice of contacting, on a quarterly basis, 295 of its members, primarily specialists and firms doing business with the public, to monitor their progress in meeting the NYSE's generic milestones. As a result of these reviews, 26 NYSE members have been selected for intensive follow-up monitoring, including possible regulatory action or special examinations. The staff also examined selected broker-dealers. The staff and SROs expect to continue their reviews and examinations through 1999. Appropriate follow-up action will be taken at the conclusion of their reviews and examinations based on the seriousness of the staff's or the SROs' findings.
In addition to cause examinations, SEC and SRO examiners are conducting Year 2000 examinations of the largest, most significant clearing broker-dealers in the United States in an effort to be sure that these firms are ready for Year 2000. Examiners are also evaluating broker-dealers' disclosures in their BD-Y2K filings as part of all routine SEC, NASD and NYSE examinations.34 The primary objective is to determine whether the information in the registrants' Form BD-Y2K is current, complete, not misleading and supported by adequate documentary evidence. Examiners accomplish these objectives through interviews with key personnel at the registrants' offices and reviews of relevant books, records and other supporting documentation. As with the cause examinations, appropriate follow-up action is taken at the conclusion of the examination based on the examiners' findings.
During the latter half of 1998, the staff inspected the NASD's and NYSE's regulatory programs for member firm Year 2000 compliance. The purpose of the joint inspection was to evaluate the NASD's and NYSE's programs in three broad categories: education, regulatory monitoring, and the SROs' own back office operations. Overall, the staff found that the NASD's and NYSE's programs were well developed and comprehensive, although the staff made several recommendations to these SROs for improvements to their programs. Each SRO adopted all of the recommendations.
The Commission is monitoring the ongoing progress of non-bank transfer agents in achieving Year 2000 compliance through review of TA-Y2K disclosures and staff examinations. The staff review of selected TA-Y2K reports indicated that the majority of non-bank transfer agents remain on target to achieve Year 2000 compliance.
The first TA-Y2K reports were due on August 31, 1998. The staff compiled the overall results of the first TA-Y2K reports, which reflect the firms' self-reported progress as of July 15, 1998. The data below were derived from the responses received from 529 non-bank transfer agents to Part I of the August 31, 1998 report.35
|Implementing Steps To Address Year 2000 Problems36||Internal Testing37||Point -to- Point Testing38||Implementation Of Tested Software39||Contingency Planning40|
|Firms Reporting Less Than 51% Complete||31%||52%||65%||53%||58%|
|Firms Reporting 51-75% Complete||17%||13%||4%||12%||4%|
|Firms Reporting 76-99% Complete||23%||15%||5%||14%||5%|
|Firms Reporting 100%
Some 176 non-bank transfer agents were required to file Part II of the initial Form TA-Y2K. Of the 176 reports reviewed by staff, 40 non-bank transfer agents were recommended for cause examinations.41 The criteria used in the review of Part II of Form TA-Y2K for selecting a non-bank transfer agent as a candidate for a cause examination included answers indicating the non-bank transfer agent's Year 2000 compliance program was: (1) inadequate (including such indicators as, a failure to establish a Year 2000 plan, take an inventory of computer systems, or have a contingency plan); (2) untimely (i.e., inadequate progress in the basic Year 2000 compliance milestones of assessment, implementation, and testing, or in development of a contingency plan); or (3) described insufficiently (i.e., narrative answers in Part II of the Form were not fully informative or inconsistent with information provided in Part I of the Form).
In January 1999, the Commission instituted public administrative and cease and desist proceedings against nine non-bank transfer agents who failed to timely file all or part of the required TA-Y2K reports. Five of the non-bank transfer agents simultaneously settled with the Commission at the time of the action. The remaining non-bank transfer agents either settled at a later date or were dismissed after filing a withdrawal of their non-bank transfer agent registration.
The staff compiled the preliminary results of the second TA-Y2K report, which reflect the firms' self-reported progress as of March 15, 1999. The data below were derived from the responses of a significant percentage of the non-bank transfer agents that submitted Part I of the April 30, 1999 report.42
|Implementing Steps To Address Year 2000 Problems||Internal Testing||Point -to- Point Testing||Implementation Of Tested Software||Contingency Planning|
|Firms Reporting Less Than 51% Complete||2%||11%||22%||12%||22%|
|Firms Reporting 51-75% Complete||8%||12%||13%||12%||9%|
|Firms Reporting 76-99% Complete||31%||34%||28%||34%||12%|
|Firms Reporting 100%
As with broker dealers, the staff uses the examination program to complement the information reported on the TA-Y2K forms. By focusing on individual firms, the staff is able to obtain a clearer picture of potential problems facing the industry.
During 1996 and 1997, the examination program focused on enhancing the securities industry's awareness of the Year 2000 problem.43 Beginning in 1998, examiners conducted more in-depth reviews of non-bank transfer agents' Year 2000 compliance efforts. The reviews focused on the firm's timetable, or milestones, for completing their Year 2000 program. Because the Commission stated that non-bank transfer agents should complete their corrections by December 31, 1998, reserving 1999 for testing,44 the staff examined firms for conformance with the December 31, 1998 milestone.
During 1998, examiners conducted 101 on-site reviews of non-bank transfer agents. The staff selected these firms to maximize examination coverage of the largest non-bank transfer agents (in terms of the number of holders of record).45 In three reviews (approximately 3% of the firms examined), the staff was sufficiently concerned about the milestone dates that the registrants identified for having their Year 2000 problems corrected or tested, that it cited the firms with deficiencies.46 Other deficiencies cited included the failure to have a Year 2000 plan, to obtain written assurances of compliance from a critical third-party vendor, and to conduct internal testing. The staff is following-up with the non-bank transfer agents that received deficiency letters to ensure that they corrected the deficiencies noted or can otherwise provide a reasonable explanation for them.
Following adoption of the disclosure requirements in Form TA-Y2K, the staff has reviewed the forms looking for red flags' and then followed-up with telephone interviews or on-site reviews. To date, the staff has conducted four follow-up telephone interviews and 30 on-site examinations. As a result of these examinations, two non-bank transfer agents withdrew their registrations. These examinations are conducted by the specialized Year 2000 teams. The staff expects to continue these reviews and examinations through 1999. Appropriate follow-up action will be taken at the conclusion of such reviews and examinations based on the seriousness of the staff's findings.
In addition to cause examinations, examiners are also evaluating non-bank transfer-agents' disclosures in their TA-Y2K filings in the course of all routine examinations. The primary objective is to determine whether the information in a registrant's Form TA-Y2K is current, complete, not misleading and supported by adequate documentary evidence. Examiners are accomplishing these objectives through interviews with key personnel and reviews of relevant books, records and other supporting documentation. As with the cause examinations, appropriate follow-up action is taken at the conclusion of the examination based on the staff's findings.
Investment advisers assist both individuals and investment companies in making investment decisions. Investment advisers and investment companies are responsible for managing approximately $15 trillion in assets, including over $5.7 trillion in mutual fund assets.47 Year 2000 disruptions could cause advisers difficulties in executing and confirming client trades. Advisers to investment companies also might not be able to communicate with other third-party service providers, such as custodians, non-bank transfer agents, pricing services, and distributors.
For investment companies, a breakdown in their systems could impair their ability to use third-party service providers. For example, it could become difficult for investment companies to:
Because of the importance of the fund and adviser industries, the Commission's staff also is engaged in ongoing efforts to evaluate the Year 2000 readiness of investment advisers and investment companies. These efforts include:
As with broker-dealers and non-bank transfer agents, the Commission adopted a filing requirement rule in order to better evaluate the Year 2000 preparedness of advisers and funds, identify firms that pose significant risk to their clients and shareholders, and evaluate the adequacy of disclosure made by advisers and funds. Based on these reports, inspection and examination staff can focus their resources on those advisers and funds that may have problems.
Investment advisers with reported assets under management of not less than $25 million were required to file Part I of Form ADV-Y2K, and investment advisers to a registered investment company were required to file Parts I and II of Form ADV-Y2K. As of January 1, 1999, 95% of the advisers required to file the first round of reporting on Form ADV-Y2K had done so. Commission staff contacted advisers that had not yet made the required (December 1998) filing and, on May 4, 1999, the Commission filed enforcement actions against eight advisers that failed to file the form. Two of the investment advisers simultaneously settled with the Commission at the time of the action. An administrative proceeding will be held with regard to the remaining investment advisers.
In the first round of reports, approximately 93% of advisers had a plan to address the Year 2000 computer problem (approximately 73% have a plan in writing). The majority of advisers had allocated funds specifically for the development and implementation of Year 2000 plans. Approximately 28% of advisers had completed implementation of their Year 2000 plan with respect to their mission-critical systems; 50% stated that they were more than half completed with that implementation.
Approximately 12% of advisers had not yet determined which of their mission-critical systems were Year 2000 compliant. Approximately 40% did not yet have a contingency plan for conducting operations if they experience problems with their systems related to the Year 2000 issue. Of those advisers reporting that they had a contingency plan, only approximately half indicated that their plans were in writing.
