This test has been prepared in order to raise awareness regarding issues that revolve around the millennium bug problem. Is your company ready to face the next century and how will you protect yourself and your company from the impending Year 2000 problem?
1) Do all business functions within your organization have an understanding of the Year 2000 problem? While this may seem basic, it is important to assure that everyone is educated on this problem, because virtually every operation will be affected.
2) Have you collected an inventory of potential Year 2000 problems within your computer systems that could effect your business operations?
3) In the event that you have pinpointed a problem, are you currently working on fixing the problem? It is important that you address the problem soon so that your systems can be fixed and tested. Waiting until December 1, 1999 is not an option.
4) Have you confirmed whether your mission critical suppliers and outside business partners are Year 2000 compliant? Even if your systems are compliant, your business operations will be at risk if your suppliers cannot deliver the services that help your company stay in operation.
5) Have you reviewed and assessed your computer contracts? Do your current maintenance contracts cover Year 2000 remediation? Have your systems been warranted to operate? Are you incorporating Year 2000 clauses into all new agreements?
6) Have you assessed whether your company is responsible for disclosing information to shareholders, government agencies or other entities regarding potential Year 2000 problems? SEC guidance is scant on this issue.
7) Have your officers and directors been briefed on the Year 2000 issue? It is important to limit the potential liability that these individuals could incur due to the problem.
8) Have you considered exposure to litigation that could arise due to the Year 2000 problem? A proactive litigation management plan may separate companies that survive from those which do not.
9) Have you reviewed your software copyright and intellectual property agreements regarding your right to modify code? In some cases these changes could void your warranties.
10) Have you reviewed Year 2000 related accounting issues? Depending on how you structure your Year 2000 remediation, you may be able to capitalize certain Year 2000 costs.
If your answer to any of these questions is "No", your organization likely needs immediate assistance. For additional information regarding litigation management and avoidance, contact any HRB working group member.
Gartner Reports Little Year 2000 Progress
Our ongoing effort by this newsletter is to provide not only a legal perspective on the Year 2000 problem but also to alert our readers to the lack of progress being made in various industry sectors. A major announcement by the Gartner Group in this regard continues to confirm our belief that the Year 2000 problem is worsening rather than improving. Newsbytes Inc. reports the results of the most recent Gartner statistics in an October 3 report. Gartner reports that though Year 2000 programs have doubled in the past year, an alarming 40% have not progressed past the initial awareness and planning stages. It reports that only 35% of companies are where they should be on the remediation life cycle.
Retailers Behind the Curve on Year 2000 Fix
The Calgary Herald reported on October 9 that a survey by the National Retail Federation revealed that 87% of mid-sized retailers in the U.S. are using financial, credit and merchandising software that may not work at the turn of the Century. Less than 25% of these retailers have corrected their software. The survey polled 17 suppliers to 2,200 mid-sized retailers or retailers that had annual revenue of $300 million to $2 billion.
Governor Wilson of California Issues Executive Order on Year 2000
On October 10, 1997 California State Governor Pete Wilson signed Executive Order 1-163-97 which gives state agencies until December 31, 1998 to resolve the state's Year 2000 problem. Among other things, the order requires that the State purchase only Year 2000 compliant hardware and software, that the State define Year 2000 compliance standards and that each state agency regularly report on its Year 2000 problems. Governor Wilson also directed that the State "address legal issues which may directly or indirectly affect state services." Copies of the order can be obtained from the Department of Information Technology's home page: Click Contact Link
New York Stock Exchange Seeks Delay in Decimal Switch Due to Year 2000 Problem
The AP reported on October 20 that SEC Chairman Arthur Levitt Jr. and the head of the National Association of Securities Dealers, Frank Zarb, have joined to ask lawmakers to delay implementation of the switch from fractions to decimals in the reporting of stock prices. The House Commerce Committee was advised that the switch to a decimal based trading system could interfere with the street's Year 2000 remediation program.
Japan Continues to Lag in Year 2000 Efforts
CMP Media's TechWire reported on October 20 that Gartner Group's Asia Pacific services group observes that Japanese corporations are lagging in their Year 2000 efforts. Bob Haywood, vice president of Asia Pacific services, stated that "there seems to be a lack of awareness in Japan and of people actually fixing the Year 2000 problem. . . [W]hat's quite frightening is that the problem is probably bigger here in Japan than in other countries" due to Japan's heavy reliance on legacy mainframe applications. The Kyodo News Service reports that nearly one half of Japanese banks are not adequately prepared for the Year 2000 problem. The Federation of Bankers Associations of Japan report that only 51.7% of banks have completed rebuilding their systems.
