WASHINGTON -- The Securities and Exchange Commission is knocking on doors of most of the 7,500 registered investment advisers to determine if they are indeed ready for 2000.
The surprise "sweep" exams, which began in late July, are intended to alert money managers to the importance of fixing all of their computer software so that trading is uninterrupted when the stock market opens Jan. 3, 2000.
The year 2000 computer problem could result from computers misreading 2000 as 1900, because they were programmed to recognize years in two digits instead of four.
Reports from money managers who already have been visited by the SEC indicate the agency wants to ensure managers are aware of the problem, and are taking steps to avoid subsequent computer glitches.
A July 27 letter to the investment advisers signed by Joyce K. Snellen, branch chief in the SEC's Northeastern regional office in New York, asks the firm being examined to provide a letter from its management describing the status of the firm's goals to be Y2K compliant; as well as copies of letters from affiliates and service providers outlining their strategies for dealing with the problem.
Because the exams are still ongoing, an SEC spokesman said agency officials could not comment.
Because of the scope of the examinations, the SEC has pulled people off other regular assignments to conduct these spot checks, said David G. Titsworth, executive director of the Investment Counsel Association of America, a Washington-based trade association.
"They are trying to hit as many advisers as they can. In New York they want to hit 80% of the registered investment advisers," he said.
The goal of the exams is to assess the investment management industry's state of readiness for 2000, rather than finding fault with specific firms and suing them for a lack of compliance, said Lawrence Friend, partner in the Boston office of PricewaterhouseCoopers, who retired as chief accountant of the SEC's investment management division in December.
However, the exams might result in a rap on the knuckles, such as a "deficiency letter" for those firms that have not taken any action to ensure they are ready for the new millenium, he said.
"I don't think it would lead to enforcement action," Mr. Friend said.
If money managers haven't been aware of the potential Y2K problem, "having the SEC come and ask questions will light a fire under you," said Pamela Wilson, senior partner with the Boston law firm of Hale and Dorr LLP, who advises money management firms. "The SEC would much rather have prevention than enforcement action."
Apart from impressing upon managers the need for them to be ready for 2000, the SEC exams also are intended to ensure investment advisers have checked that all outside links, such as custodian banks, brokerage firms and transfer agents, are gearing up as well. Moreover, the SEC wants investment advisers to test all of the links through "pretend trades," Ms. Wilson said.
"When I talk to most investment advisers, there is a gap between what they think they need to do and what the SEC wants," Ms. Wilson observed.
SEC examiners also are attempting to make sure money managers are keeping their clients apprised of what they are doing to prevent computer blowouts.
"If you are doing something, that is great. If you are not doing something, the client has the right to know, and then (they) can make a decision if they want to continue with the manager," said Patrice Singleton, general manager at Harding, Loevner Management LP, a Somerville, N.J., firm with approximately $1.6 billion under management.
SEC examiners also are going through a checklist, asking investment advisers whether they have a written plan to address the problem, whether they have taken inventory of all of the computer systems to figure out which, if any, will be affected by the millenium bug, as well as whether they are taking corrective action for the affected computer systems. The checklist mirrors the information the SEC has proposed asking money managers to disclose on the ADV-Y2K, a form to be filed at least twice in the next year.
What's more, SEC examiners also questioned managers about when they expect to complete the corrective action.
SEC examiners also asked money managers if they plan to test their inhouse computer systems for Y2K compliance, and when they expect to complete the tests, as well as their plans for participating in industrywide tests.
"They were very on target with what they were asking," said Jim Rich, manager of internal consulting and the Year 2000 project manager at Nicholas-Applegate Capital Management, San Diego, which underwent the sweep exam a few weeks ago. The SEC examiner inquired about the most important uses of the firm's various computer systems to ensure those systems will be working smoothly in the new millenium.
Nicholas-Applegate is now testing its most "mission-critical applications" and plans to continue testing its inhouse computer systems until year end. They will begin testing with the key custodian banks and other outside service providers next year, as well as participating in industrywide tests such as those organized by the Securities Industry Association, Mr. Rich said.
The firm also is keeping clients abreast of its computer conversion plans in its client newsletter, and by answering client questions.
Meanwhile, Harding, Loevner hopes to be ready with all of its computer fixes in place this fall, said Tony Tolles, chief financial officer. The firm has asked custodians and brokers about their compliance efforts and hopes to begin testing systemwide in a few months.
The firm also has informed clients of its degree of preparedness on its ADV, a form filed periodically with the SEC, and made available to clients upon request.
Moreover, the firm also has enclosed a copy of the notice explaining the Y2K problem and the steps it is taking along with its quarterly performance report to clients, Ms. Singleton said.
