On July 29, 1998 the Securities and Exchange Commission issued an interpretative release providing extensive guidance to public companies regarding their Year 2000 disclosure. Any company making filings with the SEC, including annual reports, quarterly reports, or registration statements, needs to carefully study this new interpretative release. The release also reminds municipal securities issuers and other companies that don't make filings with the SEC that the anti-fraud provisions of the securities laws apply to Year 2000 disclosure.
This release was issued against a backdrop of consistent pressure from Congress to force public companies to make more extensive and meaningful disclosure of the Year 2000 problem. In October 1997, the SEC staff issued Staff Bulletin No. 5, which reminded public companies that the existing disclosure framework required disclosure of Year 2000 problems in certain circumstances. In response to pressure for more "teeth" in the SEC disclosure requirements, that Bulletin was amended in January 1998 to provide additional guidance.
In recent Congressional hearings, a number of experts testified that public companies are still not making adequate disclosure. The Commission confirmed this perception. The release states that while 70% of SEC filings now reference the Year 2000 problem, "many companies are not providing the quality of detailed disclosure that we believe that investors would expect."
The release urges more complete disclosure in the "management's discussion and analysis" ("MD&A;") section of SEC filings, in which companies are required to discuss known material events, trends or uncertainties. According to the Commission, Year 2000 disclosure is required if a company's "assessment of Year 2000 issues is not complete." This condition will apply to most companies because complete assessment means not only having complete knowledge of the company's own state of compliance with respect to both software and embedded systems, but also having complete knowledge of the compliance efforts of important third party vendors and customers on whom the company depends. Even companies tempted to claim that their assessment is complete are still required to make disclosure unless they can reasonably conclude that the consequences of noncompliance would not be material, without regard to remediation efforts or contingency plans. In light of these stringent standards, the Commission's position is that "almost every company will need to address this issue."
The release lists four categories of information that each company should address: the company's state of readiness, costs to address Year 2000 issues, risks posed by the Year 2000 problem, and contingency plans in the event remediation efforts fail. As to each of these categories the release provides specific guidance intended to provoke more detailed and, it appears, more pessimistic disclosure. For example, the description of risks "must include a reasonable description of (the company's) most reasonably likely worst case Year 2000 scenarios."
The release also "suggests" seven additional categories of information that companies should consider, including providing historical and estimated cost breakdowns, source of funds, and whether any independent verification process has been or will be used.
Recognizing that much of the disclosure the Commission seeks will necessarily be predictions of uncertain future events, the release encourages use of the "safe harbor" for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. The release identifies many Year 2000 disclosures that would warrant forward looking statement protection, including projected remediation costs, the remediation schedule, and the estimated impact of a Year 2000 failure. However, the safe harbor does not provide ironclad protection. The safe harbor is available only if the forward-looking statements are accompanied by "meaningful cautionary statements" and the statement was not knowingly false when made. Further, it is not available for any state law claims, and the viability of the safe harbor hasn't been clearly tested yet in federal court.
While the release became effective August 4 (and therefore technically won't apply to the reports on the quarter ended June 30th due August 14, 1998), the Commission urges public companies to consider the guidance provided by the release in preparing Year 2000 disclosure to be included in those quarterly reports.
The release, alternatively designated as 33-7558; 34-40277; IA-1738; IC-23366, and International Series Release No. 1149, is available on-line at http://www.sec.gov/rules/concept/33-7558.htm.
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