The Y2K threat - real or imaginary - is over. But mutual fund companies can not now divert all of the resources devoted to Y2K preparations to modernizing their technology.

North American securities firms have spent $6.07 billion on Y2K since 1996, according to data compiled by the Securities Industry Association of Washington, D.C. and the TowerGroup of Needham, Mass. The majority of that spending came in 1998 and 1999.

But the securities industry now faces the considerable task of converting U.S. equity pricing from fractions to decimals. The Securities and Exchange Commission has mandated that securities firms switch to a decimal system for equity quotes and trading this year. Companies must submit their plans for the project to the SEC by April 14. North American securities firms are expected to have spent nearly $1 billion on decimalization of their trading and quote systems from October 1999 to the end of the year, according to a SIA/TowerGroup study on decimalization released in February. And most of that will be spent on increasing firms' trading capacity since the move to decimalization is expected to increase equity transactions.

"Decimalization will cause the most significant expansion of quote and transaction message volume that the U.S. financial markets have ever seen, increasing the number of equity transactions by as much as 81 percent," wrote Larry Tabb, director of the securities and investments practice at TowerGroup, in the study.

Despite the fact that mutual fund companies already report the net asset value of their funds in decimals, the decimalization process should also have a big effect on the fund industry, such as equity trading, clearing and settling, said Margaret Draper, a spokesperson for the SIA.

"The actual reporting is already taken care of, but that's only part of the picture," she said.

Even so, securities firms are relieved Y2K is past. The end of Y2K spending has freed up a lot of money for securities firms to spend more money on technology. An October 1999 study also conducted by SIA/TowerGroup found that the completion of Y2K projects would free up $2.4 billion in annual spending by North American securities firms. Overall technology spending is expected to grow to $24.2 billion by 2002, up from $18.4 billion in 1998.

The technology groups at Legg Mason of Baltimore were anxious to make technological improvements at the company but were restrained from doing so by Y2K, said Joyce Ulrich, first vice president of applications development for the firm. The company had already competed Y2K preparations by Oct. 1, 1999, but no new systems were allowed to be introduced until after the New Year, as a precaution.

Steven Miyao, a senior vice president with Kasina, a New York mutual fund consulting company, said a large portion of technology budgets that had been devoted to Y2K preparations are now being used to develop Internet capabilities. Miyao says that there is also a general trend toward an increase in e-business spending for fund companies in the coming year.

"What we're definitely seeing is the budgets for most of the top companies have doubled in e-commerce (for 2000)," Miyao said.

Without this type of spending on technology, fund companies risk failure in 2000, according to a recent Kasina study entitled "Sink or Surf in 2000."

"The year 2000 will prove to be a decisive one for fund complexes of all sizes," the study said. "It is becoming increasingly difficult to retain customers. Mutual fund companies are continuing to create more user-friendly interfaces and upgrades to personalize their Web sites to better serve their customers' needs."

The study says that fund companies must spend money to provide investors with personalized content since the same types of financial information can be found on many sites. Only six percent of fund firms provide personalized content at this time but by the year 2002, about 50 percent of fund web sites will provide such content, the study found.

"Funds are looking for direct contact with the investor and are creating a personal relationship through continued contact," the study's authors wrote.

The study also said that fund firms must make substantial investments to develop wireless trading systems as both Fidelity Investments of Boston and Ameritrade of Omaha, Neb. have done.

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