[Federal Register Volume 63, Number 195 (Thursday, October 8, 1998)]
[Rules and Regulations]
[Pages 54308-54330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26863]
[[Page 54307]]
_______________________________________________________________________
Part IV
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Parts 275 and 279
Investment Adviser Year 2000 Reports; Final Rule
Federal Register / Vol. 63, No. 195 / Thursday, October 8, 1998 /
Rules and Regulations
[[Page 54308]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-1769; IC-23476; File No. S7-20-98]
RIN 3235-AH45
Investment Adviser Year 2000 Reports
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Commission is adopting a new rule and form under the
Investment Advisers Act of 1940 that requires most registered
investment advisers to file with the Commission reports regarding their
plans for addressing the Year 2000 computer problem. The reports will
provide the Commission and investors with information regarding
advisers' plans to address the Year 2000 problem.
EFFECTIVE DATE: The rule and form will become effective November 13,
1998. See section III.A for filing dates.
FOR FURTHER INFORMATION CONTACT: Carolyn-Gail Gilheany, Senior Counsel,
or Arthur B. Laby, Special Counsel, at (202) 942-0716, Task Force on
Investment Adviser Regulation, Division of Investment Management,
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop
5-6, Washington, D.C. 20549. The Commission has placed a list of
frequently asked questions and answers about Form ADV-Y2K on the
Commission's Internet web site. The list is located at http://
www.sec.gov/rules/othern/advfaq.htm. The Commission staff will update
these questions and answers from time to time. The Commission urges
interested persons with access to the Internet to review these
questions and answers before contacting Commission staff.
SUPPLEMENTARY INFORMATION: The Commission today is adopting rule 204-5
(17 CFR 275.204-5) and Form ADV-Y2K (17 CFR 279.9) under the Investment
Advisers Act of 1940 (15 U.S.C. 80b) (``Advisers Act'').
I. Executive Summary
The Commission is conducting a review of U.S. public companies and
the U.S. securities industry to examine how they will address the Year
2000 computer problem.\1\ As part of this initiative, we recently
adopted rule changes to require certain broker-dealers and transfer
agents to file reports with the Commission on Year 2000 readiness.\2\
Today the Commission is adopting a new rule and form that requires most
investment advisers registered with the Commission under the Advisers
Act to file reports on their Year 2000 readiness. The reports will
permit us to better evaluate the preparedness of advisers for the Year
2000 problem, identify the advisers that pose a significant risk to
their clients and shareholders, and evaluate the adequacy of disclosure
made by advisers regarding the Year 2000 problem. This rule is the most
recent in a series of actions we have taken in an effort to assure that
the securities industry is prepared for the computer challenges
presented by the Year 2000 problem.
---------------------------------------------------------------------------
\1\ On January 1, 2000, certain computer systems may function
erroneously if modifications have not been made, because the systems
may read the date 01/01/00 as being January 1, 1900, or another
incorrect date.
\2\ Reports to be Made by Certain Brokers and Dealers, Exchange
Act Release No. 40162 (July 2, 1998) [63 FR 37668 (July 13, 1998)];
Year 2000 Readiness Reports To Be Made by Certain Transfer Agents,
Exchange Act Release No. 40163 (July 2, 1998) [63 FR 37688 (July 13,
1998)]. Under these rules, broker-dealers are required to file Form
BD-Y2K; transfer agents are required to file Form TA-Y2K.
---------------------------------------------------------------------------
II. Background
Investment advisers (``advisers'') are responsible for managing
approximately $15 trillion in assets, including over $5 trillion in
mutual funds.\3\ Advisers manage these assets by using both internal
computer systems and external systems that connect them with the
markets, service providers and clients. The failure of advisers'
computer systems could threaten their ability to manage client assets,
communicate information to clients and comply with the federal
securities laws.\4\ In the case of investment companies, a breakdown in
their systems could interfere with the day-to-day management of fund
portfolios, delay shareholder transactions and compromise recordkeeping
and other compliance systems.
---------------------------------------------------------------------------
\3\See The Investment Company Institute, Current Statistical
Releases, Trends in Mutual Fund Investing, April 1998, available at
http://www.ici.org/facts__figures/trends__0298html>.
\4\See Tracey Longo, The Millennium Time Bomb, 28 Financial
Planning 180 (Sept. 1998).
---------------------------------------------------------------------------
The Commission has taken several measures to encourage advisers and
funds to timely address the challenges posed by the year 2000 problem.
