"REFORM EFFORTS IN MUNICIPAL FINANCE, LITIGATION,
              AND BANKING: PROGRESS AND PROGNOSIS"

                REMARKS BY CHAIRMAN ARTHUR LEVITT
        UNITED STATES SECURITIES AND EXCHANGE COMMISSION
            ASSOCIATION OF THE BAR, CITY OF NEW YORK
                       NEW YORK, NEW YORK
                          JUNE 5, 1995

     I want to talk to you about three important reform movements
underway in Washington -- call them the three "R"s -- municipal
finance reform, litigation reform, and reform of the Glass-
Steagall Act.  Each of these springs from a different source --
but ALL of them hold great implications for the securities
industry, and they deserve to be examined in some detail.  I'll
begin with municipal finance.

     This is an issue that's been close to my heart for as long
as I can remember.  You could even say that it runs in the family
-- as many of you know, my father served for 24 years as New York
State Comptroller; what is less well known is that the very first
SEC inquiry into municipal finance was set in motion by a series
of audits of New York City revenue-anticipation notes he
performed in 1975.

     My father viewed public debt as a sort of paradox -- as both
"one of the most important of the fiscal mechanisms available to
government -- and one of the most vulnerable to misuse."

     Today, the SEC is keeping a close eye on those
vulnerabilities.  We've been working to hold the municipal market
to high standards, especially in light of its transformation from
an institutional to an individual investor market.  

     That change has been dramatic.  A decade ago, individual
investors held about 45 percent of outstanding municipal
securities; today, the figure is 70 percent.  It is a huge
market, now valued at about $1.2 trillion, and of critical
importance to our nation's infrastructure.  It represents the
schools that teach our children, the water we drink, the power
that enhances our lives and drives our economy, the roads that
take us where we want to go.  

     The enormous power of the municipal market demands that it
operate with complete honesty and integrity.  And yet certain
practices in the industry remain closer to the back-room deals
and "honest graft" of George Washington Plunkitt and his ward
captains in 1905, than to the full disclosure and unimpeachable
integrity demanded by our markets in 1995.

     I'm speaking, of course, of what's come to be known as "pay-
to-play" -- the practice of tying public financing business to
political contributions.  Left essentially unchecked, this
particular form of corruption has grown brazenly, and in recent
years has tarnished the reputation of bankers, lawyers and public
officials alike.  

     Investment bankers were the first to confront the ethical
implications of pay-to-play, by placing a voluntary ban on
political contributions to officials with whom they did bond
business; this was followed by a Municipal Securities Rulemaking
Board (MSRB) rule restricting contributions and solicitation.

     Several organizations of municipal bond issuers have adopted
resolutions to address the problem, and some jurisdictions --
Florida, for example -- have made the ban on pay-to-play a matter
of law.  The City of New York has demonstrated leadership on this
issue; in its recent request for services, the City asked
potential counsel whether they disclosed their political
contributions.  The Government Finance Officers Association will
consider recommending similar actions at its annual meeting,
which begins this weekend.

     I expected lawyers to be in the vanguard of the effort to
wipe out pay-to-play.  I am sad to say they are not.  The
National Association of Bond Lawyers (NABL) has adopted a modest
statement of principles, which at its most severe calls for
disclosure of political contributions.  Two firms from Little
Rock, one from Ohio, and one from San Francisco, have adopted
this statement -- a less than overwhelming response.  Perhaps
more tellingly, as far as I know only a single member firm of the
NABL Board of Directors has committed itself to these luke-warm
measures.  NABL also missed an opportunity to move forward with
its response to the MSRB's proposed rule G-38, which would
require underwriters to report arrangements with consultants. 
NABL asked that lawyers be excluded; I have to believe they can
do better than this.

     Indeed, the SEC looks to the profession to address the
problem.  That the bar has, for the most part, remained silent on
the question is deeply disturbing.  Private practitioners face a
host of ethical perils when they interact with a public client,
particularly when that client is represented by an elected
official with the power to dispense legal work.  Add to it an
elected official vigorously seeking campaign contributions -- and
viewing selection of counsel not as an exercise of the public
trust, but as a personal plum -- and you have an ethical witches'
brew, one that has bedeviled the municipal finance bar for some
time. 

     This Association, however, is in a position to help change
that -- indeed, there is hardly an organization better suited to
fill the vacuum of leadership in the bar.  For one hundred and
twenty-five years, you've led the profession on matters of
ethics, the public good, and the practice of law, and now your
Committee on Ethics is considering the question of limiting "pay-
to-play" in New York.  I hope you'll act to help us end this
insidious practice; public investors deserve a municipal market
that is governed by the invisible hand, not the greased palm. 
I'm certain that if you lead, others will follow.  

