REMARKS BY CHAIRMAN ARTHUR LEVITT 
  UNITED STATES SECURITIES AND EXCHANGE COMMISSION 
                  COMMONWEALTH CLUB
    SAN FRANCISCO, CALIFORNIA -- MAY 17, 1996   
 


I'm delighted to be in San Francisco, which among many other
things is home to the Pacific Stock Exchange.  The Pacific
Exchange has several claims to fame:  After World War II, General
Douglas MacArthur used its rule book as a model in rebuilding the
Tokyo Stock Exchange.  Twenty years ago, it helped pioneer
options trading.  But the greatest feat of all may be the way the
Pacific Exchange defies the laws of physics week after week by
being in two places at one time -- San Francisco and Los Angeles.

From my perspective as a life-long resident of the East coast --
or as it's known out here, the "wrong" coast -- the Bay area
often seems slightly ahead of the rest of the country.  And not
just in terms of technology, but also in cultural developments,
from the acceptance of diversity, to the creation of outstanding
institutions of higher education, art, and music.

Our capital markets have contributed a great deal to this city's
growth and development over the past 150 years.  Stocks helped
finance the railroads that tied West to East.  Bankers provided
hundreds of millions of dollars to rebuild San Francisco after
the devastating earthquake ninety years ago.  Over the years, our
markets have helped many local enterprises blossom -- California
Packing, underwritten for $16 million in 1916, is today Calpak,
the largest U.S. fruit and vegetable canner. Yesterday, cans;
today, computers -- our capital markets continue to play an
important role in the Bay area's prosperity.

And the SEC plays an important role in our capital markets.  I
want to talk to you today about that role, which lately has been
the subject of some debate.

Congress created the SEC to restore and maintain investor
confidence after the 1929 stock market crash.  We achieved that
goal by reassuring investors that in our markets, their interests
would be held supreme.  For the last 62 years, the protection of
investors has been the primary goal of the Commission.

How do we reassure investors that the markets will be fair? By
compelling those who want to use the public's money to tell the
truth, the whole truth, and nothing but the truth about the
enterprise; and by going after them mercilessly when they don't. 
Scholars call this process "the remediation of information
asymmetries"; but we have a simpler name for it: investor
protection.

The Commission sets standards for marketplace behavior through a
constantly evolving set of rules.  Those rules are not without
their costs to businesses, and in each case the SEC is called
upon to decide whether the investor protection afforded by the
rule is worth the cost imposed.

Last year, Congress asked whether consideration of costs to
business should be given roughly equal status with investor
protection, leaving the SEC with not one but two "primary"
missions. 

This questioning of the most basic mandate of the Commission led
me to take a fresh look at our system of regulation.  Given the
opportunity to defend or dilute the primacy of investor interests
in American capital markets, I concluded that they should be
defended.

I've since made the case for investor interests to Congressman
Jack Fields, who first raised the question, and I'm deeply
gratified by the response -- Congressman Fields took a broad view
and worked closely with the SEC to ensure the best possible
outcome for our nation.  The result of his skillful approach was
a bill voted out of committee by unanimous, bipartisan consent.  

But the most important audience to make this case to is investors
themselves -- and I assume that most of you fit that description. 
That's really why I'm here today -- more than Congress or the
SEC, this debate is about you.

There's hardly been a better time to discuss the question. 
Americans today are taking the stock market by storm.  In 1995,
mutual fund assets surpassed commercial bank deposits for the
first time ever.  As a nation, we now have even more money
invested in the stock market than in real estate. 

These are historic changes.  With so many new people in the
market, a shift away from the traditional SEC priority of
protecting investors would have huge implications.

For the Commission, the primacy of investor interests was present
at the creation.  The securities laws directed the SEC to enforce
those laws "for the protection of investors" and "in the public
interest."  In our two most basic statutes, those phrases,
separately or together, are used no less than 225 times.

The mission of the SEC could just as easily have been "to protect
markets"; or, "to strengthen the brokerage industry"; or, "to
safeguard corporate finance"; or, "to ensure a steady supply of
capital for companies that need it."  Indeed, bank laws have the
safety and soundness of the banking system as their primary goal. 
But Congress didn't write the SEC's statutes that way.  The
intent to protect investors is unmistakable.  

Lest anyone think this question is purely academic, let me cite
just one example of how it works in real life.  As I speak, the
SEC is engaged in an effort to strengthen and safeguard the
independence of the Financial Accounting Standards Board.  