Since 1996, our examiners have raised year 2000 concerns during adviser
and investment company examinations, and recently our staff has begun a
series of examinations that focus on plans to address the year 2000
problem. Last year, Chairman Levitt sent a letter to all registered
advisers urging them to prepare for the year 2000 problem,\5\ and in
July 1998, we published an interpretive release to provide guidance on
the disclosure obligations of advisers, funds and others.\6\ Last
month, we announced a moratorium on the implementation of new SEC rules
that require major reprogramming of systems by, among others,
investment advisers and funds.\7\ The moratorium is designed to
facilitate and encourage securities industry participants to allocate
sufficient resources to remediation of the year 2000 problem.
---------------------------------------------------------------------------
\5\ Letter from Chairman Levitt, dated November 13, 1997,
available at http://www.sec.gov/news/press/97-102.txt>.
\6\ Statement of the Commission Regarding Disclosure of year
2000 Issues and Consequences by Public Companies, Investment
Advisers, Investment Companies, and Municipal Securities Issuers,
Securities Act Release No. 7558 (July 29, 1998) [63 FR 41394 (Aug.
4, 1998)] (Statement on year 2000 Disclosure).
\7\ Commission Statement of Policy on Regulatory Moratorium to
Facilitate the year 2000 Conversion, Investment Advisers Act Release
No. 1949 (Aug. 27, 1998) [63 FR 47051 (Sept. 3, 1998)].
---------------------------------------------------------------------------
On June 30, 1998, the Commission issued a release proposing rule
204-5 (``Proposing Release'') that would require most advisers
registered with the Commission to submit a form, Form ADV-Y2K, on their
preparedness for the year 2000 problem.\8\ In response to the proposal,
we received 24 comment letters from professional and trade
organizations and investment advisers. Nearly all of the commenters
supported the proposal, which we are adopting largely as proposed.
---------------------------------------------------------------------------
\8\ Investment Adviser year 2000 Reports, Investment Advisers
Act Release No. 1728 (June 30, 1998) [63 FR 36632 (July 7, 1998)].
---------------------------------------------------------------------------
III. Discussion
A. Rule 204-5
New rule 204-5 requires each investment adviser that is registered
with the Commission and (i) has at least $25 million of assets under
management,\9\ or (ii) is an adviser to an investment company
registered under the Investment Company Act of 1940,\10\ to file Form
ADV-Y2K with the Commission.\11\ The form must be filed
[[Page 54309]]
with the Commission no later than December 7, 1998, and an updated form
must be filed no later than June 7, 1999. Each filing must reflect the
adviser's preparedness for the year 2000 problem no earlier than 15
days before the respective filing deadline.
---------------------------------------------------------------------------
\9\ The amount of assets under management for purposes of the
rule is the amount reported on Schedule I of the adviser's most
recently filed Form ADV (17 CFR 279.1), or the most recent amendment
to its Form ADV.
\10\ 15 U.S.C. 80a.
\11\ Generally only advisers that have at least $25 million of
assets under management or that advise a registered investment
company can register with the Commission. See section 203A(b) of the
Advisers Act (15 U.S.C. 80b-3a(b)). Advisers in the states that do
not regulate investment advisers, advisers with principal places of
business in foreign countries, and other advisers exempt by SEC rule
from the $25 million assets under management limitation, however,
may register with the Commission. See rule 203A-2 under the Advisers
Act (17 CFR 275.203A-2).
---------------------------------------------------------------------------
Shortly after publication of this release, we will mail a copy of
Form ADV-Y2K to each registered adviser. The form mailed to each
adviser will contain certain pre-printed information, such as the
adviser's name and registration number. The form (without the pre-
printed information) also is available on the Commission's web site,
and advisers may down-load the form and complete it on their computers,
print the completed form, and return it to the Commission.\12\ The
Commission asks advisers to return the Form ADV-Y2K they receive in the
mail containing the pre-printed information or the version down-loaded
from the web-site.\13\ An authorized person of the adviser, who
participates in managing or directing the adviser's affairs, must sign
the report.\14\ Form ADV-Y2K, like all forms filed with the Commission
by investment advisers, will be publicly available.\15\ Shortly after
the Commission receives the forms, we will make data from the forms
available on the Commission's web site.\16\ In addition, the Commission
or its staff, after reviewing the forms and other pertinent
information, may make findings or conclusions, or compile information
from filings by individual firms, and make firm-specific, aggregate or
derivative information available to the public, Congress or members of
the securities industry.
