As Jan. 1, 2000 approaches, financial service company executives are finding that there really are two year 2000 problems.

There is the operational task of making sure the computers of a company and those of its vendors will work on Jan. 1. And there are legal concerns which require, as much as possible, reducing the chance that a company will be sued successfully because of some Y2K hiccup.

Solving the operational Y2K problem necessitates programmers poring over and revising millions of lines of computer code. Addressing the legal Y2K problem largely requires the creation of paper, financial services firm executives and lawyers say. Indeed, lawyers and consultants have advised mutual fund companies to painstakingly document in anticipation of lawsuits that are viewed as inevitable.

"There's a lot of CYA in this Y2K," said Jim Tubridy, a manager specializing in Y2K issues for McGladrey & Pullen, the accounting and consulting firm. "You need to have all of your documentation in good order."

Fund companies' lawyers said firms are creating a record which shows that they acted in what the lawyers say is a "commercially-reasonable manner" to prepare for the computer change. Acting in a commercially-reasonable manner here means identifying the plan a company adopted for Y2K, showing how officials followed the plan and describing how they tested to make sure things work as anticipated.

Putnam Investments, which in December said it was Y2K compliant one year early, has chronicled work which began in 1995 with "great documentation," said Gavan Taylor, Putnam's chief information officer. Putnam has examined everything from the obvious-the operation of its computers- to the operation of its power, heating, air conditioning and ventilation systems and even of its water supply for key sites.

Putnam announced its Y2K compliance to, " bring peace of mind to our clients and our advisers," Taylor said.

There is more to preparation than documentation, of course. Business executives have banded together in the hope of convincing Congress to pass legislation which will limit the liability of companies who prepare reasonably for Y2K. The threat of litigation is chilling cooperative efforts among businesses, executives say.

"There is still no adequate -- or reliable -- safe harbor' against punitive and consequential damages for companies that have met all regulatory requirements and standards -- however much we invest, and in spite of our good faith," Marshall Carter, chairman and chief executive officer of State Street Corp., told Congress earlier this month in testimony supporting Y2K legislation.

The mutual fund industry, at least in part because of the SEC's oversight, is viewed as less vulnerable than many to Y2K legal problems. The most likely problems for mutual fund shareholders are delayed statements and administrative glitches, said Matthew Fink, president of the Investment Company Institute, in testimony to Congress in the fall.

Still, there is some uneasiness among lawyers and fund company executives. It seems in some quarters as if some people are waiting for a Y2K mistake, said Ronald Feiman, a lawyer in New York who represents mutual fund companies and fund boards.

"The potential claimants are ready to send in their redemption requests on January 2 and see what happens," Feiman said.

Some industry observers are skeptical about the motives of protests from industry about the burden of Y2K compliance. Robert H. Rosenfeld, a lawyer in Chicago one of whose clients has sued Microsoft because of alleged Y2K problems in two Microsoft products, said business executives have had plenty of time to prepare for Jan. 1.

"Everyone has been given tremendous notice of the problem," Rosenfeld said.

His recommendation to mutual fund executives: document your work "very carefully" and have a lawyer be part of the company Y2K team.

But, that is precisely the sort of advice which is grating on some executives in the financial services industry.

"Year 2000 is the attorneys full employment act," said Richard B. Lieb, president of the systems and services division of SEI Investments, the mutual fund and administration firm in Oaks, Pa. When it comes to Y2K preparations, there is, "what we are really doing for the year 2000 and what we are doing for the lawyers," Lieb said.

Lieb said he has been receiving literature from lawyers describing what the literature depicts as the enormous liability Y2K presents and sponsoring conferences on the issue. Lieb has hired a paralegal to spend two-thirds of his time keeping track of Y2K documents.

When SEI issued a Y2K press release recently, the company's lawyers scrupulously reviewed it before it could go out, Lieb said. The press release finally was issued with a 26-word disclosure statement, which concluded with a citation of a federal statute. Usually, Lief's press releases go out without legal review.

But when it comes to Y2K issues, "I don't send anything unless I check it with the lawyers," Lieb said.

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