Australia Year 2000 Effort Slack
AAAP Information Service Pty. Ltd reported on October 22 that a survey conducted by the West Australian Department of Commerce and Trade found that almost one half of those questioned did not know what the Year 2000 problem was. Seventy two per cent of respondents had taken no action against the problem. Less than 30 per cent had done anything at all. The head of the Commerce and Trade Ministry's task force, Bruce Robbins, stated that "there's almost a total lack of understanding about the severity of the problem; businesses will fail if they don't act . . . "
Midland Bank Study Reports Majority of Small Businesses at Risk
M2 Presswire reported on October 22 the results of a Midland Bank survey on the impact of the Year 2000 problem. It found that while 66% of all business in the UK have a good awareness of the issue and 61% believe that the issue could have a serious impact on them, 70% of them have made little or no budget provision for the problem, 64% have had little or no contact with their suppliers and 55% have no inventory or action plan. The survey found that London area businesses are less prepared that business in other regions of the country.
Basle Committee on Bank Supervision Issues Its Year 2000 Report
The Basle Committee on Bank Supervision is a committee of banking supervisory authorities which was established by the central bank governors of the Group of Ten Countries in 1975. It consists of representatives from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Sweden, Switzerland, United Kingdom and the United States. Its September report "The Year 2000: A Challenge for Financial Institutions and Bank Supervisors" puts the Year 2000 problem in perspective from an international banking point of view.
"Banks rely heavily on automation to manage information. If automated applications failed to work properly, it would be difficult if not impossible to conduct business. While the Year 2000 problem is often seen as a technical issue, it is much more than a technical one because of the implications that not dealing with it properly could have on each and every business line within the bank. . . .
"The Year 2000 issue is potentially the biggest challenge ever faced by the financial industry. Every automated system including equipment with computer chips embedded inside is potentially at risk and must be analyzed and renovated or replaced if needed. Unlike most automation projects that can be staggered as to schedule and delayed if problems are encountered, all critical renovations must be addressed at once with no possibility for extending roll out deadlines. . . . Institutions that are not already addressing the Year 2000 date change as a strategic priority need to focus on this challenge immediately.
Senate Testimony Confirms Litigation Risks
On October 22, the Senate Banking Committee under the leadership of Senator Robert Bennett held hearings on the litigation impact of the Year 2000 problem. Testimony from attorneys Jeff Jinnet of LeBouef Consulting and Greg Cirillo of Williams, Mullen, Christian & Dobbins outlined the expected litigation wave. Robert B. Austrian, Senior Software Analyst at Nationsbanc Montgomery Securities also provided useful insight. His testimony highlighted those industries that he identified as most vulnerable to litigation.
"We believe that nearly all sectors of the business community are vulnerable to the Year 2000 problem. Some are more vulnerable than others, including those with the most date-intensive applications. These include banking, investments, insurance, and manufacturing industries, the later more a result of their highly computer-dependent, "just-in-time" inventory practices than of a high incidence of dates per se.
In December, 1996, International Data Corporation surveyed 500 executives of medium and large companies spanning six industries including banking, insurance, investing, manufacturing, utilities and communications. Executives in the banking, insurance and investing industries stated, most frequently that the possibility of legal liabilities exited in their industries; 55%, 43% and 37%, respectively, responded "yes" to "possibility of legal liabilities arising from Y2K problems?". In the survey, the following sources of legal challenge were named by the percentages of executives shown (more than one answer allowed):
Customers 62% Regulators 32% Stockholders/Policyholders 21% Suppliers 3% Other/Don't Know 18%
Although some industries seem more likely to experience legal liability than others, we strongly believe that all industries are affected by the problem and subject to litigation risk. . . ."