---------------------------------------------------------------------------
\12\ The SEC's web site is www.sec.gov>. The Commission also is
making available, through its web site, the software required to
access the form.
\13\ The Commission had considered requiring advisers to file by
fax, but we are not doing so because we are unsure about the ability
of the technology we had planned to use to accept the expected
volume of filings.
\14\ The adviser is not required to engage an independent public
accountant to attest to the report. The Commission had proposed not
to require an auditor attestation for Form ADV-Y2K, and the
commenters agreed that the auditor's attestation was not necessary.
\15\ See section 210(a) of the Advisers Act (15 U.S.C. 80b-
10(a)). One commenter requested that the forms not be made public.
The Commission believes it is important that investors be able to
access information about their advisers' preparedness for the year
2000 problem, just as they can access similar information about
broker-dealers. See Exchange Act Rule 17a-5(e)(5)(v) (17 CFR
240.17a-5(e)(5)(v)).
\16\ The information will be available at http://www.sec.gov/
rules/othern/advfaq.htm>. Several commenters expressed concern that
their responses to certain questions may appear incomplete in the
absence of a more detailed explanation. To address this concern, the
Commission will place on its web site a statement explaining that
the information on the form may be incomplete, and that it only
reflects developments as of the date the form was submitted to the
SEC. The statement will urge interested readers to seek more
complete information from the adviser about its preparedness for the
year 2000 problem.
---------------------------------------------------------------------------
Four commenters urged us to exempt from the rule advisers that also
are SEC-registered broker-dealers or transfer agents, or affiliates of
banks. These commenters argued that since these advisers are required
to file similar reports with us or with the bank regulatory agencies,
there is no reason to require duplicative reports. While the Commission
appreciates the need to avoid imposing unnecessary paperwork on
investment advisers, we are not adopting these commenters' suggestions.
An adviser's response to the same or similar questions in Form BD-Y2K,
Form TA-Y2K \17\ or similar forms filed with the banking regulatory
agencies, may (and in some cases should) be different because of the
different focus of those reports. To the extent there is overlap among
the reports, the burdens imposed by completing Form ADV-Y2K should not
be significant since previous responses can simply be restated in Form
ADV-Y2K (if they remain accurate).\18\
---------------------------------------------------------------------------
\17\ Reports to be Made by Certain Brokers and Dealers, supra
note 2; year 2000 Readiness Reports To Be Made by Certain Transfer
Agents, supra note 2.
\18\ We are also not adopting one commenter's suggestion that
advisers organized in a holding company structure be permitted to
file a single report on the year 2000 preparedness of the holding
company. Such an approach would make it very difficult for us and
members of the public reviewing the data to distinguish between
those advisers who were not required to file Form ADV-Y2K from those
that failed to comply with the filing requirement. Advisers that are
members of a holding company with integrated computer systems should
be able simply to use identical responses in each of the reports
filed with the Commission.
---------------------------------------------------------------------------
B. Form ADV-Y2K
New Form ADV-Y2K has two parts. The first part must be completed by
all advisers required to file the form, while the second part must be
completed only by advisers to investment companies registered with the
Commission under the Investment Company Act.
1. Part I: Information Required From All Advisers
Part I of the form contains 13 questions about an adviser's plans
to address the year 2000 problem with respect to all of its
clients.\19\ The questions are in multiple choice or fill-in-the-blank
format; all advisers filing the form must respond to each question.
Form ADV-Y2K asks for information in several areas: (1) the adviser's
year 2000 compliance plan; (2) resources and personnel to address year
2000 issues; (3) systems that may be affected;\20\ (4) the adviser's
progress in addressing year 2000 issues; (5) contingency plans; (6) the
readiness of third parties; and (7) whether, and the means by which,
the adviser takes into consideration the year 2000 preparedness of
issuers of securities the adviser recommends to clients.\21\
---------------------------------------------------------------------------
\19\ The questions in Part I of Form ADV-Y2K are generally the
same as the questions in Part I of Form BD-Y2K and Form TA-Y2K.
\20\ There are no universal definitions for mission-critical
systems; it is up to each adviser to determine which of its systems
are mission-critical.
\21\ See Question 11 to Part I of Form ADV-Y2K. The Commission
has added this question in light of the important role advisers can
play in identifying issuers and securities that may be adversely
affected by year 2000 problems, and protecting their clients from
losses as a result. The Commission recognizes, however, that some
advisers have investment styles that make consideration of year 2000
preparedness of issuers irrelevant. For example, some advisers'
advice is limited to the advisability of investing in broad asset
classes (e.g., market timers); some manage accounts that track
indexes; and others use ``technical analysis'' and base their advice
on market trends, but not on the fundamentals of particular issuers.
