Directors Will Stand by for New Year's
November 22, 1999
BOSTON - Mutual fund directors will be among the executives on call New Year's weekend as the fund industry readies itself for possible computer troubles associated with the date change to the year 2000.
Fund companies and their lawyers now are lining up directors in the event there are problems pricing securities in a fund's portfolio around Jan.1, according to fund executives, consultants and lawyers. Directors will be on call in case funds are forced to make changes in their securities pricing procedures or make special pricing decisions because of Y2K problems, lawyers and consultants said.
Directors generally have been put on notice that they should be available by telephone during the New Year's weekend and the first few days of business in the new year, said Ronald Feiman, a mutual fund lawyer in the New York office of Mayer, Brown & Platt of Chicago. In addition, fund companies will have executives and operations staff on the job during the weekend in the event any Y2K problems arise, according to fund executives.
"Directors are diligent," Feiman said. "They're not going to run off and vanish."
Fund directors, often as members of a special board pricing committee, oversee and approve the procedures that funds use to set the value of the securities the funds own. Mutual funds normally use the market value of the securities they own to establish the fund's net asset value. Executives are preparing contingency plans, however, in the event that some companies or some international markets are forced to shut down or limit operations because of Y2K computer problems.
If, for example, a market is unable to remain open because of Y2K problems, that could force a fund to use the fair value of a security for pricing purposes. That was the case in Taiwan when an earthquake there in September closed the country's financial markets for a week. (MFMN 11/1/99)
The pricing issue, if one does arise, should not pose undue problems for the mutual fund industry, said E.K. Easton Ragsdale, director of quantitative research for the equity group at State Street Research & Management Co. of Boston. Any lack of liquidity from Y2K problems should be short-term, Ragsdale said. If there are Y2K-related problems, they appear likely to be largely contained to sectors such as emerging markets, Ragsdale said.
Ragsdale spoke at a conference on Y2K liquidity issues sponsored by the National Investment Company Service Association here earlier this month.
Liquidity in financial markets normally tends to decrease at the end of the year, Ragsdale said. That reduced liquidity probably will be more pronounced this year because of concerns about Y2K, he said. Portfolio managers are likely to trade less and build their cash reserves above the level they normally hold in late December, Ragsdale said.
At the NICSA conference, executives said they were confident the mutual fund industry was well prepared for Y2K in terms of its computer systems. But speakers expressed concern that shareholders might increase demands on call centers or unnecessarily redeem their investments or exchange their equity and fixed-income holdings for money market funds.
"The risk that we still face between now and the end of the year is the heightened press frenzy," said Darlene DeRemer of Wrentham, Mass., a consultant to mutual fund companies.