July 8, 1998

The Honorable Arthur Levitt, Jr.
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Dear Chairman Levitt:

I am writing with reference to the SEC staff's June 1998 Second Report on the Readiness of the United States Securities Industry and Public Companies to Meet the Information Processing Challenges of the Year 2000 (Second Report). By letter dated December 6, 1996, I asked that the Commission file the first report by June 1, 1997 and annually thereafter. This Second Report shows significant progress, but also shows significant pitfalls. The SEC needs to do more.

Your cover letter indicates that "although the Commission is encouraged by industry efforts to date, there is still much work to be done." I agree that there has been considerable progress but I do not necessarily share your encouragement. For example, a table in the Second Report at page 3 showing the status of exchange and NASD mission-critical systems reflects a 73.1 percent remediation to date, but the chart on page 15 on the status of exchange and NASD mission-critical systems shows that of 363 total mission-critical systems, only 165, less than half, are already compliant. Your First Report stated unequivocally at page 23 that, with respect to the SEC's own mission-critical systems, "EDGAR is currently Year 2000 compliant." However, the Second Report at page 10 backtracks, revealing that this was an overstatement: "although the staff believes that EDGAR is Year 2000 compliant, testing of the system continues, and the staff is developing contingency plans should the system fail."

I commend the securities industry for the seriousness with which it has approached Year 2000 remediation issues, and I particularly note the unparalleled industry-wide test program piloted by the Securities Industry Association. The June 18, 1998, SEC staff memorandum notes that "[w]ith respect to broker-dealers, investment advisers, and investment companies, the sheer number of these entities makes it impracticable to obtain and compile information on individual systems." At the same time, the Second Report declares at page 11 that "[t]he Commission is committed to taking the necessary steps to achieve the highest possible industry compliance rate and minimize the effect of any disruptions that occur." How is this possible without the information that SEC staff claims is impracticable to obtain?

Moreover, the Second Report discloses at page 6 that the staff is considering whether to recommend that the Commission propose a rule, similar to those already proposed for broker- dealers and transfer agents, that would require registered advisers to report their progress on making their systems Year 2000 compliant. However, these rules should have been in place two years ago for all registered entities. Under them, you should have been receiving information concerning: 1) the scope and status of Year 2000 compliance plans; 2) commitments of funding and personnel; 3) systems that may be affected; 4) progress in addressing the six steps of preparation: (i) awareness of the problem; (ii) assessment of steps to be taken; (iii) implementation; (iv) internal testing; (v) point-to-point testing with service providers; and (vi) implementation of tested software; 5) contingency plans; and, 6) readiness of third parties on which the entity relies for critical systems. I urge you to act on this matter with all due speed.

Both your Second Report and Commissioner Unger's June 10, 1998, testimony before the Senate Subcommittee on Financial Services and Technology concerning disclosure of Year 2000 readiness paint a bleak picture of incomplete and misleading disclosure or no disclosure at all by public companies. The Second Report notes that the Commission will issue yet another interpretation on Year 2000 disclosure requirements, but stronger action may be necessary at this point. This is another matter that requires speedy attention.

At the end of the day, our greatest exposure may be international, because foreign counterparts lag far behind the U.S. financial services industry in remediation and contingency planning efforts. I request that the Third Report provide a full description of the Commission's coordinated efforts with the Department of Treasury and the Board of Governors of the Federal Reserve to address the international aspects of this serious problem.

In closing, thank you for your cooperation and your hard work on this important matter. The Second Report is far more readable and informative than the first, and I commend SEC staff for reworking the Second Report to comply with the General Accounting Office's (GAO) recommendations. I would request that the Commission include the appropriate Commerce Committee staff in any quarterly oral briefings on Year 2000 issues and that you notify me promptly in writing of any significant changes or developments.

Sincerely,

JOHN D. DINGELL
RANKING MEMBER

cc: The Honorable Tom Bliley
The Honorable Michael Oxley
The Honorable Thomas Manton
The Honorable James F. Hinchman

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