These advisers would respond to this item by checking the ``Not
Applicable'' response. An adviser should only check the ``Not
Applicable'' box if it is an appropriate response with respect to
all of its accounts.
---------------------------------------------------------------------------
Several questions elicit information on specific aspects of the
adviser's plans to address the year 2000 problem and when those plans
will be complete.\22\ This information is important so that the
Commission can learn not only about the steps an adviser is taking to
prepare, but also when it expects to complete those steps. Several
commenters expressed concern that some of these questions, as proposed,
appeared to prescribe specific steps that all advisers must take in
order to prepare for the year 2000 problem.\23\ We have revised the
wording of these questions to clarify that the Advisers Act requires no
particular steps to be taken by an adviser to prepare for the year 2000
problem.\24\ The Commission highly recommends, however, that all
advisers consider the six steps of preparation the Commission has
[[Page 54310]]
identified that advisers and funds can take to prepare for the year
2000 computer problem.\25\
---------------------------------------------------------------------------
\22\ See Questions 5, 7-10 to Part I of Form ADV-Y2K.
\23\ Also, two commenters raised questions about the requirement
in the instructions to Part I that advisers include information
about their affiliates that are not required to file the form. The
Commission has clarified that advisers should include information
about SEC registered affiliates that are not required to complete
the form, i.e., those that have less than $25 million of assets
under management, but are permitted to register under an exemption.
\24\ See Questions 7-8 to Part I of Form ADV-Y2K. Under the
Advisers Act, an adviser that is unable, or uncertain about its
ability, to address year 2000 issues, would be required to disclose
this information, if material, to its clients. See Statement on year
2000 Disclosure, supra note 6.
\25\ These steps are: (i) identification of potential year 2000
problems; (ii) assessment of steps to avoid year 2000 problems;
(iii) implementation of steps to avoid year 2000 problems; (iv)
internal testing of software designed to avoid year 2000 problems;
(v) point-to-point testing of software designed to avoid year 2000
problems (i.e., testing with service providers such as broker-
dealers, custodians, transfer agents and distributors); and (vi)
implementation of tested software that will avoid year 2000
problems.
---------------------------------------------------------------------------
An adviser that has computer systems for which it has made
different amounts of progress in preparing for the year 2000 must
respond to questions regarding its year 2000 preparedness based on a
``qualitative average'' of its systems.\26\ This qualitative average
requires an adviser to give greater weight to mission-critical systems
than to other of its systems. Commenters generally preferred this
approach to an alternative under which the adviser's progress with
respect to each system would be separately reported.
---------------------------------------------------------------------------
\26\ See Instruction 4 to Part I of Form ADV-Y2K.
---------------------------------------------------------------------------
Responses to several questions in Form ADV-Y2K depend on obtaining
information about third party systems that communicate with the
adviser's systems. Several commenters asserted that advisers should be
required to report only on their own readiness for the year 2000
problem, not on the readiness of third parties, especially since the
adviser is required to execute the form. Because many advisers rely
extensively on the computer systems of third parties in their day-to-
day business, eliminating these questions would reduce substantially
the utility of these reports and yield an incomplete picture of
readiness for the year 2000. The Commission, therefore, has not
eliminated these questions from the form.\27\
---------------------------------------------------------------------------
\27\ In our Statement on year 2000 Disclosure, supra note 6, we
stated that an issuer should assess ``whether third parties with
whom a company has material relationships are year 2000 compliant.''
We also stated that an issuer should take ``reasonable steps to
verify the year 2000 readiness of any third party that could cause a
material impact on the company'' and that we understood ``that this
is often done by analyzing the response to questionnaires sent to
these third parties.'' We believe that investment advisers should
take similar steps. Therefore, the Commission has added an
instruction to the form that requires advisers to make reasonable
inquiries of third parties to obtain information necessary to
respond to the form. See General Instructions to Form ADV-Y2K. If an
adviser has no reason to believe that a third party's responses to
an inquiry were not truthful, the Commission would not expect the
adviser to inquire further.
