ITAA's Year 2000 Outlook September 18, 1998 Volume 3, No. 34 Published by the Information Technology Association of America, Arlington, VA Bob Cohen, Editor bcohen@itaa.org Read in over 70 countries around the world ITAA's Year 2000 Outlook is published every Friday to help all organizations deal more effectively with the Year 2000 software conversion. To create a subscription to this free publication, please visit ITAA on the web at https://www.itaa.org/transact/2ko utlooksub.htm. To cancel an existing subscription, visit https://www.itaa.org/transact/2kremove.htm. ITAA's Year 2000 Outlook is sponsored in part by CACI International Inc., DMR Consulting Group Inc., and Y2Kplus Investment Funds Draw Y2K Oversight Attention to the Y2K preparedness of investment advisors and mutual funds is expanding to include the Y2K worthiness of the investment decisions being made. A hearing of the Senate's Special Y2K Committee in Washington this week, titled "The Year 2000 Te chnology Problem: Pensions and Mutual Funds," drew a small mountain of testimony from federal officials, association executives, pension fund managers, and mutual fund top brass. Laura Unger, Commissioner, Securities and Exchange Commission (SEC), said that her agency's discussions with industry are producing a growing awareness of Y2K as investment criteria. "In discussions with major fund complexes, we have learned that their i nvestment advisers are increasingly considering companies' Year 2000 compliance when they evaluate the merits of the particular companies as potential investments." Unger said that one major fund complex routinely asks prospective portfolio companies abo ut their Y2K readiness. The assessment includes questions about the priority assigned to the repair task, assets committed, current status and third party risks. A second, she said, is reviewing publicly available information about particular companies' readiness and conducting on-site visits. "We believe that this kind of Year 2000 due diligence is, or will become, typical of the investment decision-making process used by many funds' investment advisers," she said. Unger said the SEC staff has recommended making this type of Y2K investment de cision criteria a standard feature of reporting requirements for fund advisers. Alan Lebowitz, Deputy Assistant Secretary for Program Operations, with the Department of Labor's Pension and Welfare Benefits Administration said Y2K readiness is also an issue for plan fiduciaries, both in terms of selecting investments and assessing cur rent portfolios. "…because information regarding Year 2000 compliance may be necessary to make an informed investment decision, participants and beneficiaries in 401 (k) plans who have responsibility for directing their investments, like plan fiduciaries , should consider Year 2000 issues when determining how to invest their retirement assets," Lebowitz said. Meanwhile, the mutual fund industry, represented by Investment Company Institute President Matthew Fink, clearly sought to reassure Congress that mutual fund industry "participants" are on the case. "To the extent that the industry experiences any Y2K-r elated problems, the consequences to fund shareholders of such problems most likely would be in the nature of delayed statements or other temporary administrative glitches," he noted. "It would be most unfortunate if investors and savers, including mutua l fund shareholders, became fearful that their money could disappear as a result of Y2K." Fink indicated it may become appropriate for Congress and regulators to send investors and savers a reassuring message "so as to avoid any unnecessary panic." While Fink said mutual fund investment advisers are including Y2K as part of their normal investment decision research process, it is important that such individuals retain the discretion to evaluate this factor "in a manner and to the extent that it dee ms appropriate in the particular circumstances…This is precisely what shareholders…pay the adviser to do on their behalf," Fink said. The industry's case, however, may be far from closed. Eugene F. Maloney, executive vice president and corporate counsel of Federated Investors, a mutual fund company controlling assets of $150 billion, testified that he became involved with the Y2K issue this past May, at which point "it was clear that the analyst community had not focused on the issue of business risk as it relates to Y2K and were content with the vague statements made by issuers as to expenses incurred to date and their self-evaluation of their Y2K readiness. I expect this to change dramatically…" Maloney related that his firm's efforts to contact securities issuers has met with mixed results. Fewer than one in four responded to the firm's letter writing campaign. Of those that did respond, quality has been very uneven. More mail is on its way, Maloney indicated. Federated Investors has opened a Y2K file on every security it owns and analysts are tracking issuer readiness. According to the executive, each of the company's investment areas has a Y2K coordinator, and all Y2K activities to determ ine readiness or increase understanding are documented in a central file. Maloney also indicated that Y2K is not the "special circumstance" that would cause trustees to retrench from diversified positions. "No such insight has become apparent to us which would countenance a fiduciary abandoning a strategy of broad diversifica tion as a way to successfully counter any issuer risk presented by Y2K," he said. In response to predictions of a "technology winter," Maloney said, "While some level of turmoil is to be expected, some people say it will be temporary in nature. No credi ble source has predicated a permanent impairment in the value of the securities of publicly traded companies…" Senate Committee Advances Y2K Bill The Senate Judiciary Committee has passed The Year 2000 Information and Readiness Disclosure Act, S. 2392, a bill to get companies talking publicly about their Y2K issues. The bill provides limited liability protection for a limited time for specific typ es of Y2K information, but not liability protection for Y2K related failures. Sponsored by Sens. Hatch, Leahy, Bennett and Kyl, this son of the original Good Samaritan legislation promotes company-to-company information sharing while maintaining the righ ts of consumers. The bill provides liability protection for allegedly incorrect statements and the