Not all filers answered all of the questions posed on the Form. The responses for some of the questions, therefore, do not add up to 100%.
|Do you have a Year 2000 plan?||5,020
|Is your plan written?||3,729
|Did you allocate funds in Fiscal Year 1998 for your plan?||3,097
|Did you allocate funds in Fiscal Year 1999 for your plan?||2,859
|Did you allocate funds in Fiscal Year 2000 for your plan?||1,857
|Have you determined which of your mission-critical systems are not Year 2000 compliant?||4,559
|Do you have a Year 2000 contingency plan?||3,198
|Is your contingency plan written? (Those answering "yes" to the previous question.)||1,702
With respect to the funds advised by registered advisers, as the next table illustrates, approximately 94% had a plan for addressing the Year 2000 computer problem (approximately 84% of the funds had a written plan). Approximately 18% of those funds had completed implementation of their Year 2000 plan with their mission-critical systems; another 69% were more than half-completed with that implementation. Similar to the results for advisers, however, approximately 40% of the funds did not yet have contingency plans, and of those funds reporting that they had such plans, slightly more than half indicated that the plans were in writing.
The staff believes the percentages reported for contingency plans may not reflect actual practicethe true numbers may be different. The reasons for this vary. For example, the staff was told that some small advisers reported no contingency plans when, in fact, they had taken significant steps to plan for internal contingencies, and also for external contingencies such as the Year 2000 failure of a service provider. Moreover, in some cases, the staff was told that some advisers have decided to bring their own systems into compliance and then, upon completion, will turn their attention to contingency planning.
|Do you have a Year 2000 plan?||900
|Is your plan written?||758
|Have you determined which of your mission-critical systems are not Year 2000 compliant?||873
|Do you have a Year 2000 contingency plan?||540
|Is your contingency plan written? (Those answering "yes" to the previous question.)||308
An updated version of Form ADV-Y2K must be filed by June 7, 1999. After receiving those reports, the staff will update the Commission's website database so that the public can have the most current information available regarding the readiness of advisers and funds for the Year 2000. The staff will also evaluate those reports to determine if the registrants have made sufficient progress in preparing their computer systems for the Year 2000.
In order to supplement the information on the ADV-Y2K, the staff meets regularly with the ICI and other industry groups and representatives to obtain data, to promote readiness, and to monitor the progress of industry assessment, remediation, disclosure, and contingency planning efforts. These meetings will continue throughout the year. The staff is working with the ICI to determine how we could best disseminate important information in the face of Year 2000 disruptions, such as emergency Commission actions or staff interpretive positions or other guidance.
As with broker-dealers and non-bank transfer agents, the staff uses the examination program to complement the information reported on the ADV-Y2K forms. By focusing on individual firms, the staff is able to obtain a clearer picture of problems facing the industry.
During 1996 and 1997, the examination program focused on enhancing the securities industry's awareness of the Year 2000 problem. Beginning in 1998, examiners conducted more in-depth reviews of investment advisers' Year 2000 compliance efforts. These reviews focused on each subject firm's timetable, or milestones, for completing its Year 2000 program. In particular, because the Commission has indicated its view that registrants should complete their corrections by December 31, 1998, reserving 1999 for testing, the staff examined firms for conformance with the December 31, 1998 milestone.
In 1998, the staff conducted 4,402 on-site reviews, representing approximately 60% of all registered investment advisers. The staff reviewed 3,895 investment advisers; 445 investment companies or investment company complexes; and 62 other entities (such as non-bank transfer agents and broker-dealers that were either dually registered as an investment adviser or affiliated with an examined investment adviser). These firms were selected based on their size (i.e., assets under management) and location in order to maximize the staff's coverage of the population of registered advisers. In 136 of these reviews (approximately 3% of the total of firms examined), the staff was sufficiently concerned about the milestone dates that the registrants identified for having their Year 2000 problems corrected, that it cited the firms with deficiencies.49 Other deficiencies cited included the failure to plan for external testing, and the failure to prepare an inventory of systems. The staff is following-up with the firms that received deficiency letters to ensure that they corrected the deficiencies noted or can otherwise provide a reasonable explanation for them.
Following the adoption of the disclosure requirements in Form ADV-Y2K, the staff has reviewed the forms looking for red flags' and then followed-up with telephone interviews or on-site reviews. To date, the staff has conducted 176 follow-up telephone interviews and 64 on-site examinations. These examinations are conducted by the specialized Year 2000 teams. The staff expects to continue these reviews and examinations throughout 1999. Appropriate follow-up action will be taken at the conclusion of such examinations based on the seriousness of the staff's findings.
In addition to cause examinations, examiners are also evaluating the disclosures made by investment advisers and investment companies in their ADV-Y2K reports during the course of routine examinations. The primary objective is to determine whether the information in a Form ADV-Y2K is current, complete, not misleading and supported by adequate documentary evidence. Examiners are accomplishing these objectives through interviews with key personnel at registrants' offices and reviews of relevant books, records and other supporting documentation. As with the cause examinations, appropriate follow-up action is taken at the conclusion of the examination based on the staff's findings.
Comprehensive industry testing is vital to Year 2000 remediation because the securities industry encompasses thousands of interdependent participants. Broker-dealers, markets, clearing organizations, depositories, non-bank transfer agents, mutual funds, information vendors and communications vendors, among others, must exchange, process, balance, confirm, and settle millions of trades every trading day. That interdependence means that it is not sufficient for every firm and organization to prepare its own systems for the Year 2000; integrated testing among participants is the only meaningful way to reduce the risks of failure to the lowest possible level.
Most industry Year 2000 tests are designed to evaluate the status of Year 2000 remediation and to identify areas where further work is needed. To effect meaningful testing that is not unwieldy, the industry has conducted Year 2000 testing at many levels, ranging from industry-wide testing for certain major participants to data-exchange testing (such as "point-to-point" testing) involving virtually all broker-dealers.
Moreover, the testing incorporated many types of market participants performing a variety of model transactions in a Year 2000 environment. Results thus far have revealed very few Year 2000 problems.
On six weekends in March and April 1999, the SIA sponsored industry-wide Year 2000 testing. Over 350 clearing broker-dealers participated, together with National Securities Clearing Corporation (NSCC), The Depository Trust Company (DTC), The Options Clearing Corporation (OCC), NASDaq, the exchanges, major mutual funds and major communications vendors. The first four testing weekends simulated trading on December 29-31, 1999 and January 3, 2000; the fifth testing weekend simulated January 4, 2000 and focused on mutual funds; the final testing weekend simulated January 22, 2000 and focused on options expiration.
The industry-wide testing encompassed a variety of products: equities, options, corporate bonds, municipal bonds, money market products and unit investment trusts (UITs). The testing also included mortgage-backed securities trading processed through DTC (other mortgage-backed securities were tested outside the industry-wide test). Finally, the testing encompassed some mutual fund trading processes, a "buy side" test, and limited testing of money-market products.
Participant firms executed numerous "test cases" from scripts that were designed to simulate major trading functionalities from order entry to settlement. Many of the test cases required firms to exchange information with counterparty "buddy firms." The testing process compared the actual results of participant activities against expected results.
The mutual fund component of the industry-wide test looked at the purchase and redemption of mutual fund shares when conducted through broker-dealers and cleared by NSCC. That component of the test included 62 fund families. Also, asset managers for institutional "buy side" firms, including mutual funds, participated in the test in a process coordinated by the Asset Managers Forum.
The industry-wide test also encompassed a limited-scope money market test, involving four firms. As discussed below, a comprehensive money market test is being held in June 1999.
Results from the first four days of testing indicate that over 97% of test results were successful. In particular, the SIA received over 260,000 successful test results, and only 6,868 unsuccessful results. Non-Year 2000 issues, such as data entry errors, caused the vast majority of unsuccessful results.
The industry-wide test revealed only four Year 2000 systems errors, accounting for only 0.02% of all test results. Moreover, the SIA has stated that that all Year 2000 errors uncovered during the test were fixed promptly. Notably, no Year 2000 errors occurred on the fourth day of the test, which simulated trading and settlement activities occurring on and immediately after January 3, 2000.
Beside the SIA-sponsored industry-wide test, the securities industry is conducting a variety of multi-firm tests to evaluate Year 2000 readiness. Although these tests are not all complete, the results thus far demonstrate that the industry has made considerable progress.
Market Data Test Market data testing on February 27 (beta test) and May 1, 1999 looked at the exchange of data between market data providers, information vendors and end-users, using a January 3, 2000 systems date. Participants included securities exchanges, futures exchanges, market data vendors, and 145 end-users. The test did not indicate any Year 2000 problems.
Government Securities The Government Securities Clearing Corporation (GSCC) required member firms to complete Year 2000 point-to-point testing by the end of February. In addition, twenty-three member firms successfully conducted additional testing with the GSCC at the same time as the industry-wide test.