---------------------------------------------------------------------------
2. Part II: Information Required From Advisers to Investment Companies
Part II of Form ADV-Y2K must be completed by advisers to a
registered investment company or group of investment companies. Part II
is designed to elicit information about the year 2000 readiness of the
investment companies (``funds''). Only advisers that are sponsors or
administrators of a fund complex must complete Part II.\28\ If no
sponsor or administrator of the complex is a registered adviser, at
least one adviser to a fund (or series) in the complex must submit a
report for the fund complex, if the adviser is registered with the
Commission.\29\
---------------------------------------------------------------------------
\28\ If there are multiple administrators or sponsors, the
adviser must complete the form only with respect to funds for which
another adviser has not reported.
\29\ See Instruction 1 to Part II of Form ADV-Y2K.
---------------------------------------------------------------------------
The Commission proposed to require each adviser to a fund complex
to report for the entire complex unless another adviser is reporting on
behalf of the fund, and explained that this approach would permit
multiple advisers to a single fund complex to decide among themselves
which adviser would file the report.\30\ We received numerous
objections to this proposal from advisers to funds. Many argued that
advisers or sub-advisers that do not sponsor funds are not in a
position to report on a fund's preparation for the year 2000 problem.
In response, we have added a note clarifying that the adviser that is
the sponsor or administrator of a fund complex should file the
report.\31\ In some cases, however, the sponsor or administrator of a
fund complex is not a registered investment adviser, and no adviser
otherwise might be required to file Part II for that fund complex.
Therefore, in such cases (which the Commission believes to be few) at
least one of the advisers to the fund complex must file Part II of Form
ADV-Y2K on behalf of the complex.\32\
---------------------------------------------------------------------------
\30\ See Proposing Release, supra note 8.
\31\ See Instruction 1 to Part II of Form ADV-Y2K.
\32\ As noted in the Proposing Release, the Commission does not
have authority under Section 204 of the Advisers Act (15 U.S.C. 80b-
4) to require a fund sponsor or administrator that is not registered
under Section 203 of the Advisers Act (15 U.S.C. 80b-3) to file Form
ADV-Y2K.
---------------------------------------------------------------------------
Commenters on the Proposed Form expressed concern that some of the
questions in Part II contained assumptions that funds rather than third
party service providers (such as advisers or administrators) were
engaged in year 2000 planning and remediation activities. We have
revised several questions and deleted others to make clear that the
form is not based on these assumptions. We also have added an
instruction at the suggestion of one commenter to clarify that
advisers, in responding to questions in Form ADV-Y2K, should treat as
third parties any other advisers or sub-advisers for the fund or funds
for which the adviser is completing the Form.\33\ Finally, in response
to two comments, we have added an instruction clarifying how advisers
to insurance company separate accounts,\34\ and the funds underlying
the separate accounts, should respond to items in Form ADV-Y2K.\35\
---------------------------------------------------------------------------
\33\ See Instruction 3 to Part II of Form ADV-Y2K.
\34\ These separate accounts are typically registered with the
Commission as unit investment trusts.
\35\ See Instruction 4 to Part II of Form ADV-Y2K. This
instruction is designed to exclude from Form ADV-Y2K information
about the year 2000 preparedness of the insurance company's general
computer systems, the primary function of which is to support fixed
rate insurance products that are generally excluded from regulation
as securities.
---------------------------------------------------------------------------
IV. Paperwork Reduction Act
As discussed in the Proposing Release, certain provisions of rule
204-5 (17 CFR 275.204-5) contain collection of information requirements
within the meaning of the Paperwork Reduction Act of 1995 \36\ because
registered advisers would have to file new Form ADV-Y2K (17 CFR 279.9)
with the Commission. The form is necessary for the Commission to assess
the steps advisers are taking to manage and avoid year 2000 problems.
The Commission did not receive public comments in response to its
request for comments in the Proposing Release on the Paperwork
Reduction Act analysis.\37\
---------------------------------------------------------------------------
\36\ 44 U.S.C. 3501.
\37\ Although two commenters discussed the amount of time that
would be required to complete Form ADV-Y2K, none specifically
addressed the Paperwork Reduction Act analysis in the Proposing
Release. One commenter believed that the time estimate for
completing Form ADV-Y2K was reasonable; the other commenter believed
the Commission's estimate was too low, but did not specify the
amount of time it would take to complete the form.
