More than half the banks providing custody services to the mutual fund industry are still grappling with the year-2000 problem in their computer systems, a research firm says.
Dalbar Inc., a Boston research company, said that only 38%, or eight of the 21 custodian banks serving the $4 trillion mutual fund business, are year-2000 compliant. The finding was based on a study done as part of Dalbar's 1997-1998 Custody Service Guide, a yearly road map of the mutual fund market.
The year-2000 problem involves computer code that incorrectly handles dates beyond Dec. 31, 1999. Because computer programs refer to years by their last two digits, for example, 98 for 1998, 2000 may be misread as 1900.
While the problem can affect a variety of businesses, financial companies are particularly vulnerable because of their reliance on interest calculation and accounting systems.
The banking, thrift, and credit union regulators have mandated that all institutions correct the year-2000 problem and begin testing their new systems by the end of 1998.
However, 12 of the 21 banks surveyed by Dalbar had yet to complete systems changes, at least in the mutual fund custody area. They include Chase Manhattan, PNC Bank in Pittsburgh, State Street Bank and Trust Co. in Boston, and Chicago-based Northern Trust. Bank One Trust Co. did not respond to the survey.
Among the institutions that told Dalbar they had already tackled the problem are: BankBoston; Bank of New York; Union Bank of California, San Francisco; and Fifth Third Bank, Cincinnati.
The primary function of a custodial bank is to pay for and receive securities on behalf of a mutual fund company within a three-day settlement period, said Louis S. Harvey, president of Dalbar. "Could you imagine you had a settlement of several billion dollars and you're a century off?" he asked.
Custodian banks also collect income, such as dividends, from mutual fund companies, Mr. Harvey explained.
Of the noncompliant banks contacted for this story, Chase, Northern Trust, and PNC all said that they are busy working on the year-2000 problem.
A spokeswoman said that Northern Trust has been concentrating on correcting the problem in its core businesses - trust and private banking - but has not neglected the mutual fund custody business. She declined to comment further.
A PNC spokesman said, "We obviously have taken this very seriously for some time and plan to be compliant by the third quarter of 1998."
Chase Manhattan also anticipates being ready to meet the 1998 regulatory deadline, said senior vice presidents Brian Robbins and Paula Sausville.
But Mr. Robbins, who holds responsibility for addressing the year-2000 issue throughout Chase, added: "Our systems are just one small part of it." He noted that the telecommunications companies and service providers that banks use must also have dealt with the problem.
Kenneth Novell of San Francisco-based Spectrem Group said that banks which have yet to comply are the ones that control most of the custody business and therefore have a lot of work ahead of them.
"The systems that are in place at those banks are fairly large, complex mainframe systems," said Mr. Novell. "It's not the kind of thing where you can just (use) Microsoft Windows to be millennium-compliant."
But Chase's Ms. Sausville, an executive in the bank's global investors services division, disagreed. "The renovation of the computer systems really has to do with the code, not with the number of transactions that are processed," she said.