Mortgage-Backed Securities (MBS) The MBS Division of DTC tested with member firms from July 1998 through May 1999, and the MBSCC has been testing with member firms since June 1998. Other mortgage-backed securities transactions were part of the industry-wide test.
Securities Lending Test Stock loan testing in May 1999 looked at lending-related activities involving DTC, Loanet and securities borrowers and lenders. Testing was held on May 13, 14 and 17, which respectively simulated system dates of December 30 and 31 and January 3, 2000. In conjunction with the securities lending test, the OCC sponsored a hedging test that accommodated hedging transactions between lenders and borrowers and OCC's computation of adjusted margin requirements. Preliminary results do not indicate any Year 2000 problems.
Money Market Products In June 1999, the SIA is sponsoring a comprehensive money market test that is expected to encompass upwards of 90% of industry volume. During the test, DTC will engage in test transactions with issuing agents, broker-dealers and custodians, simulating systems dates of December 30 and 31, 1999, and January 3, 2000.
Corporate Bond Automated Bond System (ABS) The SIA, NYSE and SIAC held a one-day test of the NYSE's ABS on February 20, 1999, to be followed by a second one-day test on June 12, 1999. Twenty-nine firms that had direct connections with the ABS system participated on February 20. The February 20 test revealed two Year 2000 problems in the ABS system, and the SIA reports that both have been resolved.
Automated Customer Account Transfer Service (ACATS) Service The SIA will test the NSCC's ACATS service on July 2 and July 6-10, 1999. The ACATS service enables NSCC members to effect automated transfers of customer accounts among themselves. Those test dates will simulate systems dates of December 27-31, 1999 and January 3, 2000.
Transfer Agents The DTC conducted testing with "FAST" (Fast Automated Securities Transfer) non-bank transfer agents between October 1998 and May 1999. The testing encompassed 93 non-bank transfer agents who account for the great majority of securities non-bank transfers. The testing simulated non-bank transfer activities using system dates of December 31, 1999 and January 3-4, 2000. No Year 2000 problems arose during the testing.
Payment Systems On June 12 and 13, 1999, the Federal Reserve and several other entities are engaging in cross-border testing of systems for major payment transactions, including Fedwire. Also, the Federal Reserve has made Fedwire available for testing by depository institutions since mid-1998.
DTC Leap Year Testing The Year 2000 will be a leap year a fact that some computer systems may not recognize. Accordingly, DTC will conduct testing on June 22-24, 1999 to represent systems dates of February 28-29 and March 1, 2000.
Only clearing and other large firms participated in the SIA-sponsored industry-wide test and the other multi-firm tests discussed above. The SROs, however, have also been testing data connections with member broker-dealers. That testing included connectivity testing and point-to-point testing to check the ability of the broker-dealers and the SROs to exchange securities data in a Year 2000 environment. SROs are continuing to give firms the opportunity to participate in extended point-to-point testing, which permits firms to test data connections with several SROs at once. SROs are also allowing firms to retest their systems as they modify them to meet new business needs.
Beyond testing with their SROs, individual securities firms test their systems at several levels ranging from internal data and communications systems to systems for exchanging data with other securities firms. For example, introducing broker-dealers that do not carry customer accounts need to test their systems for exchanging data with the account-carrying clearing firms they use, and vice versa.
The staff is working with the SROs as they monitor the status of Year 2000 testing and remediation by member firms and will take further action if necessary. The Commission has also approved rule changes giving the SROs the authority to require member firms to engage in Year 2000 testing and reporting, as the SROs deem necessary. For example, the NASD is requiring member clearing firms to conduct testing with their introducing firms. The staff is following-up to determine whether all required tests have been completed, and if not, to ensure that appropriate action is taken.
The positive test results suggest that the securities industry has gone far in identifying and resolving the Year 2000 problems in their computer systems. The Commission is working with the SROs as they identify any potential problems indicated by the tests.
It is important to recognize that positive test results do not guarantee that a securities firm will avoid Year 2000 problems. The industry's complexity and interconnected nature means that no testing process will uncover every Year 2000 problem ahead of time. Accordingly, even with the positive results thus far, securities firms should continue to monitor their internal systems, and should be aware of the Year 2000 readiness of the firms with which they do business.
As noted earlier, no amount of testing will insure a problem-free transition to the next century. Thus, although the industry is making strong progress in its remediating and testing its systems, prudence requires comprehensive contingency planning.
The staff meets regularly with the SIA, ICI, major SROs and clearing agencies, as well as staff of other financial service regulators, such as the Board of Governors of the Federal Reserve and the Commodity Futures Trading Commission, to discuss industry status and contingency planning. The staff anticipates that coordinated contingency planning with the securities industry and other regulators will have two major components: planning responses to range of failure scenarios and establishing a network of information coordination centers.
In the event Year 2000 problems occur, efficient reliable communication regarding the nature and extent of the problem will be critical to decision makers to craft an appropriate response. The staff meets regularly with several SIA committees and the SROs to establish procedures for information collection and dissemination during the Year 2000 transition. Efforts focus on how to most efficiently collect accurate status information from members of the industry beginning Saturday, January 1, 2000 and throughout the first several weeks of the year, and disseminate that information to all interested parties. Plans are currently underway to establish a timetable for firms to report in to previously designated data collection centers with responses to a predetermined list of questions. The staff is also working with SIA, ICI, and SROs to establish consensus on appropriate actions each should take in the event of various failure scenarios.
Although the staff does not anticipate widespread failures, as part of its contingency planning, it is devoting significant attention to how it would respond to the failure of a clearing broker-dealer. An important component of planning for this contingency is working with SROs and staff of the Board of Governors of the Federal Reserve to identify, through examinations and review of disclosure, firms that appear unlikely to be fully Year 2000 compliant on time and to seek to prevent or mitigate the consequences of such failure.
As part of this effort, the Commission recently proposed a rule that would require any registered broker-dealer (or non-bank transfer agent) that has a material Year 2000 problem on or after August 31, 1999 to cease its securities business unless it certifies that it will solve the problem by October 15, 1999. By effectively requiring any firm not compliant by October 15, 1999 to shut down, the proposed rule, if adopted, would give the staff, the industry, and other interested parties time to wind down the firm in a way that would not create risks for the market as a whole or for the firm's customers.
The staff is also developing plans to minimize the impact of firm failures that may occur despite best efforts to prevent them. In particular, the staff met with the Securities Investor Protection Corporation (SIPC) on several occasions to address what procedures would be used in case of a firm failure, and to ensure that SIPC will have sufficient resources to address multiple, simultaneous firm failures should they occur. In addition, staff from the SEC, SIPC, and the SROs formed a task force to determine the most appropriate procedures for handling the non-bank transfer of customer accounts in the event of firm closures in late 1999 or early 2000. The staff is also discussing with the SROs the effect and appropriate response in the event any of their members should be unable to handle order flow due to Year 2000 processing problems.
In addition, the Commission proposed recordkeeping requirements intended to assist the firms and the Commission in the event that customer assets and records must be transferred from a firm experiencing Year 2000 problems to a firm that is Year 2000 compliant. Comment on these rules, and the Year 2000 operational capability rules, was generally favorable, and the rules are likely to be adopted in the near future.
Due to the increasingly interconnected global financial markets, Year 2000 related failures in one or more foreign markets might impact both U.S. markets and other foreign markets. The Commission does not regulate foreign markets or foreign firms and is thus unable to obtain as much information about them as about U.S. firms and markets. Nonetheless, the Commission has the authority to assess the degree of risk that the unregulated activities of U.S. brokerage firms pose to the regulated entity, and has concluded that the Year 2000 risks posed by the international activities of U.S. brokerage firms is not significant.50 Because a Year 2000 failure in a foreign market could affect a U.S. market or U.S. investors having international investments, however, the staff has taken steps to learn about the progress of non-U.S. remediation efforts and to participate in various international groups that are addressing the problem.
The staff is aware of reports that some countries are behind in their Year 2000 efforts. Given the scope and complexity of the problem, the number of affected systems, and the limited time within which to complete remediation efforts, it seems likely that some Year 2000 disruptions will occur. Nonetheless, individual firms, financial market infrastructure providers, and financial market authorities worldwide have made substantial efforts to resolve Year 2000 challenges. Public and private sector organizations are continuing their efforts to address global Year 2000 issues. These organizations include the Joint Year 2000 Council (Council), the International Organization of Securities Commissions (IOSCO), the Basle Committee on Banking Supervision (Basle Committee), the International Association of Insurance Supervisors (IAIS), the Committee on Payment and Settlement Systems (CPSS), the SIA, the Global 2000 Coordinating Group, Custody 2000, and the Society for Worldwide Interbank Financial Telecommunications (S.W.I.F.T.). These organizations have acted to facilitate testing, provide guidance on Year 2000 policy issues, sponsor regional meetings, survey industry participants, and maintain websites where industry participants may post self-assessments describing their Year 2000 remediation efforts. Through the Commission's membership in IOSCO, its staff has worked to encourage other countries and regulators to address Year 2000 challenges.
