Dear Dagen: Do Year-End Fund Trades Get Recorded This Year or Next?

Y2K concerns add a bit of intrigue to this otherwise mundane issue.
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Are the trades that mutual funds make during the last three days of December reflected in 1999 or 2000? Do they go by the trade date or settlement date? -- Hank Barnett


You've raised one of those obvious but fascinating questions like, "What do judges wear under their robes?"

When you get down to basics, the answer is pretty straightforward. However, Y2K concerns add a few twists to your question.

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Most trades are effective on the trade date, or the day the transaction occurs.

Most funds price their own shares at the end of each trading day. So, trades made by a fund manager during the day should be reflected in that fund's net asset value, or NAV, at the end of that day.

"The accounting systems at most firms are capable of producing a full set of financial statements at any moment on any day," says Pamela Wilson, an attorney at

Hale & Dorr

in Boston.

One exception is if a trade hasn't been confirmed by the time the market shuts down. That's usually 4 p.m. ET. But on New Year's Eve this year, the

New York Stock Exchange

will close at 1 p.m. ET.

At the latest, a trade might be reflected in the fund's NAV for the following business day.

Trades typically don't settle until a few days later, but that's not an issue for investors, as you'll see.

A trade that occurs near the end of a year or a reporting period should be reflected in the fund's report for that period. Funds are required to detail their complete holdings to shareholders twice a year.

If a fund is required to report its holdings as of Dec. 31, 1999, and was buying shares of, say,

America Online


on the last day of the year, that trading would show up in its shareholder report as a 1999 transaction.

Behind the scenes, though, any trade made on the last couple of days of this year will not settle until the next century.

Settlement is the final step in a securities transaction. It's the point when cash and securities actually change hands.

In the U.S., a trade must settle three business days after an order is executed. It's called "T+3," which stands for trade date plus three days. In other countries, the settlement period may be longer. For example, in the U.K., it's T+5 for stocks.

This is the guts of the securities system.

And this back-office function usually doesn't concern retail investors. Thankfully, in the U.S., things rarely go wrong.

But this year raises some unprecedented issues.

Whether it's necessary or not, it appears that some firms may limit their trading next week in the days leading up to Jan. 1, 2000.

These institutional investors simply don't want their trades left unsettled before the close of business on New Year's Eve -- just in case there are some unforeseen Y2K consequences.

"Some fund companies are telling their managers to make all investments this week at the latest," says Wilson at Hale & Dorr. "They want to keep securities transactions to a minimum. The more they invest in foreign markets, the more that will be true."

In the settlement process, a large money-management firm might be dealing with multiple custodians -- the banks that are responsible for holding the cash and securities of that firm's accounts. The custodians are responsible for delivering cash and securities to settle trades.

Frankly, money-management firms don't want to be at the mercy of another firm's computer systems going haywire. If there's a problem, investors would blame the mutual fund company, even if it's a third-party bank that's responsible for the glitch.

Some Y2K doomsayers are waiting to see if riots erupt. So, why should a money manager keep an AOL trade open if it can avoid it?

"No one wants to have things open over the weekend," says one Wall Street veteran. "What happens? Who knows?"

Look for a settlement-related pullback in trading late next week. Trades executed Tuesday should be settled by Friday. Wednesday, Thursday and Friday could be pretty quiet.

Grab your flashlight and wait to see what happens.

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Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.