1 See Memorandum to Accounting/Treasurers Committee No. 27-98, Compliance Advisory Committee No. 18-98,
Independent Accountants Advisory Committee No. 7-98, Internal Audit Committee No. 6-98, Investment Advisers
Committee No. 24-98, Operations Committee No. 26-98, SEC Rules Committee No. 68-98, Transfer Agent Advisory
Committee No. 37-98, Unit Investment Trust Committee No. 21-98, Electronic Commerce Working Group, and
Technology Task Force, dated July 6, 1998.
2 See Memorandum to Accounting/Treasurers Members No. 18-98, Compliance Advisory Committee No. 19-98,
Independent Accountants Advisory Committee No. 8-98, Internal Audit Committee No. 7-98, Investment Advisers
Committee No. 26-98, Operations Committee No. 27-98, SEC Rules Committee No. 73-98, Transfer Agent Advisory
Committee No. 41-98, and Unit Investment Trust Committee No. 22-98, dated July 14, 1998.
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August 11, 1998
TO: ACCOUNTING/TREASURERS COMMITTEE No. 35-98
COMPLIANCE ADVISORY COMMITTEE No. 22-98
INDEPENDENT ACCOUNTANTS ADVISORY COMMITTEE No. 9-98
INTERNAL AUDIT COMMITTEE No. 10-98
INVESTMENT ADVISERS COMMITTEE No. 29-98
OPERATIONS COMMITTEE No. 32-98
SEC RULES COMMITTEE No. 78-98
TRANSFER AGENT ADVISORY COMMITTEE No. 48-98
UNIT INVESTMENT TRUST COMMITTEE No. 23-98
ELECTRONIC COMMERCE WORKING GROUP
TECHNOLOGY TASK FORCE
RE: INSTITUTE COMMENT LETTERS ON SEC'S YEAR 2000 RULE PROPOSALS
______________________________________________________________________________
The Institute recently filed with the Securities and Exchange Commission two comment letters
regarding the SEC’s Year 2000 rule proposals. The first letter addresses the SEC’s proposed rule that
would require most registered investment advisers to file Year 2000 readiness reports.1 The second letter
responds to the SEC’s request for additional comment on whether to impose an independent
accountant’s review requirement on certain Year 2000 readiness reports that will be filed by non-bank
transfer agents and certain broker-dealers under recently adopted rules.2 The letters are attached and
summarized below.
1. Investment Adviser Year 2000 Reports
Proposed new Rule 204-5 under the Investment Advisers Act of 1940 would require most
registered investment advisers to file Year 2000 readiness reports on proposed new Form ADV-Y2K.
The form would consist of two parts. Part I would be completed by each
adviser and would contain eleven questions about the adviser’s Year 2000 preparations with respect to
2each of its clients. Part II would be completed by advisers to a registered fund or a group of registered
funds and would consist of questions similar to those in Part I. All questions would be in multiple
choice or fill-in-the-blank format.
The Institute’s letter generally supports the SEC’s proposal and their efforts to design a
regulatory framework that provides flexibility to investment advisers in identifying and addressing Year
2000 problems. It also supports the Commission’s decision not to include an attestation requirement in
the proposed rule and reiterates our concern that the reports should be treated confidentially.
The letter discusses the following issues relating to Part II of the proposed form:
a. Investment Advisers’ Fund Reporting Responsibilities
The instructions specify that each adviser or sub-adviser to a fund must complete Part II for that
fund and any other fund in the same complex, unless another adviser is submitting a form covering the
investment company. The Institute’s letter points out that not every adviser will be able to prepare and
file the form on behalf of the fund it advises, particularly if the adviser provides only portfolio
management services to the fund or the adviser is neither a sponsor (or similar entity with administrative
responsibilities) of the fund nor otherwise affiliated with the sponsor. The letter explains that these
advisers would not possess (or be in a position to obtain) the information necessary to complete the
form, including information pertaining to distribution, shareholder servicing, transfer agency, and fund
accounting, among other back-office related functions.