persons making them, unless the plaintiff can provide "clear and convincing evidence" that the information was material; known to be false, inaccurate or misleading; provide d with the intent to deceive; or with a reckless disregard to the statement's accuracy. The bill would also protect allegedly inaccurate defamatory or disparaging statements unless shown by clear and convincing evidence that the information provided was done so either falsely or recklessly. Specific types of information included in the measure are oral or written statements, but not SEC or bank regulatory filings or statements made pursuant to the sale of securities. The bill creates a category called "Year 2000 Readiness Disclosure Statements." These statements must be clearly labeled as such and pertain to products or services. The measure also extends the definition of "Year 2000 Processing," including both hardware and software and taking into account dates other than January 1, 2000. Other facets of the bill are antitrust protections (except in the case of boycott or price fixing), protection of information provided to the government, encouragement for the use of websites to post Y2K notifications, and establishment of a national Y2K clearinghouse. The measure would allow companies to designate previous statements (made as far back as January 1, 1996) as "Year 2000 Readiness Disclosure Statements" by providing notice to statement recipients within 45 days of bill enactment and postin g such notice on their Y2K websites. The bill is expected to be voted by the full Senate soon and then be sent for quick passage in the House and signed by the President before Congress adjourns. Speaker Says Supply Chain Merits Separate Y2K Review For even the most diligent remediators, the Year 2000 issue may be starting to look like that pink rabbit on television. Going and going. (For the moment, forget about this bunny's date with the time barrier waiting just 469 days down the road). As com panies do more to address the situation, new layers are discovered that need addressing. That point became clear this week at an SPG Y2K trade show in Los Angeles, where supply chain management was an important topic of discussion. David Hurst, Data Dimensions Director of Non-IT Issues, led a thought-provoking exploration into navigating this parallel universe. For many companies, managing the supply chain response to the Year 2000 is essentially a letter writing campaign to any an d all suppliers and vendors ever lucky enough to present a bill. Many of these letters are never answered. Hurst offered what appears to be a more comprehensive and productive approach. Long standing and strategic business relations, not voluminous Y2K inquiries, are the ties which bind companies together, making even the largest corporate giants seem like little more than the sum of their external partners. Hurst offered as examples a h amburger colossus, straddling the globe with 17,000 restaurant franchises in 100 countries, with 130 distribution centers, 4000 suppliers, 500 vendors of other types, and 80 other business partners. A pharmaceutical firm with dependencies on both sole sup pliers and suppliers in Third World locations. And a specialty fashion retailer with one-of-a-kind merchandise coming from 2000 one-of-a-kind small and mid-size enterprises. Is the Y2K problem a matter of supplier heal thyself? Maybe yes and no. In answering the question, companies need to figure out exactly which entities-beyond key suppliers--should be included in the web of critical interdependencies. Many companies may operate only through franchisees and dealer agents. Distributors may need to be on the list. Also business partners like banks and advertising agencies. And key outsourcing providers too, such as payroll processors, check printers, coupon redemption c enters or co-packers. Hurst says whether or not these entities are getting ready for the Year 2000, cutting these links from the corporate chain may be virtually impossible. For instance, he noted that some companies may be highly leveraged on customers for their revenue stre am. So the readiness of key customers to cope could be critical. Cross dependencies also snarl the ability of firms to just cut and run from date challenged partners. A supplier may be a customer too. A partner could be a shareholder. Captive providers-those that have forsaken all others to serve a single master--may contend that an implied obligation exists and cry foul if the relationship ends. And then there is the matter of existing business contracts, the paper cement that keeps supplier relationships in place. Hurst said even those firms that have flagged the Y2K folly of their suppliers must still prepare the proper legal groundwork before they undertake anticipatory breach of contract actions. Hurst says a Year 2000 program office should distinguish between IT projects and business relationship management, a non-IT set of functions. This corporate chain gang could include professionals with expertise in business relationship management (sales people, buyers and procurement specialists), corporate communications, contracts administration, financial management, project scheduling and the like. The work of this group is in many ways similar to that performed on the IT side of the program office. Hurst says the tasks include building an inventory of partners and associating business functions with the products or services they provide. He says people tend to get hung up on protecting their favorite products, perhaps losing perspective on just how important such products are to the lifeblood of the company. Some products or services may not even be technology-based, like custodial services. Th is doesn't necessarily eliminate them from interest, however. The question for all is both how they will function within the enterprise and as independent businesses. To answer the question, the business relationship management team builds a list ranking suppliers by order of importance and rates them in terms of the severity of the disruption anticipated and how quickly any breakdowns will be felt. Putting the strategy together could also include deciding how to communicate with suppliers (Hurst says top tier suppliers deserve a face to face meeting), whether legal exposures and recoveries apply, on-going vendor status, and if and how the enterprise plans to test products or services. Supplier communication scales up