Any system or application, which calculates ages, sorts by dates, or performs any other specialized date calculation, could possibly incur problems.^[7] These problems include, but are not limited to:

1. Total cessation (abend): system could shut down and cease to operate. This could have a multitude of implications due to the intercon-nectivity factor discussed above. Consider the impact to a corporation if key vendors or suppliers were unable to deliver, due to slow downs or cessation of their operations.
2. Inaccurate date triggers which cause an event to occur at the wrong time. For example an automated accounting system could improperly make payments before or after scheduled, thus affecting a firm's liquidity.
3. Computational errors is the most likely form of Y2K event. For instance computers may not accept settlement dates in the year 2000, produce errors in computational models used for risk analysis, render hedging and derivative s pricing functions inaccurate and be unable to calculate interest payments and maturity dates on debt instruments.
4. Perceptional human errors can lead to misinterpretation and misinformed decision making. An analyst making projections may be relying on data that is erroneous due to Y2K, thus causing the resulting projections to be skewed.
5. Leap year while current calendars will show February 29, 2000, computers that generate days and months will revert back to 1900 which was not a leap year.
6. Year 99 problem it is debatable whether the year 99 problem falls under the Y2K problem list, however, it is similar in nature and may have to be dealt with accordingly. This problem is mainly a result of data entry personne l needing to insert 2000 into a 2-digit year field and substituting "99" as a default. As a result of years of such shortcuts erroneous date triggers will begin to occur.
7. Days of the week many systems track time by days of the week will be effected. For instance traffic lights, train crossings and similar systems, which use weekly calendars, will operate on Saturday, January 1, 2000 as if it was Monday, January 1, 1900.
^[8]

Due to its heavy reliance on technology the business community will be hit hard by Y2K. Imagine the problems that would be created for public companies like banking institutions, insurance companies, brokerage firms, if they were not a ble properly use software or hardware that uses date fields. This inability to handle dates after 1999 could possibly cause problems with billing, asset management, money transfers, settlement process, etc. ^[9] If the manifestations of Y2K described above we re to occur, many companies would not be able to carry out their mission critical functions.

Costs to Fix the Problem

This issue would not receive the attention befitting a potential global disaster if not for the tremendous costs associated with it. Total cost estimates are difficult to predict especially when large corporations substantially increas e their estimates. Estimates for conver-sion of internal systems include $5 Billion for the US government (according to recent GAO estimates), $50 Billion for private industry and up to $600 billion globally according to the Gartner Group. Chase Manhatt an Bank recently announced that it would be increasing its total Y2K spending budget to $300 million, up from $250 million, because of additional costs associated with testing.^[10] Consider the fact that Citibank recently announced that it intends to increa se its Y2K spending to $600 million.^[11]

In a recent statement the Securities Industry Association (SIA) estimated that the financial services industry will spend between 4-6 Billion over the next three years. ^[12] For any public corporation, the costs alone associated with Y2K co uld reach the level of being material, and thus have to be disclosed in public filings. These disclosures may go beyond costs and include matters such as litigation due to Y2K, the potential impact on operations, and any other issues which are considered material to investors.

Disclosures of the Year 2000 in the Corporate Setting

Public corporations are required to provide periodic disclosures to the public regarding its business, results of operation and other matters.^[13] The SEC and other regulatory bodies require these disclosures. Regardless of the way information is provided, companies have a general obligation to disclose all material information. Information is "material" where there is a substantial likelihood that a reasonable shareholder would consider the information important in making an i nvestment decision. ^[14] Based upon the nature of Y2K and the potential impact it can have, it is easy to see it becoming a material issue that should be reported. The Supreme Court used a balancing test in TSC Indus., Inc. v. Northway, Inc. to determ ine if materiality existed that focused on the probability of an event occurring versus and the impact the event would have on the company's operations. ^[15]

After the turn of the century corporate officers and directors may find themselves facing liability for failing to disclose material Y2K issues, either by shareholder suits and or SEC investigations. In legislation introduced by Sen. Robert F.Bennett (R-UT),^[16] publicly traded corporations would be required to make specific disclosures with regard to company's year 2000 problems. While the bill has not reached the full congress, its mere existence demonstrates the heightened scrutiny th is issue is receiving.