In April 1998, the Basle Committee, CPSS, IAIS, and IOSCO formed the Joint Year 2000 Council, an organization that aims to ensure a high level of attention to Year 2000 issues within the global financial supervisory community; share information regarding regulatory and supervisory strategies; discuss contingency measures; and serve as a point of contact for national and international private sector initiatives. The Council is chaired by the Governor Roger W. Ferguson, member of the Board of Governors of the Federal Reserve System, and is comprised of senior representatives from its four sponsoring organizations.
The Council meets with an External Consultative Committee comprised of international public sector and private sector organizations, including representatives from international payment and settlement mechanisms (S.W.I.F.T., Euroclear, Cedel, and VISA), international financial markets associations (the International Swaps and Derivatives Association, the International Institute of Finance, and the Global 2000 Coordinating Group), multilateral organizations (including the International Monetary Fund and World Bank), financial rating agencies (Moody's and Standard & Poor's), and other international organizations.
The Council has undertaken a number of initiatives to address Year 2000 issues. For example, in 1998 the Council sponsored regional meetings for financial market regulators that allowed participants to share strategies and discuss possible regional contingency arrangements. The Council distributes a regular newsletter to financial market authorities worldwide and maintains an extensive website that provides, among other things, country pages listing Year 2000 contacts for government entities, associations, and private sector organizations in various countries. The Council's country pages also contain Year 2000 readiness questionnaires completed by financial infrastructure operators, including exchanges, trading systems, and clearance and settlement systems. The self-assessments provide information describing the organization's computer systems and the status of system testing.
In addition, the Council has addressed Year 2000 issues in several policy papers.51 Most recently, the Council and its sponsoring organizations developed guidance for financial market authorities related to Year 2000 contingency planning. The paper discusses risk mitigation measures, public communication strategies, mechanisms for exchanges of information, and issues surrounding potential liquidity constraints. In addition, the Council's sponsoring organizations prepared specific contingency planning guidance for financial market authorities that oversee the banking, securities, and insurance industries, and payment systems. The Council also published a paper providing guidance to private sector financial firms on the development and implementation of a business continuity project.
In June 1998 the Council published guidelines for supervisors and auditors to assess the adequacy of a financial institution's Year 2000 preparations. The guidelines highlight issues involved in several elements of Year 2000 preparations, including: organizational awareness of the extent of potential Year 2000 problems (e.g., obligations regarding customer assets and significant interdependencies with external parties); assessment of affected activities; system renovation; implementation of tested systems; and contingency planning. The paper urges supervisors to apply proactive pressure to institutions that appear to be falling behind in their conversion efforts.
In December 1998, the Council published a paper emphasizing the need for market participants and market infrastructure operators to disclose information about the status of their Year 2000 preparations and testing results. The Council also published papers discussing the scope of the Year 2000 problem and guidelines for successful testing programs.
The private sector also has undertaken a wide range of international Year 2000 initiatives. For example, the SIA established an International Operations panel to facilitate communications between major cross-border users and providers of financial service operations. In an effort to assess global Year 2000 preparedness, the SIA, in conjunction with the International Operations Association, developed and distributed a "scorecard" to 650 foreign and international financial services firms and institutions, including stock and futures exchanges, regulators, global depositories and clearing corporations, brokers, and banks. The SIA concluded that the level of awareness of the Year 2000 problem was consistent throughout the global industry, but that the level of preparedness varied depending upon the size of the firm. In addition, the SIA found weaknesses with regard to cross-border testing, contingency plans, and assessments of vulnerability to third party vendors.52
Drawing on information compiled by the Global 2000 Coordinating Group, the SIA's International Subcommittee reported at the SIA's Year 2000 Industry Testing Seminar in February 1999 on the status of industry testing in various countries. The International Subcommittee noted that, in addition to the U.S., the following countries have completed some form of industry testing: the United Kingdom, Japan, Hong Kong, Switzerland, Singapore, China, Brazil, Mexico, Australia, Canada, South Korea, Denmark, Germany, and New Zealand. These countries have well documented plans for testing in 1999, although the extent of testing varies greatly. France, Mexico, Italy, Spain, and the Czech Republic have announced plans for industry testing in 1999, but have provided little detail regarding their plans.
Private sector organizations also have initiated cooperative efforts to address Year 2000 issues. For example, in March 1998, a number of banks, investment firms, and insurance companies formed the Global 2000 Coordinating Group, an organization that aims to identify areas where coordinated initiatives could facilitate efforts by the global financial community to improve the Year 2000 readiness of global financial markets. As of January 1999, the Global 2000 Coordinating Group was comprised of 539 participants from 244 institutions and associations representing 53 countries. A Steering Committee of 42 persons from 22 countries guides the activities of the Global 2000 Coordinating Group. During 1998, the Global 2000 Coordinating Group held formal meetings in New York, London, Paris, Tokyo, Budapest, and Sao Paolo, which included sessions that were open to all members of the financial community and to their auditors, supervisors, and regulators. Members of the Steering Committee also participated in numerous industry-sponsored meetings that addressed Year 2000 issues.
The Global 2000 Coordinating Group has published best practices papers on several subjects, including testing and contingency planning. The Global 2000 Coordinating Group also has developed questionnaires for countries and financial services firms to provide self-assessments of their Year 2000 readiness. As of December 1998, three countries (the Netherlands, Switzerland, and the U.S.) had posted their self-assessments on the Global 2000 Coordinating Group's website. Similarly, as of November 1998, 15 nations had posted assessments of their financial markets' Year 2000 readiness on the Global 2000 Coordinating Group's website,53 and, as of January 1999, nine financial services firms had posted their self-assessments.
In 1999, the Global 2000 Coordinating Group plans to focus on identifying areas that present the highest risks to the financial services industry. The Global Coordinating Group will continue to emphasize (1) testing, (2) the assessment and disclosure of risks, (3) collective actions for mitigating risks, and (4) preparation for unexpected events/crisis management. The staff will participate with the Global Coordinating Group in addressing this issue.
Cooperative testing efforts also are underway. For example, in January 1999, Custody 2000, a group comprised of global custodians, subcustodians, broker-dealers and international depositories initiated plans for creating a unified proxy testing environment to test the Year 2000 preparedness of subcustodians. The process will match global custodians and broker-dealers with agent banks to verify through a standard test that counterparties can process post-trade instructions in a Year 2000 environment. The results of the test will be audited by an external firm and documented in a standard test booklet. The testing began in February and will conclude by June 1999.
S.W.I.F.T., which maintains a messaging network through which correspondent banks advise and confirm payments, also has made efforts to facilitate testing. In March 1998, S.W.I.F.T. introduced its dedicated Year 2000 Customer Test System, which allows customers to test business transactions, including S.W.I.F.T. message processing, under Year 2000 conditions. In August, S.W.I.F.T. began a mandatory test program that is scheduled to end on July 31, 1999. In January 1999 the Council reported that since the initiation of the testing program, over 1,400 customers have conducted tests. However, only 23% of S.W.I.F.T.'s customers have connected to the testing system and only 2% of S.W.I.F.T.'s customers have transmitted test confirmations under the mandatory testing program.
Although S.W.I.F.T. does not publicly disclose the results of customer testing, it provides data on testing activity on a monthly basis to S.W.I.F.T. National User Groups. S.W.I.F.T. cooperates closely with the National Bank of Belgium, which provides quarterly summary reports on the status of S.W.I.F.T.'s Year 2000 program to the Council.
Public and private sector organizations have committed substantial resources to addressing global Year 2000 issues. Individual firms and financial market infrastructure providers have made considerable progress in system remediation and testing. Financial market authorities have worked steadily to raise awareness of Year 2000 issues and monitor industry readiness. Nonetheless, given the large number of affected systems, as well as the financial industry's reliance on telecommunications, water, energy, and other infrastructure services, some Year 2000 disruptions may occur in the financial markets. Accordingly, several organizations, including the Council and the Global 2000 Coordinating Group, recently have emphasized the need for contingency planning, both by financial market authorities and by individual firms. The Commission also believes that contingency planning is an important component of Year 2000 preparations for U.S. firms. The Commission will continue to work with regulators in other countries to address Year 2000 concerns.
Adequate disclosure of the material effects that the Year 2000 problem may have on a company's operations continues to be of the utmost importance to the staff. Last year, after issuing a revised Staff Legal Bulletin No. 5 on the issuers' disclosure obligations, the staff created a Year 2000 Task Force to determine whether there was any quantitative and qualitative improvement in the Year 2000 disclosure. The review indicated that many public companies were not providing sufficiently detailed and particularized disclosure in their filings.
Based in part on the results of this review, on July 29, 1998, the Commission issued an interpretive release54 setting forth the Commission's views on how public companies, investment companies, investment advisers, and municipal securities issuers should meet their disclosure obligations regarding the Year 2000 issue and its consequences. The interpretive release, which supersedes Staff Legal Bulletin No. 5, provides specific guidance for public companies about the disclosure required in their Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), financial statements, and other relevant sections. The release makes it clear that almost all public companies will be required to make extensive Year 2000 disclosure in their filings. On November 9, 1998, the Commission issued further guidance clarifying several questions raised since the interpretive release.55
A company must provide Year 2000 disclosure if:
The Commission believes that the vast majority of companies have material Year 2000 issues, and therefore expects them to address this topic in their MD&A. In almost all cases, this disclosure should be updated in each quarterly and annual report.
