Year 2000 disclosure issues

ederal and state laws generally impose a duty on the officers and directors of corporations to disclose to current and potential investors all facts which are "material" to the corporation's present and future financial health. The scope of "material" information is broad, and is generally regarded to be any information that a reasonable investor would consider important. Disclosure failures can lead to corporate liability, as well as personal liability of officers and directors. Thus, securities laws and also common and statutory laws relating to fiduciary duties and disclosure requirements should be carefully reviewed to determine whether a duty to disclose year 2000 problems is present. Where uncertainty exists, disclosure may be the best option to avoid government enforcement actions and/or investor suits for fraud or other violations.

Regarding public companies, the primary laws of concern are the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the disclosure of material information in connection with the registration, offering, and sale of securities and the solicitation of proxies, and also require the reporting of financial conditions in annual 10-K, quarterly 10-Q, and other reports. This can include the reporting of not only past and current financial conditions, but also information that could have a result on future financial conditions. The Securities Exchange Commission (SEC) has stated that year 2000 problems and costs will often be material, and that their existence and ramifications should be noted in "MDA" (Management's Discussion and Analysis of Financial Condition and Results of Operations) sections of annual 10-K and quarterly 10-Q reports, as well as in any other SEC forms and reports requiring such disclosures. Unfortunately, the SEC has not yet offered specific advice regarding the scope of necessary disclosures. Companies seeking more specific guidance may want to review 10-K and 10-Q reports of larger corporations, particularly those in the finance and insurance industries, to get a feel for what other companies are doing. Where questions arise regarding the sufficiency of proposed disclosures, it will likely be wise to err on the side of excess detail.

Other disclosure obligations to investors may arise owing to reporting duties imposed on accountants, auditors, and other professionals, or from contractual obligations to creditors or other parties. Additionally, business entities whose activities are highly regulated by particular government agencies may want to determine whether these agencies have promulgated any rules or guidelines specifically relating to the year 2000 problem. As an example, pursuant to notices issued by the Federal Financial Institutions Examination Council (FFIEC), financial institutions may be subject to closer scrutiny if disclosure sufficiency questions arise.