     There is another aspect to this issue.  As counsel
participating in municipal bond offerings, you should be
concerned about pay-to-play practices, not only from an ethical
perspective, but as a disclosure issue as well.  

     In its March 1994 interpretive release regarding the
disclosure obligations of municipal issuers and dealers under the
antifraud provisions, the Commission expressed its view that
"[i]nformation concerning financial and business relationships
and arrangements among the parties involved in the issuance of
municipal securities may be critical to an evaluation of an
offering."  

     Disclosure of these material arrangements could indicate the
existence of actual or potential conflicts of interest, and may
reflect upon the qualifications, level of diligence, and
disinterestedness of financial advisers, underwriters, experts
and other participants in an offering.  Pay-to-play corrupts the
system, and investors are certainly entitled to know whether the
securities they are purchasing benefited from the normal and
expected arm's-length checks and balances built into the offering
process.

     Investors expect participants in securities offerings to
follow those standards and procedures -- especially in the case
of municipal securities, where the local financing authorities
often erect specific safeguards to preserve the integrity of the
public financing process.  Material deviations from those
procedures warrant disclosure.

     Members of the Bar need to be sensitive to these issues
regardless of their role in the offering -- whether they are
acting as issuer's counsel, disclosure counsel, bond counsel, or
underwriter's counsel.  Counsel for the various participants must
ensure that all have access to facts regarding material financial
and business relationships, including political contributions,
that could influence municipal securities offerings.  Whatever
your role, you will be responsible for having reviewed the
content of the official statement.  As with any disclosure issue,
if, based upon information available to you, it appears that the
offering materials contain misleading statements -- or are
materially incomplete because of the omission of information
indicating a conflict -- you'll be expected to raise those issues
with all participants in the offering.  The "I only looked at the
tax issues" defense, or the "I relied on my lawyer" defense, will
not be credited lightly by the SEC. 

     Speaking of defense, let me now shift over the litigation
reform, which has received a great deal of attention lately, both
at the SEC and here at the Association of the Bar of the City of
New York.  Although Congress has considered reform of the system
of private litigation under the federal securities laws before,
the Republican victory in November really got the issue rolling.

     On the House side, securities litigation reform was wrapped
into one of the ten points in the Republicans' Contract With
America and launched on a very fast track.  A fairly extensive
reform bill, sponsored by Representative Cox and others, was
introduced on January 5th, the day the new Congress convened. 
This bill contained a number of provisions designed to eliminate
abuses in securities class actions, and to curb frivolous
lawsuits, that the Commission was prepared to support.  But it
also contained measures that we felt were ill-conceived, measures
that would make it difficult or impossible for defrauded
investors to bring meritorious cases.  These included a strict
"loser-pays" provision, overly stringent pleading requirements,
and the elimination of liability for reckless conduct.  The bill
also would have effectively eliminated actions based on the
fraud-on-the-market theory of liability.

     Following hearings at which the Commission and this
Association, among others, testified, the bill was revised to
alleviate some of its harshest potential impacts on private
rights of action.  Although it still contained provisions that we
believe would adversely affect private actions by investors, the
bill did move in a positive direction.  One remaining area of
particular concern is a safe harbor provision that would shield
from liability false forward-looking statements that were made
with the intention of misleading investors.  On March 8th, the
bill passed the House by a large margin.

     Now the scene has shifted to the Senate, where the Committee
on Banking, Housing, and Urban Affairs just eleven days ago
approved and reported out of committee a compromise securities
litigation reform bill put together by the Committee Chairman,
your Senator Alfonse D'Amato.  The Senate bill incorporates many
of the provisions contained in legislation introduced last year
by Senators Dodd and Domenici, and, in my judgment, represents an
improvement over the House bill.  The goal of striking the
appropriate balance between curbing abusive practices and
protecting investors has not quite been reached, however.

     The Senate bill contains some troubling provisions, such as
its safe harbor for forward-looking statements.  Although it is
clearly an improvement over the corresponding provision in the
House version, the Senate bill would, in some cases, allow
statements to receive the benefit of safe harbor protection even
though they were known to be false.  The bill also fails to
extend the statute of limitations for securities fraud actions as
recommended by the Commission, and does not restore a private
cause of action for aiding and abetting.