Of all the federal agencies the Securities and Exchange Commission (SEC) has been the most vocal in trying to increase the awareness of the problem in the marketplace. In its June 1997 report to Congress the SEC discussed the negative impact Y2K could have on the securities industry. ^[17] The report states that it would be impossible for any company to reach total Year 2000 compliance and thus the focus should be on risk minimization. In this report and Staff Legal Bulletin No. 5, issued J anuary 12,1998, the Commission has given guidance on the types of disclosures that must be made.^[18]

The directors and officers of a public corporation must therefore become informed about the potential problems created by Y2K to determine if it would be a material issue that should be disclosed. Based upon current regulations and rec ent SEC guidance, the following should be kept in mind:

• Publicly traded corporations are required to file form 10-QSB (quarterly reports), form 20-f (foreign entities) and form 10-KSB (annual reports), to the SEC. ^[20] In both the quarterly and annual reports, companies must disclose in th e section on Management's Discussion and Analysis of Financial Condition and Results (Item 303 of Regulation S-k and S-B), any material event or uncertainty that would effect future financial results, or cause reported results to materially change.

The Safe-Harbor for Forward Looking Statement

One incentive for companies to come out and disclose their Y2K problems is found under the Private Securities Litigation Act of 1995 ("PSLA" or "Act"). ^[25] The Act's purpose is to encourage disclosure of forward-looking information and prevent liability stemming from frivolous private securities litigation. ^[26] The act establishes a safe-harbor for both written and oral statements that are 1) identified as forward looking^[27] and accompanied by meaningful cautionary language, 2) immaterial to the litigation, 3) made by the defendant without actual knowledge that the statement was false or misleading. ^[28] The Act has come under fire for being ineffective and incapable of inducing companies to make more meaningful forward looking statements.^[29]

The application of the safe-harbor has not yet been litigated extensively; however, the Year 2000 problem is likely to be a significant test case for disclosure immunity. For example, Company XYZ is a publicly traded manufacturer who is heavily dependent upon an automated production process. Corporate counsel for XYZ, upon learning of potential negative Y2K impacts, advises XYZ to disclose the estimates in the MD&A portion of the upcoming 10-Q filing and subsequent 10-K. The st atements generally, in boilerplate terms, disclose XYZ's efforts in dealing with the problem, the projected remediation costs and the impact the problem could potentially have on the company. In addition to this in the Factors that may effect Future Resul ts section management adds the following cautionary statement:

The question of whether the safe-harbor provision would apply is now the issue. Again the safe harbor protects statements that are identified as forward looking in nature and accompanied by meaningful cautionary statements. Whether th e forward-looking statement itself and the accompanying cautionary language are sufficient to fall under the safe-harbor is debatable. What is considered meaningful cautionary lan-guage is still an area of great uncertainty and has yet to be settled judicially.^[30] However, in the context of the year 2000 problem boilerplate language may not be enough.

Unlike any other problem, which has faced the financial industry none has been more pervasive as Y2K. It has the capability of impacting an organization in numerous ways on every level. This compounded with the fact it will hit most companies all at once thus, making it difficult to argue to a jury it was a problem which did not deserve special attention in disclosures to shareholders. While the appropriate level of disclosure in forwarding-looking statements and the precise meaning of meaningful cautionary language is being settled in the courts, careful counsel may want to err on the side of caution and provide detailed Y2K risk factors in their forward-looking statements. In addition to this the cautionary language accompanying these statement should provide com-pany or industry specific information delineating the risks Y2K poses.

Liability under Securities Laws for Failure to Disclose Y2K Problem

As explained above under publicly traded companies are required to make certain disclosures in their annual and quarterly SEC filings. If a company fails to disclose its year 2000 problem properly it may face liability under the regula tions governing these reports. The following is a list of provisions, which could create liability for corporations and their officers and directors:

Section 11(a) of the 1933 Securities Act

Signatories to registration state-ments that fail to undertake an earnest due diligence inquiry may be liable to anyone purchasers of the stock that detrimentally rely upon resulting material omissions and misstatements. This liability extends to D&O's, underwriters, auditors and lawyers involved in the offering.

Section 12(2) of the 1933 Securities Act

This section applies to any public offer or sale of securities whether registered or not, which is disseminated by means of an oral statement or written prospectus. It grants a private right of action to shareholders who have purchased securities of a corporation based upon untrue statements of material fact in a prospectus, or failure to make statements in a prospectus not misleading.

Section 10(b) and 10b-5 of the 1934 Securities and Exchange Act

Similarly, 10(b) and 10b-5 are anti-fraud provisions that create a private right of action against any person selling securities through means of interstate commerce through manipulation or deception including untrue statements or omiss ion of material facts. In addition to providing a private right of action, 10(b) and 10b-5 allow the SEC to bring separate enforcement actions that could result in civil and criminal penalties.