---------------------------------------------------------------------------
Under Office of Management and Budget rules, an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless the agency displays a valid OMB
control number.\38\ The Commission, therefore, has sent the collection
of information requirements contained in rule 204-5 and Form ADV-Y2K to
the Office of Management and Budget for review in accordance with 44
U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection of
information is ``Proposed Rule 204-5'' and ``Form ADV-Y2K.'' OMB has
approved the PRA request and assigned control number 3235-0513 to Form
ADV-Y2K with an expiration date of December 31, 1999.
---------------------------------------------------------------------------
\38\ 44 U.S.C. 3506(c)(1)(B)(v).
---------------------------------------------------------------------------
The Commission is adopting rule 204-5 and Form ADV-Y2K and
requiring most registered investment advisers to file the form with the
Commission regarding advisers' plans to
[[Page 54311]]
address the year 2000 computer problem. The rule imposing this
collection of information can be found at 17 CFR 275.204-5 and 17 CFR
279.9. The collection of information required by Form ADV-Y2K is
mandatory and responses are not kept confidential.
Rule 204-5 describes the requirement to file Form ADV-Y2K. The
Commission estimates that there are approximately 7,500 investment
advisers registered with the Commission, approximately 6,500 of which
would be required to file Form ADV-Y2K. Although the amount of time
needed to comply with the rule could vary, the Commission estimates
that, on average, an adviser would devote approximately two employee
hours of preparation time to completing Part I of the form, and an
additional two employee hours to completing Part II of the form, if the
adviser is required to complete Part II. This estimate was based on
field-testing of Form ADV-Y2K by the Commission's Office of Compliance
Inspections and Examinations. The total annual burden will be 14,782
hours ((6,500 advisers x 2 hours) + (891 advisers x 2 hours)). This
burden would be incurred twice, once in 1998 and once in 1999. The rule
would not impose an ongoing reporting requirement, and the rule and
form, as adopted, do not impose a greater paperwork burden on advisers
than was estimated and described in the Proposing Release.
V. Cost/Benefit Analysis
The Commission is sensitive to the costs and benefits imposed by
its rules, and understands that completing Form ADV-Y2K may impose
costs on advisers and funds. As discussed below, we believe that the
costs imposed by requiring advisers to complete Form ADV-Y2K are
necessary and justified in light of the need to make information on the
year 2000 problem available to investors, Congress and the Commission.
The Commission believes that requiring advisers to report on their
readiness for the year 2000 problem will yield important benefits, both
direct and indirect. The year 2000 reports required by the rule will
yield direct benefits because they will assist the Commission in
evaluating the preparedness of advisers and funds for the year 2000
computer problem. The reports also will help us identify advisers and
funds that may not be preparing for the year 2000 problem and may pose
a risk to their clients and shareholders. The reports also will
identify disclosure by advisers and funds regarding risks associated
with the year 2000 problem that may be inadequate. Finally, the reports
will permit the Commission to make information available to the public
and to fulfill requests by members of Congress for information
regarding the securities industry's readiness for the year 2000
problem.
The year 2000 reports will yield important indirect benefits. By
requiring the year 2000 reports at this time, some advisers and funds,
whose year 2000 preparedness efforts to date have been inadequate, may
be persuaded to accelerate their efforts, which could save them
significant costs in the future if they fail to make the necessary
modifications to their computer systems.\39\ This indirect benefit is
difficult to quantify. It is difficult to estimate the costs that could
be incurred if computer systems of advisers and funds fail to function
properly after December 31, 1999.\40\ Moreover, if the systems of
advisers and funds fail after December 31, 1999, it could have negative
effects not only for the advisers and funds themselves, but also for
investors and third parties, such as underwriters, brokers, transfer
agents, custodians, sub-advisers and other service providers.
---------------------------------------------------------------------------
\39\ It has been estimated that without corrective measures,
ninety percent of all computer applications worldwide may fail, or
fail to function properly, because of the inability properly to
recognize the date change. Maggie Parent, Morgan Stanley, year 2000
Issue Paper (May 1997), available at http://www.ms.com/main/
link12.html.
\40\ The Securities Industry Association has stated that the
transition to the year 2000 is the largest business and technology
effort that the world has ever experienced. See SIA, year 2000,
available at <>http://www.sia.com/year__2000/index.html.
---------------------------------------------------------------------------
Avoiding the harm to third parties may be one of most important
benefits to proper preparation for the year 2000 problem. Most firms'
computer systems today depend on the systems of many other firms and
individuals. If even one of these systems were to fail, this could have
negative repercussions on the systems of other firms with which its
computers communicate. The failure to address this interdependence may
be one of the greatest harms stemming from the year 2000 problem.\41\
The benefit of avoiding this harm from occurring, although difficult to
quantify, may be extremely significant to investors, firms and the
economy in general.