     It remains to be seen what will happen in the full Senate
and, assuming a bill is passed, in the conference committee. 
Judging by the bipartisan support received by the bills in both
the House and the Senate, it seems likely that some form of
securities litigation reform will be enacted by Congress this
year.  Of course, the Commission will continue to work with
Congress and other interested parties to develop legislation that
protects investors while eliminating abuses.  

     The most popular word in Washington today, on BOTH sides of
the aisle, is probably "change."  In a 1936 speech, Franklin D.
Roosevelt defended the New Deal by saying, "Wise and prudent men
-- intelligent conservatives -- have long known that in a
changing world, worthy institutions can be conserved only by
adjusting them to the changing time."  How surprised he would be
today, when conservatives have seized the mantel of change, and
quote FDR even as they try to undo the New Deal.  

     The Glass-Steagall Act was signed into law by President
Roosevelt in 1933.  Over the years, important aspects of this New
Deal legislation have been trimmed back; today, however, a
complete overhaul is being proposed. 

     On January 4th of this year, Chairman Leach of the House
Banking Committee introduced "The Financial Services
Competitiveness Act of 1995."  The SEC supports the bill's
principal purpose -- to modernize the financial services
regulatory framework by reforming Glass-Steagall.  Reform would
provide banks with greater flexibility and new avenues for
innovation.  In so doing, it could improve bank competitiveness
at home and abroad.

     In weighing Glass-Steagall reform, however, Congress also
needs to consider how financial services modernization will
impact investors and the U.S. capital markets as a whole.  The
U.S. securities markets are the deepest, most liquid, and
strongest in the world.  In one recent year alone, 1993, those
markets raised $1 trillion in capital for companies.  These funds
were raised through the entrepreneurial and risk-taking efforts
of securities firms, from private investors, and without the
benefit of federal deposit insurance.  The continuing success of
our capital markets requires that we preserve the securities
industry's ability to assume risks, and that we maintain a strong
system of investor protection to support public confidence in the
securities markets. 

     The Commission finds much that it can support in H.R. 1062. 
Chairman Leach's bill, by initiating the debate on Glass-Steagall
reform this year, has already made an important contribution.  In
addition, the bill proposes a number of useful changes to the
regulation of financial services -- for example, a flexible yet
effective framework for addressing conflicts of interest that may
arise when banks advise or sell mutual funds. 

     Looking at the bill as a whole, however, the Commission is
concerned that H.R. 1062 could impair the operations of the
highly competitive U.S. securities markets.  The bill's proposed
regulatory structure does not fully take into account some of the
real differences between the securities and banking industries. 
Banks have traditionally operated subject to regulatory
restrictions on risk-taking -- restrictions imposed in the
interests of bank safety and soundness.  But securities firms,
and the securities markets generally, specialize in
entrepreneurial and risk-taking activities.  

     For this reason, securities regulation does not, and should
not, seek to insulate securities firms from the risks they incur
in their business activities.  H.R. 1062, however, proposes a
complex, bank-oriented regulatory structure that would rigidly
constrain the operations of securities firms that are affiliated
with banks. 

     The Commission is also concerned that H.R. 1062 would allow
banks to continue to conduct a wide range of securities
activities outside the sales practice, capital, and other
investor protection requirements of the federal securities laws. 
Over the past two decades, by virtue of expansive interpretations
of the Glass-Steagall Act, banks have dramatically increased the
scope and volume of their broker-dealer activities.  Because of
the 60 year-old bank exclusions to the federal securities laws,
this expansion has occurred in significant part outside the legal
framework governing all other broker-dealer activities.  H.R.
1062, rather than taking a fresh look at the bank exclusions,
would continue and even extend the range of securities activities
that can be conducted in banks and outside the federal securities
laws.  This would compromise functional regulation and investor
protection in favor of expanding bank powers.

     I want to stress that the Commission does not oppose Glass-
Steagall reform; quite the contrary -- we remain strong
supporters of financial services modernization.  We simply
believe that the regulatory framework contemplated by H.R. 1062
is flawed and would not serve the best interests of investors and
the capital markets. 

     We have the most successful capitalist system in history,
and the market has reached unprecedented heights.  Change can be
disruptive under those circumstances.  But we became pre-eminent
as a nation not by RESISTING change, but by EMBRACING it.

     All three areas I've discussed -- the municipal market,
litigation practices, and financial services -- are ripe for
reform.  It is my fond hope that, as we proceed down that road,
the Association of the Bar and SEC will continue to work
together, to ensure that the changes we make are reasonable, that
they are balanced, and -- most importantly -- that they serve our
nation well by serving its people well.
  
                          #    #     #