Section 17(a) of the 1933 Securities Act

This provision allows the SEC to bring actions against parties who issue registration statements containing mat-erial and false representations or omis-sions.

State Blue Sky Laws

While in many cases similar to the federal securities laws, state Blue-Sky law could require certain disclosures related to Y2K. Publicly traded entities should review with counsel the need to disclose Y2K under applicable Blue Sky Law s.

SRO Disclosure Requirements

In addition to the disclosures required by the SEC most of the major exchanges require listed companies to disclose "material events" such as Y2K. Considering the important role SRO's play in the market, they could have an im pact on member's Y2K efforts as well as protecting investors.

One SRO helping to ensure member compliance is the NASD. The NASD has taken several steps to alert its members to the problem, such as issuing notices and alerts to members on Y2K,^[31] establishing on-line resources dealing with the issue (www.nasd.com), proposing all members strive for Y2K compliance, and requiring all members to complete and return a Year 2000 Compliance Survey. The NASD requires companies, which are listed on the NASDAQ to disclose to the public by means of the press a ny material information, which may affect the value of its securities or influence investors' decisions.^[32] In addition the NASD in Notice to Members 97-16 stated that Y2K related computer failures will not generally be considered a defense to violations of firms regulatory or compliance responsibilities nor a mitigating factor when determining sanctions.

The other major exchanges such as the American Stock Exchange (AMEX), and the New York Stock Exchange (NYSE) have taken similar actions. They too have material information disclosure requirements. The New York Stock Exchange requires its listed companies to release quickly to the public any news or information which might reasonably be expected to materially affect the market for securities. ^[33] The American Stock Exchange requires listed companies to make immediate disclosures of all mat erial information concerning its affairs, except in unusual circumstances.^[34]

Accounting Disclosure Issues

The Emerging Issues task Force (EITF), a division of FASB, decided that software conversion costs should be expensed as incurred. These costs may also have to be reported separately depending upon the materiality of the costs.^[35]

Financial Accounting Standard ("SFAS") No.5, which deals with accounting contingencies,^[36] requires an accrual if a loss is probable and can be reasonably estimated. This disclosure should indicate the nature of the contingency and the possible range of loss. Based upon the nature of the Y2K problem a reportable contingency could exist. Thus, under SFAS 5 if it is likely that a company will not be Year 2000 compliant, or that an asset will be impaired or a liability inc urred as of the date of the financial statement, and the loss can be reasonably estimated, then the estimated loss must be charged against earnings and a description be provided in the body of the financial statement.

In addition to SFAS 5, companies may have to make further disclosures under SOP 94-6 which deals with Disclosure of Certain Significant Risks and Uncertainties. SOP 94-6 requires disclosures in areas such as impairment or amortization of capitalized software costs, inventory valuation, long-term contract accounting, warranty reserves, reserves for sales returns and allowances, or litigation if, based on the facts and circumstances existing at the date of the financial statements.^[37] The Year 2000 could very well have an effect in all of these areas.

Disclosure Concerns for Auditors

Due to the nature of the Year 2000 problem, independent Auditors may have to include an assessment of the likelihood of failure due to non-compliance within a company's financial statements. In making this assessment auditors may want to document their clients Y2K disclosures in order to show compliance with current Statements on Auditing Standards (SAS) which are drafted pursuant to Generally Accepted Accounting Principles (GAAS). SAS No. 53 requires auditors to conduct their audit s o that errors and irregularities which are material are discovered. These findings would have to be disclosed in the year that the audit is being conducted for. In addition to these requirements an auditor would also be required to publicly disclose any attempts by the audited company to cover up problems related to Y2K which would have a material effect on it.^[38] Auditors would also have to make necessary disclosures as required by the SEC.

Conclusion

It has been said that Y2K is not a technical problem, but rather a business management problem. Examples of this are the obligations and potential liability that comes from incomplete or inaccurate disclosures of Y2K effect on an organ ization. Considering the incre-dible impact Y2K can have on earnings, liabilities, and overall corporate govern-ance, investor protection becomes paramount. Investors are particularly vulnerable when it comes to Y2K because its full scope is only beginn ing top reach the popular press and each company's y2K problems are unique and can only be determined by significant efforts.

Due to the high cost of remediation, the likelihood of business operational disruptions and the widespread media attention Y2K has received, it will be almost impossible for companies to argue Y2K was not a material issue worthy of ment ion in public disclosures. Plaintiff's attorneys representing disgruntled shareholders will have an easy day in court if they can show a company's management failed to make appropriate disclosures. Only time and significant litigation will determine what level of disclosure was legally sufficient.