---------------------------------------------------------------------------
\41\ C. Lawrence Meador and Leland G. Freeman, year 2000: The
Domino Effect, Datamation (Jan. 1997), available at http://
www.datamation.com/PlugIn/issues/1997/jan/01depend.html.
---------------------------------------------------------------------------
The proposed rule may impose some additional costs on advisers and
funds. Advisers may need to spend resources obtaining answers to
questions in the form, completing the form and submitting it to the
Commission. These costs likely will vary from adviser to adviser. Small
advisers, for example, may spend comparatively little time completing
the form because small advisers are likely to have few systems, and one
person may be responsible for all of the systems. This person may have
all of the information necessary to complete the form and can do so in
a few minutes. Larger advisers may require more time because they are
more likely to have many systems and it is possible that such advisers
would have to draw on the knowledge of several individuals to complete
the form.
The Commission estimates that there are approximately 7,500
investment advisers registered with the Commission, approximately 6,500
of which would be required to file Form ADV-Y2K. Although the time
needed to comply with the rule likely will vary from adviser to
adviser, the Commission estimates that an adviser will devote
approximately two employee hours of time to complete Part I of the
form. In addition, approximately 891 registered investment advisers
have registered investment companies as clients. In our view, those 891
advisers are likely to need an additional two hours completing Part II
of the form on behalf of a fund or fund complex.
These estimates are based on field-testing of the form by the
Commission's Office of Compliance Inspections and Examinations. Two
commenters discussed the amount of time it would take to complete the
form. One agreed with the Commission's estimate while the other stated
that the Commission's estimate was low, but did not specify the amount
of time that would be required. Thus, the Commission is not revising
its annual burden estimate, which is 14,782 hours ((6,500 advisers x 2
hours) + (891 advisers x 2 hours)). The form likely will be completed
by information technology professionals. The Commission estimates the
hourly wage rate for these professionals to be $100 per hour. The
Commission, therefore, estimates that the total annual cost of
completing the forms is $1,478,200.\42\ The Commission believes that
the proposed rule would not impose significant additional costs on
investment advisers.
---------------------------------------------------------------------------
\42\ This burden would be incurred twice, once in 1998 and once
in 1999.
---------------------------------------------------------------------------
The Commission requested comment on its cost/benefit analysis, and
commenters were requested to provide views and empirical data relating
to any costs and benefits associated with the rule. No comments about
the cost/benefit analysis, other than those discussed above, were
provided, and no
[[Page 54312]]
data were presented. The Commission believes that the costs imposed by
the rule are insignificant compared to the benefits. If advisers and
funds are not prepared for the Year 2000 problem, however, the effect
on advisers and funds, and their clients and third party service
providers, could be very substantial. For that reason, in the
Commission's view, the chance of ameliorating the Year 2000 problem
with respect to advisers and funds justifies the costs involved.
VI. Summary of Regulatory Flexibility Analysis
The Commission has prepared a Final Regulatory Flexibility Analysis
(``FRFA'') in accordance with the provisions of the Regulatory
Flexibility Act (``Reg. Flex. Act'') (5 U.S.C. 604) in connection with
the adoption of the rule described in this Release. An Initial
Regulatory Flexibility Analysis (``IRFA'') was prepared in accordance
with 5 U.S.C. 603 in conjunction with the Proposing Release and was
made available to the public. A summary of the IRFA was published in
the Proposing Release. No comments were received on the IRFA.\43\
---------------------------------------------------------------------------
\43\ Although two commenters discussed the amount of time
required to complete Form ADV-Y2K, none specifically addressed the
IRFA.
---------------------------------------------------------------------------
The FRFA discusses both the need for, and objectives of, the rule
and form adopted by the Commission. As set forth in greater detail in
the FRFA, the rule requires most registered investment advisers to file
with the Commission a report on Form ADV-Y2K regarding plans to address
the Year 2000 computer problem.
The FRFA provides a description and an estimate of the number of
small entities to which the rule will apply. For purposes of the
Advisers Act and the Reg. Flex. Act, an investment adviser generally is
a small entity if (i) it manages assets of $25 million or less reported
on its last amended Form ADV (17 CFR 279.1) or its most recent Schedule
I to Form ADV (17 CFR 279.1), (ii) it does not have total assets of $5
million or more on the last day of its most recent fiscal year, and
(iii) it is not in a control relationship with another investment
adviser that is not a small entity.\44\ The Commission estimates that
approximately 1,000 investment advisers registered with the Commission
are small entities.
