SEC will audit firms with Y2K troubles
December 14, 1998
SEC examiners will conduct special audits - possibly as early as next month - of mutual fund companies and other investment advisers who may be having trouble meeting year 2000 programming targets.
After evaluating forms which fund companies and other investment advisers filed Dec. 7, the SEC plans to send examiners to conduct detailed on-site inspections of those firms whose filings suggest that their computer systems may not be fully prepared for the switch from Dec. 31, 1999 to Jan. 1, 2000.
The SEC will target for exams those firms which have not made adequate progress in their Y2K efforts, said Gene Gohlke, associate director of the SEC's office of compliance, inspections and examinations. The agency will "come down pretty hard" on firms which appear inadequately prepared, Gohlke said last week.
The SEC will ask some firms that are behind schedule in their Y2K efforts to disclose the status of their preparations in a special mailing to clients, Gohlke said. The SEC's compliance staff may refer the worst cases of ill-preparedness to the agency's enforcement division for possible action, Gohlke said. There is no way of knowing how many firms may be audited prior to a review of the Y2K-related forms, Gohlke said.
SEC compliance staff members conducted roughly 4,000 exams of investment advisers in August and September. In September, SEC Commissioner Laura Unger told Congress that the mutual fund industry as a whole was making reasonable progress in preparing for potential Y2K difficulties.
Gohlke said the follow-up exams would be more detailed than those conducted as part of last summer's reviews. The SEC staff will identify firms which they will examine based on information disclosed in the forms. SEC examiners will look to insure that firms have established a Y2K plan and will review projections of when the plans will be carried out. Firms expecting to be ready in late 1999 are most likely to be audited, Gohlke said.
Examiners will also be looking at what Y2K testing firms are planning. The staff also will review whether fund advisers are taking into account the Y2K preparedness of the companies in which they invest, Gohlke said. There is no formula for the SEC deciding to do an audit.
It is not clear when exactly the SEC will conduct the exams. The commission has hired a private contractor to scan the forms into a computer database. The agency still was receiving the so-called ADV-Y2K forms on Wednesday afternoon, said Duncan King, an SEC spokesman. King predicted the SEC will not have a reliable count of the number of forms received until this week. The SEC supervises roughly 8,000 investment advisers.
The SEC hopes the contractor will complete work on scanning the documents this month. It will then decide what companies it will look at more closely.
Gohlke also said last week mutual funds which invest abroad should consider developing contingency plans in case some foreign exchanges are unable to process trades early in the year 2000 because of computer problems. Some foreign exchanges might have to suspend business for days or weeks, Gohlke said.