from general awareness letters to more detailed exchanges, spelling out in technical terms exactly what is expected. Contract reviews identify supplier responsibilities by determining what and how contracts may still apply (some may be out of date, void, or expire prior to the Year 2000). Status checking could include factors like an analysis of the supplier's capacity to meet production quotas, financial or legal analysis, risk and records management. Hurst says companies should also decide to what extent they may be willing to help struggling suppliers. He offered the example of a food manufacturer with a product made by a third party experiencing heavy duty Y2K problems. Hurst said that even though helping the supplier would also help competitors offering the same product, the food manufacturer decided to ride to the rescue because the product line was too important to its own business and reputation. This kind of company to company Y2K aid package could include awareness materials, help desk, on site support, repair cost financing, or process help. SEC Guidance May Be Litigation Guidebook The Securities and Exchange Commission has sent a Y2K wakeup call to corporate boardrooms, and the message may finally be getting through. Kenneth Freeling, who spoke about officers and directors liability at a conference this week in Los Angeles, says th e SEC guidance for Y2K disclosure by public companies issued last August puts corporate boards between "a rock and a hard place." Freeling is an attorney with the New York-based firm of Kaye, Scholer, Fierman, Hays & Handler. "Inadequate disclosure," he says, "could lead to a securities class action lawsuit. But companies who are in bad shape and do disclose may be opening themsel ves up to charges of mismanagement and shareholder derivative suits." Freeling says that SEC guidance is normally general in nature, providing a framework on the type of information expected and allowing public companies to make their own interpretations. The Y2K guidance is explicit. And that could be a problem for many companies. "[The guidance] is a guidebook to plaintiffs' lawyers," Freeling says. "If public companies don't satisfy it, you have almost a prima facie case if the company experiences material losses." The agency's break with the past reflects current realities. "The SEC is trying to say to public companies that they view the Year 2000 as a universal problem of enormous magnitude," Freeling noted. In such a situation, "specific and detailed disclosure " is required. Perhaps so. But that has not made the disclosure pill less apt to stick in the corporate craw. Freeling says his clients look at him "open mouthed" when he explains the new requirements. And with good reason. The SEC statement, Freeling says, provides "extraordinary opportunities for plaintiffs' lawyers." When they come, Freeling says the suits will fall into two broad classes. In the first wave, shareholder derivative suits, will claim broad mismanagement if forward looking statements make losses seem likely. The 1995 Securities Reform Act may provide a modest statutory safe harbor to corporate boards in such cases, provided that disclosures meet the SEC requirements and do not constitute boilerplate responses. After the Y2K shoe drops and losses are realized, the second wave will hit, Freeling says. In these securities class action suits, shareholders will conclude that corporate Y2K disclosures have been "less fulsome" than SEC requirements, Freeling suggests . Such disclosures may also include material misstatements or omissions of fact. Freeling estimates that half of Y2K litigation will fall into one of these two categories. "The SEC statement makes companies sitting ducks for this kind of litigation," he says. But not lucky ducks. "Juries won't be sympathetic," Freeling predicts. He says that these are hindsight cases, where the turmoil and pressure of managing a competitive business is ignored and plaintiffs' attorneys bring a "laser focus to a small series of events." Out the c ourtroom window go any acknowledgement of past corporate successes or positive performance, replaced in the juror's mind by the idea that Y2K remediation and nothing else should have been the work of the enterprise. Such cases, Freeling says, are difficult to defend-the reason why most are settled prior to trial. Meanwhile, corporate boards relying on officers and directors insurance policies to pay such settlements may want to have a heart to heart with their insur ance companies. And as with all things Y2K, sooner is better than later. Media Watch This week's issue of the Economist features an in-depth series of articles on the Y2K issue by Frances Cairncross, author of The Death of Distance. Check it out on the web at http://www.economist.com/editorial/freeforall/current/bug1.html. Closer to Home This week ITAA announced that EBS Dealing Resources, Inc. has received ITAA*2000 certification. ITAA*2000 is the industry's century date change certification program. The program examines processes and methods used by companies to perform their Year 200 0 software conversions. EBS Dealing Resources, Inc. participated in a rigorous evaluation of its approach to date conversion, with extensive analysis in eleven discrete process areas deemed necessary to a successful Year 2000 conversion. Business to Business Syntel, Inc., Troy, MI, has won a multi-million dollar Y2K contract with Ryder System, Inc. Sterling Software, Inc.'s Information Management Division, Los Angeles, CA, has announced the availability of the latest version of their Microsoft Windows based online analysis and reporting tool, VISION:Dimensions, which now supports IBM DB2 OLAP Server . COGNICASE Inc., Montreal, Canada, has been awarded a $2 million contract by the District of Columbia's Office of Tax and Revenue. Data Integrity, Inc., Waltham, MA, has entered into an agreement with E K Cosmos to distribute their Y2K products in Japan and Korea. ITAA Y2K Information Center Solution Providers Directory http://www.itaa.org/script/2000vend.cfm ITAA*2000 Certification Program http://www.itaa.org/2000cert.htm Outlook Archive http://www.itaa.org/script/get2klet.cfm Legislative and Litigation Table http://www.itaa.org/Y2Klaw.htm Calendar http://www.itaa.org/y2kcal.htm Vendor/User Status Questionnaires http://www.itaa.org/questmain1.htm Copyright ITAA 1998. All rights reserved. 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