Yardeni Predits Y2K Recession
Dr. Edward Yardeni, the chief economist of Deutsche Morgan Grenfell predicts that "there is at least a 30% probability of at least a mild recession in 2000" in his July 14,1997 report "New Era Recession? Deflation, Irrational Exuberance, & Y2K" While predicting a significant rise the Dow by the Year 2000, he notes "that level could be followed by a significant drop in stock prices in the US and in other stock markets around the world." Dr. Yardeni's provocative Year 2000 reports can be found at Click Contact Link
SEC Staff Legal Bulletin Gives Guidance on Year 2000 Reporting
As previously reported in the August edition of the Millennium Bug Liability Newsletter, the SEC was scheduled to give guidance by way of a staff legal bulletin regarding guidance on reporting Year 2000 exposures. On October 8, the Divisions of Corporation Finance and Investment Management issued Staff Legal Bulletin No. 5 (CF/IM). A staff legal bulletin represents the staff's views. It is not a rule, regulation or statement of the SEC and the SEC neither approves nor disapproves its content.
Because of its significance, we quote liberally from the bulletin.
"I. The Year 2000 Issue
Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The year 2000 issue affects virtually all companies and organizations.
II. Disclosure by Public Companies Regarding the Year 2000 Issue
Many companies must undertake major projects to address the Year 2000 issue. Each company's potential costs and uncertainties will depend on a number of factors, including its software and hardware and the nature of its industry. Companies also must coordinate with other entities with which they electronically interact, both domestically and globally, including suppliers, customers, creditors, borrowers, and financial service organizations. If a company does not successfully address its Year 2000 issues, it may face material adverse consequences. Companies should review, on an ongoing basis, whether they need to disclose anticipated costs, problems and uncertainties associated with Year 2000 consequences particularly in their filings with the Commission. Public companies may have to disclose this information in Commission filings because:
- the form or report may require the disclosure, or
- in addition to the information that the company is specifically required to disclose, the disclosure rules require disclosure of any additional material information necessary to make the required disclosure not misleading.
The following is a discussion of certain requirements.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Companies should include disclosure in the "Management's Discussion and Analysis of Financial Condition and Results of Operations if:
- the cost of addressing the Year 2000 issue is a material event or uncertainty that would cause reported financial information not to be necessarily indicative of future operating results or financial condition, or
- the costs or the consequences of incomplete or untimely resolution of their Year 2000 issue represent a known material event or uncertainty that it is reasonably likely to affect their future financial results, or cause their reported financial information not to be necessarily indicative of future operating results or future financial condition.
- Description of Business
If Year 2000 issues materially affect a company's products, services, or competitive conditions, companies may need to disclose this in their "Description of Business." In determining whether to include disclosure, companies should consider the effects of the Year 2000 issue on each of their reportable industry segments.
Form 8-K
A company's Year 2000 costs or consequences may reach a level of importance that prompts it to consider filing a Form 8-K. At their option, companies would file these reports under Item 5 of Form 8-K. In considering whether to file a Form 8-K, companies should be particularly mindful of the accuracy and completeness of information in registration statements filed under the Securities Act which incorporate by reference Exchange Act reports, including Form 8-K's.
Accounting Considerations
The Emerging Issues Task Force considered the issue of how to properly reflect the costs of modifying computer software for Year 2000 projects in the financial statements. In July 1996, the EITF concluded that these costs should be charged to expense as they are incurred.
III. Disclosure by Investment Companies and Investment Advisers Regarding the Year 2000 Issue
Year 2000 Issue
Under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, investment advisers and investment companies may be required to make appropriate disclosure to clients and shareholders if operational or financial obstacles are presented by the Year 2000 issue. Disclosure of the Year 2000 issue is necessary if it is materially misleading to shareholders to omit the information.
The Investment Company Act provides that it is unlawful for investment companies to mit from registrations statements and other public filings "any fact necessary in order to prevent the statements made therein, in light of the circumstances under which they were made, from being materially misleading." Open-end investment companies ("mutual funds) are required by Item 5(b) of Form N-1A to describe in their registration statements the experience of their investment advisers and the services that the advisers provide. In response to this item, investment companies may need to disclose the effect that the Year 2000 issue would have on their advisers' ability to provide the services described in their registration statements.
The anti-fraud provisions of the Investment Advisers Act generally impose on investment advisers an affirmative duty, consistent with their fiduciary obligations, to disclose to clients or prospective clients, all material facts. In addition, investment advisers are required to disclose to any client or prospective client all material facts about "[a] financial condition of the adviser that is reasonably likely to impair the ability of the adviser to meet contractual commitments to clients, if the adviser has discretionary authority (express or implied) custody over such client 's funds or securities. . ." Therefore, if the Year 2000 issue affects the adviser in a way that would be material to clients or presents a material threat to an investment adviser's financial ability to satisfy its obligations under the advisory agreements, the adviser would be required to disclose such material facts to its clients, including any investment company clients, and prospective clients."