Under the first step, a company's assessment should take into account whether third parties such as vendors, suppliers, and significant customers with whom it has material relationships are Year 2000 compliant. The determination of whether a relationship is material depends on the nature of the relationship. The company must also consider its potential liability to third parties if its systems are not Year 2000 compliant.
The second step requires companies to consider their Year 2000 disclosure obligations on a broad basis. Absent clear evidence of readiness, a company must assume that it will not be Year 2000 compliant and weigh the likely results of this unpreparedness.
To encourage companies to provide meaningful disclosure, the release provides interpretive guidance on the application of the statutory safe harbors for forward-looking information provided by the Private Securities Litigation Reform Act of 1995. These safe harbors provide protection for forward-looking information accompanied by meaningful cautionary statements. The safe harbors apply only in private lawsuits in federal court.
The Commission's regulatory authority over disclosure by issuers of municipal securities is not as broad as its authority over disclosure by public and investment companies. Generally, municipal securities offerings are, by statute, exempt from registrations and municipal securities issuers are exempt from the reporting provisions of the federal securities laws, including line-item disclosure rules. Under an antifraud standard, the release provides guidance to municipal securities issuers on how to disclose their Year 2000 issues.
The release does not promulgate any new accounting requirements. Instead, it relies on existing accounting and auditing standards to provide guidance on accounting and disclosure issues arising from the Year 2000 problem.56 The release clarifies that Year 2000 issues may arise in the context of: (a) conducting an audit; (b) evaluating "Going Concern" issues; and (c) disclosing the resignation of an independent auditor.
The Commission gave additional guidance by publishing FAQs to clarify some recurring issues. The FAQs clarify that the interpretive release is not to be used as a "checklist" and that a company needs to provide adequate discussion of its Year 2000 problems based on facts and circumstances. The FAQs also provide additional guidance on the types of Year 2000 costs a company should consider in its discussion of Year 2000 risks.
In December 1998, the staff surveyed issuers' periodic reports for Year 2000 disclosures. The survey consisted of two parts. For the first part, the staff searched the EDGAR database for all quarterly and annual reports filed after August 4, 199857 that contained the phrase "Year 2000" or "Y2K". As a result, on December 28, 1998, the staff sent 973 letters to companies requesting that they provide an explanation for the absence of Year 2000 disclosure in their reports or to amend promptly their reports to include Year 2000 disclosure.
In the second part of the survey, the staff reviewed the filings of 349 companies that did provide some discussion of Year 2000 disclosure in their reports in order to gauge the effect of the interpretive release on Year 2000. In this part of the survey, they compared the Year 2000 disclosure included in a company's Form 10-K for the period ending December 31, 1997 to the same disclosure in its Form 10-Q for the period ended September 30, 1998. Of the 349 companies reviewed, 98 were in the utility industry, 102 were in the health care industry, 49 were in the transportation industry and 100 were in industries other than utility, health care or transportation. The number of companies surveyed in the utility, health care and transportation industries represented approximately 30% of all reporting companies in those industries.
Overall, the survey indicated that Year 2000 disclosure had significantly improved in the categories covered by the interpretive release and in every reviewed industry. The following table demonstrates some of the improvement.
|Areas of Disclosure Addressed in the Release||Dec. 31, 1997
|Sept. 30, 1998 |
|Information Technology Systems Remediation||76%||98%|
|Estimated Completion Dates for the Various Phases of the Remediation||6%||74%|
|Third Party Year 2000 Exposure||32%||87%|
|Worst Case Scenario Resulting From the Year 2000||0||68%|
|Estimated Future Remediation Costs||19%||60%|
|Non-Information Technology Remediation||18%||58%|
|Quantification of Historical Remediation Costs||7%||41%|
|Quantification of information Technology System Remediation||4%||34%|
|Quantification on Non-Information Technology System Remediation||0||17%|
Not all the news was good. Most importantly, the survey suggests that disclosure needs to be improved in a number of areas, including:
Companies also need to
The staff intends to monitor the Year 2000 disclosure made by companies as part of its ordinary course of business. The staff will monitor Year 2000 disclosure in registration statements and on-going Exchange Act reports filed with the staff and selected for review. In addition, in April 1999, the staff monitored Exchange Act filings of companies in selected industries focusing on the adequacy of Year 2000 disclosure. On April 30, 1999, the staff sent letters to the Chief Financial Officers of the monitored companies whose Year 2000 disclosure could, in the staff's opinion, be improved.
The staff also continues to assess whether investment companies are providing meaningful disclosure about Year 2000 issues. In particular, in reviewing investment company disclosure, the staff has looked for the presence and quality of Year 2000 disclosure in new registration statements and amendments to existing registration statements and certain other filings made by registrants.
The staff reviewed the Year 2000 disclosure by the 50 largest investment company groups. These groups have assets in excess of $4 trillion and represented more than 81% of investment company assets as of December 31, 1998. All 50 of these groups made Year 2000 disclosure to their shareholders; moreover, these groups all provided that disclosure in their fund prospectuses. In addition, the staff surveyed 11,290 filings made by registrants since July 1, 1998 and found that nearly 98% of these contained Year 2000 disclosure.
The Commission's interpretive release regarding Year 2000 disclosure by investment advisers, investment companies, and other market participants, undoubtedly contributed to this high level of Year 2000 disclosure. In addition, the staff continued its practice of issuing a Year 2000 comment to all registrants that filed new registration statements or amendments to existing registration statements without including any Year 2000 disclosure.
This chart presents Year 2000 disclosure contained in certain filings made by registrants between July 1, 1998 and May 1, 1999.
In conducting this year's review, the staff selected new registration statements and amendments (which contain the prospectuses used by investment companies) as well as their semi-annual and annual reports. These filings are the most significant disclosure documents investment companies send to their investors. Last year's report, however, distinguished between investment company and insurance product filings, and did not include semi-annual and annual reports.
|Number of Filings||Percentage|
|New Registration Statements||427||100%|
|Amendments, Semi-Annual and Annual Reports||10,863||98%|
Investment companies may make these disclosures either in their registration statements or in their shareholder reports. While all 50 of the largest investment company groups made Year 2000 disclosure in the prospectuses, the staff is aware of fund groups that have made Year 2000 disclosures in other shareholder materials as well as in their prospectuses and shareholder reports. For example, several fund groups are informing and educating their shareholders in special brochures or via the Internet. In fact, some of the shareholder reports, brochures, and websites go into greater detail about Year 2000 issues than do their corresponding prospectuses, especially insofar as discussing budgeted costs, project teams, and remediation time-frames.
In describing the effects Year 2000 disruptions might have, these 50 fund groups generally addressed the effects of potential disruptions. All of the fund groups disclosed potential effects of Year 2000 disruptions on each fund, virtually all disclosed the potential effects on service providers, and virtually all disclosed the potential effects on portfolio investments.
The staff's screening also indicated thatas noted in last year's reportmost investment companies' Year 2000 prospectus disclosure was quite generic in nature. Most indicated their reliance on assurances from external service providers in order to be Year 2000 compliant. Only a few disclosed budgeted costs. This is not surprising, since service providers generally incur these costs. Some of the investment companies, however, disclose cost information regarding the funds they sponsor on their respective websites or in other materials.
|Assets of 50 Groups as a Percentage of Total Assets Managed by Investment Companies||81.23%|
|Percentage With Year 2000 Disclosure||100.00%|
|Of Those Investment Companies With Year 2000 Disclosure:|
|Disclosure in Prospectus||100.00%|
|Disclosure of Effect on Fund||100.00%|
|Disclosure of Effect on Service Providers||92.00%|
|Disclosure of Effect on Portfolio Investments||90.00%|
|Disclosure of Reliance on Assurances From Service Providers||82.00%|
Typically, an investment company's Year 2000 disclosure acknowledges Year 2000 problems, states that the problems are being addressed and that they will be resolved, and that the fund cannot guarantee that its remediation efforts will prevent all problems. The general nature of investment company Year 2000 disclosure (and the lack of disclosure concerning costs to the fund) probably can be explained by the heavy reliance by investment companies on external service providers (such as advisers, administrators, non-bank transfer agents, brokers, and custodians) that have represented to the investment companies that they are or will be Year 2000 compliant. Thus, the Year 2000 compliance of most investment companies is largely in the hands of other entities whose readiness the funds are not in a position to verify.
However, the Commission last year adopted rules requiring advisers that advise investment companies to provide information on their Year 2000 readiness in Forms ADV-Y2K. These forms provide better and more complete information about fund readiness than has fund prospectus disclosure overall.59 Nevertheless, the staff will continue to scrutinize disclosure documents to make sure that investors are getting adequate Year 2000-related information and that funds are complying with the Commission's interpretive release. The staff continues to direct funds to improve their disclosures as needed. And, to the extent that the staff determines that there are firm-specific problems, it will make referrals to our inspections and examinations personnel.
