The Department of Labor, the Congress, and the SEC are busily focusing on Year 2000 issues relating to employee benefit plans these days. Investment advisers and other fiduciaries should watch out.
Department of Labor. On February 9, 1998 and July 23, 1998, the Department of Labor issued news releases reminding plan fiduciaries of their fiduciary responsibility to take steps to protect employee benefit plans against Year 2000 risks. The Department has also posted a series of questions and answers on its website announcing enforcement initiatives, urging disclosure to participants, and stressing the limited role of auditors.
Congress. S.2000, introduced by Senator Robert Bennett (R. Utah), would provide that a plan fiduciary does not meet its ERISA obligations with respect to an investment in a security unless the fiduciary determines that (a) the issuer of the security has taken or is taking steps to eliminate substantially any Year 2000 problem faced by the issuer, and (b) the security is traded on a market that is prepared to operate without any Year 2000 interruption. If the plan assets are invested by an institution such as an insurance company or a bank, the plan fiduciary must determine that the institution has made the same determinations regarding the investments.
If passed, this bill would impose significant burdens on investment advisers and others acting on behalf of ERISA plans. It would replace the usual standards of prudence and of balancing risks and rewards with an absolute requirement that ERISA plans make new investments only in Year 2000 compliant companies. It also would require that ERISA fiduciaries guarantee that the markets on which the securities are traded be Year 2000 compliant. Although it does not currently appear likely that this bill will pass, it has definitely drawn attention to the issue.
SEC. Proposed Advisers Act Rule 204-5 would require most investment advisers to file new Form ADV-Y2K. The proposed new form contains 11 questions about the adviserUs Year 2000 preparations, including: (i) the scope and status of the adviserUs Year 2000 compliance plan; (ii) the commitment by the adviser of resources and personnel (including consultants) to address Year 2000 issues; (iii) the systems that may be affected by the Year 2000 problem; (iv) progress on six steps of preparation identified by the SEC; (v) contingency plans in the event that the adviser experiences Year 2000 difficulties after December 31, 1999, and (vi) the readiness of third parties upon whom the adviser relies for critical systems. If adopted, this proposal would implement the SECUs view that all advisers are required to begin discussing Year 2000 issues and their Year 2000 preparedness with their clients.
On July 29, 1998, the SEC published a release that provides guidance regarding the Year 2000 disclosure obligations of investment advisers, investment companies, public companies, and municipal issuers. The release points out that the anti-fraud rules applicable to investment advisers impose a duty of disclosure on advisers who will not be able to, or are uncertain about their ability to, address Year 2000 issues, if that inability could materially affect the service provided to clients. The release further emphasizes that the disclosures must be timely so that clients may take steps to protect their interests.
What to Do. Investment advisers and other employee benefit plan fiduciaries should immediately evaluate the potential impact of the Year 2000 problem and take appropriate action, including possible disclosure to clients and plan participants.
The Thelen Reid Report is published as an information service to clients and friends. Please recognize that the information is general in nature and does not constitute legal advice.