A full copy of the Staff Legal Bulletin can be found at Click Contact Link
Year 2000 Conferences
Year 2000 Conference & Expo
November 17-19, 1997 Boston
December 3-5, 1997 Amsterdam
To receive more information or register for this conference and receive $100 off the conference price, complete the survey that is located at Click Contact Link
Year 2000 Computer Crisis: The Litigation Summit
November 6-7, 1997 The Clift Hotel, San Francisco
January 22-23, 1998 Dallas, Texas
Presented by Fulcrum Information Systems. To receive more information call 800-869-4302.
DCI Year 2000 Issues & Answers Conference
December 9-11, 1997 Chicago
Presented by Digital Consulting Institute. To receive more information, refer to Click Contact Link
Performing an Audit of the Year 2000 Project Two Day Technical Audit Seminar for Auditors & Control Professionals
February 23-24, 1998 Cancun, Mexico
March 23-24, 1998 Marina Del Rey, CA
April 27-28, 1998 Washington, D.C.
June 8-9, 1998 St. Louis, MO
July 20-21, 1998 Minneapolis, MN
August 17-18, 1998 Denver, CO
Presented by Audit Serve, Inc. For more information, refer to Click Contact Link
Year 2000 TIC (Testing, Implementation, Certification) & Beyond Two Day Technical Seminar for Y2K Date Conversion & Project Office Professionals
March 26-27, 1998 Marina Del Rey, CA
April 30-May 1, 1998 Washington, D.C.
July 23-24, 1998 Minneapolis, MN
Presented by Audit Serve, Inc. For more information, refer to Click Contact Link
Professional Notes
Speaking Engagements
Vito C. Peraino is scheduled to speak at the following speaking engagements:
International Municipal Lawyers Association
November 17, 1997 Phoenix, Arizona
Practising Law Institute Legal Conference
February 9, 1998 New York
National Professional Communication Co., Inc. (NPCC)
February 2, 1998 Orlando, Florida
Vito C. Peraino will co-chair and Deborah A. Pitts will speak at:
Fulcrum's Year 2000 Computer Crisis: the Litigation Summit November 6-7, 1997 San Francisco
Hot Internet Links
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Hancock Rothert & Bunshoft LLP Website. Visit our website and learn more about our firm.
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This is the top technical/vendor site.
This site contains information on current events and Year 2000 topics.
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Checkout ITAA's Year 2000 Certification Program.
ITAA is an industry trade association that is focusing on the Year 2000 problem.
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The site focuses on investment opportunities.
You can also find stock information on the Year 2000 Information Center Stock Index at Click Contact Link
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}This site focuses on compliance standards for the Year 2000 problem.
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California State Government Year 2000 site.
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This site provides information on other Year 2000 links.
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This site provides useful information on the PC BIOS problem.
Projected Year 2000 Problem Costs
This partial list is intended to provide an updated tally of published Year 2000 budgets. If you are aware of a published budget, please e-mail Cathy Williams at Click Contact Link
BankBoston $50 M The American Banker 9/25/97
Bank Leumi, Israel $13M PR Newswire 8/25/97
Experian $25M Newsbytes 9/24/97
Federal Government $100B The San Francisco Chronicle 9/16/97
Jefferson County, MO $500K St. Louis Post-Dispatch 9/18/97
Lake County, IL $4M Chicago Tribune 10/9/97
Los Angeles Unified School District $30M Los Angeles Time 9/22/97
Newspaper Industrys $500M Editor & Publisher Magazine 8/23/97
Picker International Inc. $31M Crain's Cleveland Business 10/6/97
State of California $187M Los Angeles Times 9/22/97
State of Maryland $100M The Baltimore Sun 9/1/97
State of West Virginia $50M The Charleston Gazette 9/5/97
Telecom $87M The Press 9/16/97
Tribune Co. $7M Editor & Publisher Magazine 8/23/97
Hancock Rothert & Bunshoft has formed a Year 2000 Team to assist companies with related legal problems. If you would like more information on Hancock's Year 2000 Team, or on the firm in general, please contact: Vito C. Peraino on Tel: 213-623-7777 or E-mail: Click Contact Link or visit the Hancock Rothert & Bunshoft website at Click Contact Link
Visit the Year 2000 website at Click Contact Link
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.