SEC Broadens Guidance For Year 2000 Software

SEC Broadens Guidance For Year 2000 Software

By David M. Nadler
Contributing Writer

The Securities and Exchange Commission has expanded earlier guidance about the obligation of publicly held companies and investment advisers to disclose anticipated costs, problems and uncertainties associated with year 2000 software conversion efforts.

By law, publicly held corporations are required to disclose any information that materially impacts the value of their stock or that may affect the accuracy of reported financial information.

The revised bulletin issued on Jan. 12 emphasizes the obligation of publicly held companies to continually review the need for disclosures related to corporate plans to identify and correct year 2000 problems. It advises that disclosure of anticipated remediation costs, as well as possible consequences of an untimely resolution of year 2000 issues, may be required by SEC registration statements or to prevent other statements from being misleading.

The SEC recommends that corporations reveal in their registration statements and periodic filings (quarterly 10-Qs and annual 10-Ks) a general outline of their year 2000 remediation plan, a timetable for implementation of this plan and a best estimate of the cost of proposed fixes. The SEC also urges corporations to describe anticipated problems and the impact of such problems should attempted corrections fail.

The SEC now recommends disclosure of material year 2000 events in the Management's Discussion and Analysis of Financial Condition and Results of Operations. Appropriate disclosure also should be made in the risk factor section of the prospectus and periodic reports.

The SEC bulletin advises that failure to disclose year 2000 related costs and problems could result in "material adverse consequences."

As the year 2000 problem recently has been the subject of much public discussion, potential problems in this area are legally foreseeable. Any failure on the part of officers and directors to identify and disclose year 2000 risks may therefore breach the duties of care and loyalty owed to the corporation and its shareholders.

In addition, failure to disclose material information could result in a shareholder's deri- vative suit that alleges that the firm's prospectus and/or SEC filings were misleading.

The SEC bulletin makes clear that year 2000 disclosure decisions are not a one-time proposition. Rather, they must be made on a continual basis.

Companies should thoroughly examine their infrastructure and coordinate with customers, creditors, vendors and others with whom they regularly transact business to assess their collective year 2000 readiness. Further, companies must consider the impact of any lack of preparedness on the part of a third party on its own systems and operations.

Investment companies and advisers also have been cautioned that they have the obligation to disclose to clients and shareholders the operational and financial obstacles presented by the year 2000. Much like publicly held corporations, investment companies are subject to disclosure requirements in registration statements and other public filings. Failure to properly disclose all material information may be a breach of the fiduciary obligations of the investment company and its advisers.

The SEC is not the only voice urging greater public disclosure of year 2000 preparedness. The American Institute of Certified Public Accountants set forth its "Principles Governing Year 2000 Disclosure" in a December 1997 letter to the SEC.

The letter emphasizes the importance of full disclosure by companies of the scope and magnitude of their year 2000 problems, proposed remedial actions and potential obstacles to the success of the remediation plans. The AICPA recommends disclosure in connection with all securities issuance transactions and all quarterly reports.

Also, the U.S. Senate is considering legislation that would require publicly held companies to make a series of disclosures concerning their year 2000 status with each initial offering statement and each quarterly report filed with the SEC.

Even absent mandatory legislation, a safe course of action for corporate officers and directors and investment advisers is to identify all potential year 2000 problems and establish a thorough plan of corrective action. They should assess the cost of implementing their plan, and disclose the financial and operational consequences of year 2000 compliance.

The possible consequences of untimely or incomplete correction, and the costs that may arise as a result, may also need to be divulged. The SEC has made it clear that while year 2000 problems and their consequences may be difficult to predict, the failure to identify potential problems could cause far greater difficulties for publicly held companies and their officers and directors.

David M. Nadler is a partner in the law firm of Dickstein Shapiro Morin & Oshinsky LLP and chairman of the firm's Year 2000 Practice Group. He may be contacted at

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