The Securities and Exchange Commission recently reminded public companies that it intends to continue reviewing Year 2000 disclosures until companies no longer face material Year 2000 issues. With many public companies preparing to file their annual reports on Form 10-K with the SEC, it make sense to review the agency's most recent guidance regarding Year 2000 disclosure.
The SEC's most comprehensive guidance on Year 2000 disclosure by public companies is contained in an interpretive release issued on July 29, 1998. The SEC directed public companies to begin applying the guidance contained in the release immediately after August 4, 1998, and many companies have already filed at least one periodic report containing Year 2000 disclosures under the new standard. In November 1998, the agency provided additional guidance. The November release highlights some of the areas the SEC is likely to scrutinize carefully in reviewing the next round of filings by public companies.
In November, the SEC reminded public companies that they should not use the guidance contained in the July release as a "checklist." The agency cautioned, however, that for a Year 2000 disclosure to be "meaningful," companies required to make such disclosures regarding Year 2000 issues which may "present a material event or uncertainty," should address four categories of information: state of readiness, costs, risks and contingency plans. The SEC also cautioned that meaningful disclosure for those categories may vary over time as Year 2000 looms closer and as companies progress in their Year 2000 assessment and remediation efforts.
The SEC also provided guidance concerning Year 2000 "cost" and "risk disclosures." It emphasized that companies must disclose material historical and estimated costs, including the costs of external consultants, professional advisors, purchases of software and hardware and the direct costs of internal employees working on Year 2000 projects. If a company does not know its internal costs in whole or in part, it should disclose that fact and specify those costs for which it cannot determine an amount. Cost disclosures should include costs incurred to date and estimated remaining costs.
Regarding "risk disclosure," the SEC provided additional guidance on the level of detail required for disclosure of a company's "reasonably likely worst case scenario." The crucial element of this disclosure is a description of the "impact on a company if its systems, both information technology and non-information technology, do not function and it has to implement its contingency plan." The SEC noted that companies need not address all possible catastrophic events such as the potential failure of basic infrastructures such as power grids unless the company becomes aware that "a material disruption in these basic infrastructures is reasonably likely to occur."
Finally, the SEC reminded companies that they must disclose information about the potential impact of Year 2000 on material and significant relationships with third parties such as key suppliers, including information as to whether those third parties have provided assurances as to the Year 2000 compliance of their products. Companies must also be certain to disclose information regarding their contingency plans in the event that the third party is not Year 2000 compliant.
February 2, 1999
This memorandum is for general informational purposes only and should not be considered our legal advice as to any particular set of facts, nor does this memorandum represent any undertaking to keep recipients advised as to all relevant legal developments.