The Commission regulates the financing activities and corporate structure of 19 registered public utility holding companies under the Public Utility Holding Company Act of 1935 (PUHCA). These 19 companies together represent approximately 30% of the U.S. gas and electric industries.60
The staff has raised the importance of Year 2000 readiness in meetings with the industry and during its inspections of registered public utility holding companies. In addition, in both 1998 and 1999, the staff reviewed the Year 2000 disclosures of all 19 registered holding companies. In general, the staff found that all of the companies addressed Year 2000 issues in their disclosure and most provided meaningful information to the investing public.
Accountants and auditors play an important role in ensuring the accuracy of public issuers' financial statements. Year 2000 issues can affect financial statements in a number of ways. For example, if the accounting systems used by an issuer are not Year 2000 compliant, the financial statements may be affected. In addition, the Year 2000 problem may impose significant costs on an issuer, including the cost to remediate its systems, and may also threaten the ability of the issuer to continue in business. Staff in the Commission's Office of the Chief Accountant (OCA) has continued to work with the accounting profession to make clear how accountants should fulfill this role.
In July 1998, the Auditing Standards Board issued an interpretation to provide guidance to auditors assessing issuers Year 2000 problems. This interpretation reiterates a long-standing requirement that auditors evaluate whether there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.61 The interpretation notes that the auditor does not have a responsibility to plan and perform procedures solely to identify conditions and events relating to the Year 2000 Issue. However, the auditor does have a responsibility to consider whether the results of procedures performed in planning, gathering evidential matter relative to the various audit objectives, and completing the audit identify conditions and events relating to the Year 2000 Issue.
In particular, the interpretation issued in July 1998 states that the Year 2000 Issue may cause conditions and events in any of the following categories.
Accountants also have a role to play in assessing the accuracy of Year 2000 filings made by broker-dealers and non-bank transfer agents. Last year, the American Institute of Certified Public Accountants (AICPA), working with the SEC staff, issued Statement of Position 98-8 (SOP), "Engagements to Perform Year 2000 Agreed-Upon Procedures Attestation Engagements Pursuant to Rule 17a-5 of the Securities Exchange Act of 1934, and Advisories No. 17-98 and No. 42-98 of the Commodity Futures Trading Commission."62 SOP 98-8 provides an independent public accountant a list of procedures to follow when preparing its report on an entity's process for addressing Year 2000 Problems. More specifically, these procedures require an independent public accountant to consider the broker-dealer's and non-bank transfer agent's plans for addressing Year 2000 problems, their efforts to repair affected computer systems, their tests of completed repairs, and their efforts to monitor the progress of the Year 2000 project. In addition, SOP 98-8 provides the independent public accountant with a reporting format to use when reporting the results of performing the specified procedures. Finally, SOP 98-8 provides the independent public accountant with guidance on how to perform the procedures and how to report any exceptions identified.
The agreed-upon procedures are not intended to provide assurance that an entity or the parties with which an entity does business will be Year 2000 ready. However, in adopting the new rules, the Commission stated its belief that the procedures and reporting format contained in SOP 98-8 and the performance of the procedures by an independent public accountant will: (i) provide valuable information on the existence and sufficiency of the entity's process for addressing Year 2000 problems; (ii) provide an independent verification of the accuracy of the information contained in the entity's reports to the Commission; (iii) aid the Commission in obtaining a more complete understanding of the industry's overall Year 2000 preparations; and (iv) identify firm-specific and industry-wide problems. The Commission also has provided that the public will have access to the independent public accountant's report.
Issuer disclosure and the reports prepared on broker-dealers thus do provide useful information to investors. In an effort to bring this information to the attention of investors, the staff included two questions on the Commission's website for investors to use in obtaining relevant information.
Responsibility for ensuring that Commission systems are Year 2000 compliant rests with the Executive Director and the agency's Associate Executive Director for Information Technology. The Office of Information Technology (OIT) began its Year 2000 work in July 1996. The staff is on-track with the goal of completing all Year 2000 preparations, including thorough testing, by August 31, 1999.
A dedicated Year 2000 Project Team is working to bring computer systems used in the Commission headquarters and regional and district offices, into Year 2000 compliance. The scope of the team's activities includes the Commission's enterprise-wide applications, personal computer applications, infrastructure platforms and devices, and the interfaces the staff uses to provide information to, or obtain information from, external partners such as OMB, Treasury, and the NASD.
The Year 2000 Project Team's activities include acquiring compliant hardware and software, assessing and renovating current applications, developing new applications to replace non-compliant systems, testing applications in the Commission's Year 2000 test lab, performing independent verification and validation of the results and retiring systems.
In approaching the Year 2000 problem, the staff has divided the Commission's internal systems into two categories. Enterprise applications are those systems that are used throughout the Commission. PC-based applications are those systems that are used in a single office or in a small number of offices.
The table below summarizes the progress the staff has made in bringing the Commission's enterprise applications into Year 2000 compliance.
|Total Number of Mission-Critical Applications||Number Compliant||Number To Be Replaced||Number To Be Repaired||Number To Be Retired|
During the last year, the staff devoted substantial time to the EDGAR modernization program in order to minimize the chances that this systemthe Commission's most criticalwill experience any Year 2000-related problems. In 1998, the Commission assessed the millions of lines of EDGAR code and found roughly 25 Year 2000-related problem areas. All of these areas were of minimal risk, but all have been corrected. The staff is confident that there are no remaining significant Year 2000 problems. Nevertheless, because of its importance to the securities industry and to the Commission, EDGAR is being independently tested for Year 2000 compliance in June 1999. In July we will set aside nearly three weeks for the filer community to test its ability to file using EDGARLink in a Year 2000 environment.
In addition to working on its enterprise systems, the staff is assessing, repairing, replacing and retiring a number of PC-based systems located throughout the Commission. The staff made compliant or decided to retire numerous PC applications:
|Total Mission-Critical Applications||Number Compliant||Pending Replaced||Pending Repair||Pending Retirement||Pending Assessment|
Progress on PC-based systems is rapid, and the staff expects to complete work on these systems by the end of June.
As part of its Year 2000 work, the staff identified 26 mission critical external partners and 3 non-mission critical external partners with whom data are exchanged.63 The staff is working with each partner to ensure the compliance of products (files, tapes, and other electronic data exchanges) that the SEC receives from or provides to these external partners.
|Type of Data Exchange||Number Compliant||Pending Replacement||PendingRepair||Pending Retirement|
|Received by the SEC (Input)||12||0||24||0|
|Provided to the Partners (Output from the SEC)||7||0||3||9|
For the 24 input products requiring repair, the staff obtained information from each external partner indicating their plans for ensuring the compliance of the products. Where a partner has no plans for remediation, or where the partner's timeframe for resolving its Year 2000 problem extends beyond August 1999, the staff's risk mitigation strategy is to insert a mechanism (e.g., a filter or "bridge") designed so that the data ultimately used by the Commission is in a Year 2000 compliant form.
Of special note is that, as of June 20, 1999, the SEC will no longer exchange data with three mission critical external partners due to the outsourcing of Commission payroll and personnel processing to the Department of Interior. The Commission is working with the Department of Interior to ensure required data exchanges are compliant when the processing is activated.
|Type of Data Exchange||Number Compliant||Pending Replacement||PendingRepair||Pending Retirement|
|Received by the SEC (Input)||1||0||0||0|
|Provided to the Partners (Output From the SEC)||0||0||1||1|
The Year 2000 Project Team is assessing, upgrading, and testing the Commission's hardware and software. This part of the staff's Year 2000 project included 489 software products and thousands of hardware products. Renovation activities are well underway and no major problems are foreseen. To date, the staff has repaired or replaced:
The most critical data communication equipment will be repaired by June 1999; workstations and laptops will be repaired and/or replaced by early July 1999; and file and print servers will be repaired by early August 1999. However, the staff noted that hardware and software manufacturers might change their compliance statements, based on newly discovered issues. Therefore, the staff is monitoring the status of all information technology infrastructure categories each month throughout 1999. As the status changes, the staff will immediately begin efforts to bring the product into compliance.
The Commission has three leased facilities in the metropolitan Washington, DC area: the headquarters on Judiciary Square, and the Operations Center and Annex in Alexandria, Virginia. The Commission also leases space for its regional and district offices in 11 cities. In each case, Commission staff is working closely with landlords to insure all critical building systems are Year 2000 compliant. In cases where building systems are not compliant, the staff is working with the landlord to expedite repairs or replacements. A facilities team is closely tracking progress and reports to management every two weeks.
