Small businesses that handle their investments and retirement funds through a broker-dealer should review their investment companies’ Year 2000 compliance efforts to ensure their business finances will be safe after the new millennium arrives.
The Securities and Exchange Commission and the National Association of Securities Dealers Regulation Inc. (NASDR) understand the potential problem and set a deadline for broker-dealers to disclose their Year 2000 preparedness and contingency plans to customers.
The two groups recently cited 37 brokerage firms for not reporting the status of their Year 2000 preparedness as required by newly enacted federal disclosure laws. NASDR cited 59 other firms for filing the information late.
You can call the SEC’s public reference room at (202) 942-8090 to review a broker-dealer’s readiness under SEC policies.
Are your Y2K remedy efforts well funded?
The Government Accounting Standards Board recently issued rules requiring state and local governments to report the amount of money and resources they have committed to fixing their Year 2000 problems.
While businesses don’t have a Big Brother watching over them, they, too, should set aside funds to prepare for potential computer problems before the Year 2000 arrives.
Businesses can take a cue from the Government Accounting Standards Board and follow these guidelines for becoming Year 2000 compliant:
- Awareness Create a timeline noting tasks, due dates and budgets.
- Assessment Prepare an inventory of computer systems that need to be reviewed.
- Remediation Convert systems to compliance or install new systems.
- Validation Test the changes made to computers to ensure success in the new millennium.
While there is no one-size-fits-all remedy to the Year 2000 computer glitch, businesses that take care of potential problems early can avoid larger problems such as financial difficulties and lawsuits.
Y2K: No assurances for the insured
Without question, the impact of potential litigation on our civil judicial system could be catastrophic. Total legal settlements and verdicts related to the Year 2000 have been predicted at between $100 billion and $1 trillion.
In preparation for the Y2K wave of coverage litigation, the insurance industry is uniform in embracing the position that current policy coverages do not extend to Y2K issues. Still, attorneys for the insured already are considering actions against insurance companies to seek coverage under business interruption insurance, director and officer liability policies, professional errors and omissions policies and comprehensive general litigation policies.
Insureds who suffer an interruption in business stemming from the failure of a noncompliant embedded chip controller will likely be able to argue that the unexpected interruption of business was a matter of chance. Insurance companies, however, could argue that, since the Year 2000 problem has been anticipated for years, any business interruption is predictable and therefore not covered by a business interruption policy.
The majority of litigation against insurance companies will come from insureds seeking coverage under their comprehensive general litigation policies. To stem the tide, the insurance industry is adding language to exclude Y2K coverage from new CGL policies and is interpreting existing policies to exclude coverage for Y2K problems.
The Insurance Services Office reports that insurance regulators of practically every state have approved exclusionary language for Year 2000-related problems in CGL policies. Typically, CGL policies protect product manufacturers and suppliers against claims arising out of the use of their products.
However, it’s clear that CGL insurance carriers will attempt to avoid claims on the basis that the Y2K risks have been well known and, therefore, that the losses are “”expected or intended”” and are not insured risks. SBN
Mark A. Willard is an attorney with Eckert Seamans Cherin & Mellott, LLC, a national law firm based in Pittsburgh.