The letter recommends that the instructions to the form be revised to impose the responsibility
for completing and filing the form on those advisers that are a sponsor to a fund, unless a non-sponsor
adviser or sub-adviser has agreed to accept this responsibility. In those situations where there are no
registered advisers with responsibilities sufficient to enable the completion of the form on behalf of the
fund advised, the letter recommends that the fund itself bear the responsibility for completing the form.
b. Contents of Part II
The Institute’s letter notes that proposed Form ADV-Y2K is somewhat duplicative in that Part
II of the form merely tracks the questions contained in Part I. The letter explains that, contrary to the
apparent premise of the form, an investment company does not have its own management information
system; instead, systems supporting investment company functions typically are subsumed within the
sponsor’s operations. Thus, a fund would not have a Year 2000 plan or any related contingency plan.
Nor would it have a dedicated system -- mission critical or otherwise -- that can be identified,
inventoried, or tested. It also would not have any employees to approve any such remediation plan or
staffing to prepare for a Year 2000 project. In order to avoid having repetitive questions go unanswered
because they do not apply to a fund, the letter recommends that Part II be modified to more accurately
reflect a fund’s unique organizational structure.
c. Multiple Systems Reporting
The Institute’s letter supports the SEC’s proposal that where there are multiple computer
systems for which different amounts of progress have been made in preparing for the Year 2000
problem, the responses may be based on a qualitative average of the systems.
d. Facsimile Filing
3The Institute’s letter notes the SEC’s proposed requirement that all Form ADV-Y2K’s would
have to be filed by facsimile (no paper filings would be accepted) and requests clarification on (i) the
consequences for late filings, particularly if an adviser is precluded from completing a timely filing
because the Commission’s facsimile machine is busy due to heavy volume or some other communication
glitch occurs, and (ii) what would constitute acceptable verification of receipt by the Commission,
including whether the adviser may be permitted to rely on a confirmation printed on its facsimile
machine, or whether instead the Commission would send some form of return acknowledgment
indicating receipt of the form.
2. Accountant’s Review of Year 2000 Readiness Reports of Transfer Agents and Broker Dealers
As noted above, the SEC seeks comment on whether to impose an independent accountant’s
review requirement on certain Year 2000 readiness reports that will be filed by non-bank transfer agents
and certain broker dealers. This review could consist of an attestation engagement or, alternatively, an
agreed-upon procedures engagement, as was suggested by the American Institute of Certified Public
Accountants (AICPA).
In response, the Institute’s letter notes that an attestation requirement would be unworkable and
reiterates our concern that independent accountants may not have the requisite technical expertise or
personnel capacity necessary to perform the attestation as proposed.
The Institute’s letter discusses the proposed agreed-upon procedures engagement and recognizes
that it could mitigate some of our concerns with the proposed attestation requirement insofar as it would
be less time-consuming, less costly, and less disruptive operationally. We conclude, however, that
because of certain inherent limitations, this approach may not be feasible and may not necessarily
reinforce the Year 2000 compliance efforts of transfer agents and broker-dealers. Specifically, the letter
explains that in a Year 2000 context an agreed-upon procedures engagement would not be designed to
provide assurance (i) that a non-bank transfer agent or broker-dealer is or will be Year 2000 compliant,
(ii) that its remediation plan will be successful, in whole or in part, or (iii) that any party doing business
with it will be Year 2000 compliant. Without these assurances, the letter questions whether this
approach would provide any added value to the present Year 2000 reporting scheme, noting that the
cost of having this type of review, even if it is less than that of an attestation engagement, almost
certainly outweighs any benefits it would provide.
Finally, the letter notes that the specific procedures that would form the basis for a Year 2000
agreed-upon procedures engagement have not yet been determined. We recommend that any such
procedures should be applied consistently among all non-bank transfer agents and covered broker-
dealers so as to ensure that the results of the review would be susceptible to consistent evaluation by the
Commission. The letter adds that if the SEC and the AICPA collaborate in developing these
procedures, industry participants should be given an opportunity to review and comment on them.
Barry E. Simmons
Assistant Counsel
Attachments