The Commission has requested assurances from either the building owners or from specific service providers responsible for its headquarters and Operations Center facilities for the following systems, services or equipment:
|4)||Emergency Generator Power;|
|5)||Emergency Building Lighting;|
|6)||Environmental Systems (HVAC);|
|7)||Automated Door Locking/Entry/Exiting Systems;|
|8)||Emergency Annunciation Systems; and|
|9)||Emergency Fire Detection and Suppression Systems.|
Responses to date do not suggest there are any problems. Nonetheless, the staff continues to work with landlords to confirm by July 31, 1999 that all of the Commission's facilities are Year 2000 compliant. Nonetheless, as part of the Commission's contingency planning, the staff is developing responses to partial failures in buildings the Commission uses.
|Current Cost (IT)||$337,860||$2,231,329||$11,151,000||$850,000||$14,570,189|
|Current Cost (non-IT)||N/A||N/A||$375,000||$42,000||$417,000|
The FY 1999 non-IT cost includes modifications to the headquarters building, backup communications, and approximate overtime and holiday personnel costs.
Under the direction of the Executive Director, the staff is developing and coordinating a Commission-wide contingency plan for its internal business operations.
In collaboration with OIT, each Commission division and office has developed and is continuing to refine a contingency plan for its core functions. These plans consider the impact of a range of failures, including the unexpected, temporary loss of some or all mission critical systems, or a temporary, localized disruption of infrastructure or public utilities. Each division and office is preparing to carry on core functions in the event mission critical systems are lost, and the Commission is preparing to continue operations if there are temporary, localized disruptions.
Senior management meets regularly and is briefed on the status of individual contingency plans of each major division and office. Consolidation and coordination of these plans is now underway, with testing planned for mid-1999.
An important aspect of preparing for continuity in the foregoing areas is developing a plan for communications between senior level SEC staff and the regulated industry during the rollover period. In this regard, a significant aspect of the staff's contingency planning involves working with the securities industry, SROs, and the other regulators. The focus of this work is to develop and implement a communications and regulatory strategy that will facilitate the continued smooth functioning of the securities markets to the greatest extent possible during the Year 2000 transition. These plans are well underway and expected to be substantially completed during the second quarter of 1999.
As part of the contingency planning process the staff is addressing how to respond if EDGAR failed to function properly. Electronic filing after January 1, 2000 depends on the existence of two essential infrastructure elements: power and telecommunications. Temporary, localized disruptions on either the filer or Commission side can be dealt with by permitting filers to make their filings in paper. The filers would then be required to follow up with an electronic copy when the problem is resolved. The Commission staff is confident this system will function properly, but nevertheless is developing plans to accept paper filings in the event of a disruption.
As part of its commitment to investors, the Commission has provided advice and guidance to investors on the Year 2000 problem. The Commission has also made significant efforts to provide investors with information on how the firms they do business with are dealing with their Year 2000 problems. The SEC's efforts to reach out to investors on the Year 2000 issue include the following measures.
In 1998, the SEC's investor assistance specialists received over 56,000 complaints and inquiries. A database of complaint information tracks breaking trends, allowing the staff to identify problems and issues in the securities industry. The information gathered from investor inquiries helps direct SEC examination and enforcement resources to the areas of greatest need. In January 1998, the Office of Investor Education and Assistance (OIEA) began tracking complaints, inquiries, and comments relating specifically to the Year 2000 issue. As of May 20, 1999, the staff has received 171 inquiries concerning the Year 2000 issue.
To meet investors and listen to their concerns, the SEC began to organize Investors' Town Meetings throughout the country in 1994. To date, Chairman Levitt has spoken at 28 town meetings. These events attract between 600 and 1200 investors and result in media coverage that reaches millions more. At each meeting, the Chairman discusses questions investors should ask before they invest. Seminars follow the town meetings so investors can learn more about specific topics of interest. These meetings have included discussions on the effect of the Year 2000 problem on the securities industry.
The Financial Facts Tool Kit is a collection of brochures from the SEC and the SEC's governmental and industry partners. The tool kit was developed to encourage Americans to get the facts they need to save and invest wisely, and avoid costly mistakes. Thousands of individuals have received the tool kit. Beginning in August 1998, OIEA has included a flyer prepared by the NASD on the Year 2000 in that tool kit.
In January 1998, the SEC added a page to its website to provide a single place for the investor to find information on the Year 2000 problem.65 This page currently provides the following information.
In February 1999, SEC added a searchable database to its website that gives investors instant access to the Year 2000 readiness reports that most broker-dealers, non-bank transfer agents, and investment advisers, including advisers for mutual funds, have filed with the Commission.66 So far, the database includes more than 13,000 reports that describe the filers:
In only its first month of operation, the database received more than 104,000 hits.
The staff believes that the securities markets have made significant progress in resolving their Year 2000 problems during the past year. Organizations that participate in the markets are working diligently and spending considerable sums to bring each system that has any effect on investors or the markets into Year 2000 compliance. The firms and exchanges are rigorously testing these systems to verify that they are ready. Despite these preparations, the exchanges and many firms are developing detailed plans in the event of an unforeseen problem during and after the transition. In sum, the staff is confident in the ability of the securities industry to meet the transition without major disruptions. During the remainder of 1999 and into 2000, the staff will continue to work closely with the industry to minimize the effect of the Year 2000 problem on the nation's markets and investors.
Progress continues in remediating the Commission's internal systems. Each system is being thoroughly assessed for compliance and repaired or retired, as appropriate. The staff has also instituted a rigorous testing policy where each system or application is tested for compliance, notwithstanding certifications by vendors or developers. The staff believes the potential consequences to the investor and the industry from internal systems failures warrant independent testing and verification.
Finally, the staff and the industry continue to develop comprehensive contingency plans to effectively deal with any unanticipated problems. No matter how remote these failures may seem, prudence demands that the regulators and market participants have policy and procedures in place to protect the investor and to assure the integrity of the markets.
2 "Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies," July 29, 1998. Available on the Commission's website: http://www.sec.gov/news/extra/y2k/home2000.htm.
3 "Frequently Asked Questions About the Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies," November 9, 1998. Available on the Commission's Year 2000 page on its website: http://www.sec.gov/news/extra/y2k/home2000.htm.
4 On July 2, 1998, the SEC amended Rule 17a-5 and adopted Rule 17Ad-18 under the Securities Exchange Act of 1934 (Exchange Act) to require certain broker-dealers and all non-bank transfer agents to file reports describing their Year 2000 compliance efforts on forms BD-Y2K and TA-Y2K, respectively. The first reports were due August 31, 1998. The second and final reports were due April 30, 1999. See "Reports to be Made by Certain Brokers and Dealers (Final Rule)," July 2, 1998. Effective Date: August 12, 1998. [Release No. 34-40162]; and "Year 2000 Readiness Reports To Be Made by Certain Transfer Agents (Final Rule)," July 2, 1998. Effective Date: August 12, 1998. [Release No. 34-40163]. Available on the Commission's website: http://www.sec.gov/news/extra/y2k/home2000.htm A database of these reports is available to the public, and enables investors to assess the readiness any firm reporting. The database is on the Commission's website: http://www.sec.gov/news/y2k/y2kreps.htm.
7 "Operational Capability Requirements of Registered Broker-Dealers and non-bank transfer Agents and Year 2000 Compliance," March 8, 1999. Available on the Commission's website: http://www.sec.gov/rules/proposed/34-41142.txt.
8On October 1, 1998, the Commission adopted a rule under the Investment Advisers Act of 1940 to require most advisers to file reports on Form ADV-Y2K regarding their Year 2000 readiness. The first report was due by December 7, 1998. The same rule requires that an updated report be filed by June 7, 1999. A database of these reports is available to the public, and enables investors to assess the readiness of any firm reporting. The database is on the Commission's website: http://www.sec.gov/news/y2k/y2kreps.htm.
9 Generally, Commission-registered advisers that either have $25 million or more under management or act as advisers to registered investment companies must file the required reports.
10The Commission staff is discussing Year 2000-related issues with other representatives of the adviser and investment company communities. The staff expects this interaction to increase in the months ahead.
11 Although the staff does not expect the Year 2000 transition will bring crises to the securities markets or industry, contingency planning is vital to ensure any disruption or unexpected problem that does occur can be addressed in a timely and efficient manner.
12 "Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies," July 29, 1998. Available on the Commission's website: http://www.sec.gov/news/extra/y2k/home2000.htm.
14 A database of these reports is available to the public, and enables investors to assess the readiness any firm reporting. The database is on the Commission's website: http://www.sec.gov/news/y2k/y2kreps.htm.
15 This is a report prepared by the staff of the Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings or conclusions contained herein.
16 "Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public
Companies," July 29, 1998. Available on the Commission's website: http://www.sec.gov/news/extra/y2k/home2000.htm.
17 "Frequently Asked Questions About the Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies," November 9, 1998. Available on the Commission's website: http://www.sec.gov/news/extra/y2k/home2000.htm.
18 Since the last report to Congress, one clearing agency (the Participants Trust Corporation) allowed its registration to expire, reducing the number of registered clearing agencies from 15 to 14.