---------------------------------------------------------------------------
\44\ The Commission recently adopted revised definitions of
``small entity.'' See Definitions of ``Small Business'' or ``Small
Organization'' Under the Investment Company Act of 1940, the
Investment Advisers Act of 1940, the Securities Exchange Act of
1934, and the Securities Act of 1933, Investment Adviser Act Release
No. 1727 (June 24, 1998) [63 FR 35508 (June 30, 1998)].
---------------------------------------------------------------------------
Few or none of the approximately 1,000 small entities would be
subject to the rule. Only Commission registered advisers that either
have $25 million or more under management or act as advisers to
registered investment companies must file Form ADV-Y2K. Since the
definition of small entity establishes a threshold of $25 million under
management, most or all small entities are exempt from the rule by its
terms. In addition, the Commission believes that few or no investment
advisers that have less than $25 million under management have more
than $5 million in assets or are in a control relationship with an
entity that is not considered a small entity. The only other potential
small entities that would be subject to the rule are those advisers
that advise a registered investment company. The Commission is not
aware of any small entity that advises a registered investment company.
Therefore, the Commission believes that there are few or no small
entities affected by the rule.
Finally, the FRFA states that, in adopting the amendments, the
Commission considered (a) the establishment of differing compliance
requirements that take into account the resources available to small
entities; (b) simplification of the rule's requirements for small
entities; (c) the use of performance rather than design standards; and
(d) an exemption from the rules for small entities. The FRFA states
that the Commission concluded that different standards for small
entities are not necessary or appropriate.
The FRFA is available for public inspection in File No. S7-20-98,
and a copy may be obtained by contacting Carolyn-Gail Gilheany, Senior
Counsel, Task Force on Investment Adviser Regulation, Division of
Investment Management, Securities and Exchange Commission, 450 Fifth
Street, N.W., Mail Stop 5-6, Washington, D.C. 20549.
VII. Statutory Authority
The Commission is adopting rule 204-5 and Form ADV-Y2K under the
authority in sections 204 and 211(a) of the Investment Advisers Act of
1940 (15 U.S.C. 80b-4 and 80b-11(a)).
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements, Securities.
Text of Rule and Form
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is amended as follows:
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
1. The authority citation for Part 275 continues to read in part as
follows:
Authority: 15 U.S.C. 80b-2(a)(17), 80b-3, 80b-4, 80b-6(4), 80b-
6a, 80b-11, unless otherwise noted.
* * * * *
2. Section 275.204-4 is added and reserved and section 275.204-5 is
added to read as follows:
Sec. 275.204-4 [Reserved]
Sec. 275.204-5 Year 2000 reports.
Every investment adviser registered with the Commission that has
assets under management of not less than $25 million or is an
investment adviser to an investment company registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-1) must file with the
Commission:
(a) A completed Form ADV-Y2K (17 CFR 279.9) no later than December
7, 1998; and
(b) An additional completed Form ADV-Y2K no later than June 7,
1999.
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
3. The authority citation for Part 279 continues to read as
follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1,
et seq.
4. Section 279.9 and Form ADV-Y2K are added to read as follows:
Sec. 279.9 Form ADV-Y2K.
This form must be filed pursuant to Sec. 275.204-5 of this chapter
by certain investment advisers.
By the Commission.
Dated: October 1, 1998.
Margaret H. MacFarland,
Deputy Secretary.
Note: The text of Form ADV-Y2K will not appear in the Code of
Federal Regulations. Form ADV-Y2K is attached as Exhibit A.
BILLING CODE 8010-01-U
[[Page 54313]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.045
[[Page 54314]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.046
[[Page 54315]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.047
[[Page 54316]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.048
[[Page 54317]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.049
[[Page 54318]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.050
[[Page 54319]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.051
[[Page 54320]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.052
[[Page 54321]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.053
[[Page 54322]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.054
[[Page 54323]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.055
[[Page 54324]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.056
[[Page 54325]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.057
[[Page 54326]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.058
[[Page 54327]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.059
[[Page 54328]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.060
[[Page 54329]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.061
[[Page 54330]]
[GRAPHIC] [TIFF OMITTED] TR08OC98.062
[FR Doc. 98-26863 Filed 10-7-98; 8:45 am]
BILLING CODE 8010-01-C