19 Commission Statement of Policy on Regulatory Moratorium to Facilitate the Year 2000 Conversion. August 27, 1998. [Release No. 33-7568]. Available on the Commission's website: http://www.sec.gov/news/extra/y2k/home2000.htm
20 "Operational Capability Requirements of Registered Broker-Dealers and non-bank transfer Agents and Year 2000 Compliance," March 8, 1999. Available on the Commission's website: http://www.sec.gov/rules/proposed/34-41142.txt 21
"Reports to be Made by Certain Brokers and Dealers," [Release No. 34-40608; File No. S7-7-98]; and "Year 2000 Readiness Reports to be Made by Certain Non-Bank Transfer Agents," [Release No. 34-40587; File No. S7-8-98] Both are available on the Commission's website: http://www.sec.gov/news/extra/y2k/home2000.htm.
22Initially, over 1,300 firms failed to meet the August 31, 1998 deadline. Compliance increased dramatically when the NASD and other SROs sent a written reminder to each of their delinquent firms that failure to file would result in enforcement action by the SRO or the SEC.
23 Some of the 6,139 broker-dealers that filed the first BD-Y2K report did not answer every question.
24 Question 7(b) of Form BD-Y2K: What is your progress on implementation of the steps you will take to address Year 2000 problems with your mission critical systems?
25 Question 7(c) of Form BD-Y2K: What is your progress on testing of your mission critical internal systems.?
26 Question 7(e) of Form BD-Y2K: What is your progress on point-to-point testing of your critical systems (including testing with issuers, broker-dealers, other financial institutions, customers, and vendors)?
27 Question 7(g) of Form BD-Y2K: What is your progress on implementation of tested software that addresses Year 2000 problems with your mission critical systems?
28 Question 9(c) of Form BD-Y2K: What is your progress in preparing a contingency plan? Although question 9(c) did not have a "100% complete" checkbox, in response to question 9(a) 29% of broker-dealers reported having a contingency plan, while leaving blank the answer to question 9(c).
29 The April 30, 1999 BD-Y2K reports selected for this report include the 27 largest U.S. broker-dealers in terms of total capital, and all broker-dealers having total capital in excess of $50 million and 50,000 customer accounts.
30 Although question 9(c) did not have a "100% complete" checkbox, in response to question 9(a) 26% of broker-dealers reported having a contingency plan, while leaving blank the answer to question 9(c).
31 Between August 31, 1998 and April 30, 1999, selected large firms made substantial progress in their Year 2000 preparations. In the August 31, 1998, BD-Y2K report, 5% of these large firms reported 100% implementation of steps to address Year 2000 problems; 0% reported 100% completion of internal testing; 0% reported 100% completion of point-to-point testing; 3% reported 100% completion of implementation of tested systems; and 22% reported having a Year 2000 contingency plan in place.
32 "Reports to be Made by Certain Brokers and Dealers (Final Rule)," July 2, 1998. Effective Date: August 12, 1998. [Release No. 34-40162]; and "Year 2000 Readiness Reports To Be Made by Certain non-bank transfer Agents (Final Rule)," July 2, 1998. Effective Date: August 12, 1998. [Release No. 34-40163]. Available on the Commission's website: http://www.sec.gov/news/extra/y2k/home2000.htm.
33 This registrant expected to complete its corrections by June 1999.
34 In addition, the NASD Year 2000 program office has conducted more than 3,000 reviews of member firms' Y2K preparations. Similarly, the NYSE has integrated its annual examination program, in which examiners conduct meetings with senior management to have the firms report on the status of their efforts to achieve Year 2000 preparedness, with the surveillance programs discussed above.
35 Some of the 529 non-bank transfer agents that filed the first TA-Y2K report failed to answer all the questions.
36B> Question 7(b) of Form TA-Y2K: What is your progress on implementation of the steps you will take to address Year 2000 problems with your mission critical systems.? Our review of Form TA-Y2K indicates that this question was widely interpreted as requesting the progress of remediation.
37B> Question 7(c) of Form TA-Y2K: What is your progress on testing of your mission critical internal systems?
38 Question 7(e) of Form TA-Y2K: What is your progress on point-to-point testing of your critical systems (including testing with issuers, broker-dealers, other financial institutions, customers, and vendors?
39 Question 7(g) of Form TA-Y2K: What is your progress on implementation of tested software that addresses Year 2000 problems with your mission critical systems?
40B> Question 9(c) of Form TA-Y2K: What is your progress in preparing a contingency plan? Although question 9(c) did not have a "100% complete" checkbox, 25% of non-bank transfer agents reported having a contingency plan while leaving blank the answer to question 9(c).
41 Commission records show an aggregate of 228,844,792 security holder accounts reported by all non-bank transfer agents, of which 3,984,352 (1.7%) are held by the 40 non-bank transfer agents referred for possible cause examination.
42The staff is still compiling the results of the second TA-Y2K report. Some of the non-bank transfer agents that filed the second TA-Y2K report failed to answer all questions.
43 The staff did not examine bank transfer agents pursuant to agreements with the Federal bank regulators that would exercise oversight in this area. The Exchange Act identifies the bank regulators as the Appropriate Regulatory Agencies for bank transfer agents. This agreement was reached to avoid duplicative reviews of bank transfer agents' Year 2000 programs. In addition, the SEC agreed with the Office of Thrift Supervision that they would examine 20 thrift transfer agents for which the SEC is otherwise the appropriate regulatory agency and report the results of the examination to the SEC.
44 This staff provided this guidance to the industry in "Year 2000 Readiness Reports To Be Made by Non-Bank Transfer Agents," Release No. 34-39726, at n. 8 (March 5, 1998).
45 These reviews, coupled with on-site visits of non-bank transfer agents conducted since 1996, represent non-bank transfer agents serving approximately 90% of all holders of record.
46 The latest date by which these registrants expected to complete Year 2000 corrections was June 30, 1999.
47 This data comes from the Investment Company Institute's "Current Statistical Releases, Trends in Mutual Fund Investing," March 1999, available at http://www.ici.org/facts_figures/trends_0399.html.
49 A small number of registrants had correction dates as late as December 31, 1999.
50 See "Year 2000: Financial Institution and Regulatory Efforts to Address International Risks," GAO/GGD-99-62, April, 1999.
51 Available on the Joint Year 2000 Council website: http://www.bis.org/ongoing/index.htm.
52 The SIA received responses to its survey between February and May 1998, and the overall response rate was 12%. Although the low response rate does limit the usefulness of the data obtained, the survey responses indicated that 86% of the respondents planned to have their systems converted and ready to test by the end of 1998; 95% had completed initial inventories of major systems, platforms, and languages to determine their exposure to the Year 2000 problem; 69% had assessed and developed detailed plans; 38% were in the process of renovating systems and equipment; 18% were validating their systems through testing; and 22% had implemented tested, compliant systems. The majority of the respondents had completed less than 50% of their Year 2000 plan project, but only 37% of the respondents had developed a contingency plan.
53 The countries that posted assessments of their financial markets' Year 2000 readiness are: Australia, Brazil, Canada, the Czech Republic, Denmark, France, Germany, Hong Kong, Japan, Mexico, the Netherlands, Singapore, Switzerland, the United Kingdom, and the U.S.
54 "Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies," July 29, 1998. Available on the Commission's website: http://www.sec.gov/news/extra/y2k/home2000.htm.
55 "Frequently Asked Questions About the Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies," November 9, 1998. Available on the Commission's website: http://www.sec.gov/news/extra/y2k/home2000.htm.
56 Additional guidance on accounting and auditing issues on the Year 2000 issue is included in The Year 2000 Issue - Current Accounting and Auditing Guidance, published by the AICPA on October 31, 1997, and amended October 19, 1998. This is on the AICPA website: http://www.aicpa.org/members/y2000/intro.htm.
57 The Commission's interpretive release on Year 2000 issues was effective on August 4, 1998.
59 A database of these reports is available to the public, and enables investors to assess the readiness any firm reporting. The database is on the Commission's website: http://www.sec.gov/news/y2k/y2kreps.htm
60 Under PUHCA, the Commission is responsible for overseeing the organization, financial structure, securities issuances, acquisitions and affiliated transactions of public utility holding companies and their subsidiaries. Other federal and state agencies have the technical expertise to evaluate the effect of the Year 2000 problem on the reliability of utility operations. For example, the Department of Energy has asked the North American Electric Reliability Council to help prepare the electric supply and delivery systems of North America for transition to the Year 2000. The staff's inquiry regarding Year 2000 issues has focused largely on the public disclosures of registered holding companies. The staff has not made an independent assessment of the readiness of public utility holding companies for the Year 2000.
62 Available on the AICPA website: http://www.aicpa.org
63 EDGAR filing [EDGARLink] is counted once despite the fact that as many as 40,000 different entities may use the system to file in a typical year.
64 On May 28, 1999, the staff requested an additional $2.1 million in supplemental Year 2000 funds from OMB.
66 A database of these reports is available to the public, and enables investors to assess the readiness any firm reporting. The database is on the Commission's website: http://www.sec.gov/news/y2k/y2kreps.htm.
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