Now I realize that discussions about accounting tend to have a
hypnotic effect on people.  But I ask that you bear with me for a
moment, because our entire system of regulation is really only as
good as the numbers on which it rests.  If they go wrong, we go
wrong. 

Accounting standards have been set by the private sector for
almost sixty years.  This is a huge responsibility.  If standards
are drawn, or even seem to be drawn, to favor corporate interests
over those of investors, faith in our markets will erode.  

Accountants report on corporate America's performance for the
benefit of investors -- they prevent companies from giving
themselves an "A" report for a "C" performance.  It stands to
reason that the rules accountants follow in making these reports
should not be unduly influenced by the special interests of
corporate America -- public oversight is also called for, to look
after the substantial public interest.  Right now, corporate
interests predominate.  All but one of the governance body that
appoints members of the FASB represent business interests.  That
is not right.  I have asked the group to reconstitute itself with
a majority of members and its chairperson from the public sector.

While tension between the business community and standard-setters
is predictable and often healthy, farsighted leaders over six
decades have supported the independence of the process and
accepted even those standards that may have worked against their
short-term interests.  The positive economic consequences of a
visibly independent process far outweigh any potential
dislocations it may cause.  I am absolutely committed to
increasing public oversight of the accounting process.

This is but the latest twist on a very old theme.

The link between investor protection and a thriving marketplace
is a natural one.  The very word "security" conveys reassurance
and protection.  Since at least 1690, according to the Oxford
English Dictionary, it has meant "a document held by a creditor
as a guarantee of his right of payment."  And for more than 100
years before that, "security" held the broader meaning of
"property ... made over ... on behalf of a person in order to
secure his fulfillment of an obligation."  There is a telling
citation from 1592: "Without good securitie they will lend Nobody
mony," and in 1597 Shakespeare, in Henry IV, expressed a
merchant's distrust of Falstaff's word by saying, "he lik'd not
the Security."

In truth, the need for safety, reassurance, and protection of
investors is as old as the markets themselves.  Capital markets
go hand-in-hand with civilization -- indeed, it's hard to
conceive of one without the other.  People using financial
instruments have always had to be protected, and confidence in
the integrity of those instruments has always had to be
maintained.  Coinage, for example -- a primitive form of security
-- was introduced in Greece in the seventh century BC.  It was
not very long before one Polycrates of Samos was found to be
cheating Spartans with coins of simulated gold.  

When the first formal stock exchanges were organized in the 17th
century, the need to protect investors was readily apparent.  In
1697, the British Parliament passed "An act to restrain the
number and ill practice of brokers and stock jobbers."  The early
1700s are almost unrivaled for foolish schemes and feverish
speculation: One group sought to raise money for "a wheel of
perpetual motion"; another, to exploit gold deposits in
Louisiana.  Now, Louisiana is famous for many things, but gold is
not one of them -- gumbo, maybe, but not gold.  

My personal favorite is the enterprise that solicited money "for
carrying on an undertaking of great advantage, but nobody to know
what it is."  

Modern regulation of the securities markets only began in England
in 1844 with the Companies Act, which called for compulsory
disclosure through a registered prospectus.  This was followed in
1900 by the Directors Liability Act, which penalized corporate
directors and promoters for untrue statements in the prospectus. 

This investor-oriented approach to securities regulation was the
model adopted by the United States -- and I should note that it
was the states, and not the federal government, that passed the
first laws to protect American investors.  To the British model,
we added the lessons we'd learned in financing the railroads.

In the late 1800s, a series of scandals had shattered confidence
in railroad investment, causing a collapse that ruined many
investors and sent the economy into a tailspin.  After World War
I, a law was passed giving the government a role in approving
issues of railroad stock.  The legislative history cites the
"universal recognition of the [link between] sound railroad
financing and the protection of investors, the latter being
essential to maintaining confidence in railroad investment."

Our securities laws incorporated that overriding concern.  To
understand the logic of those laws, it helps to know something
about the environment in which they were enacted.  

Scholars often disagree about the causes of the Great Depression
-- but they rarely disagree about the marketplace anarchy that
preceded it.  For sheer financial chicanery, the early 1900s may
have exceeded even the early 1700s.

Shareholders signed over proxies to management to vote on
questions in which it had huge conflicts of interest --
unbeknownst to shareholders.

Cash was paid to reporters at The New York Times and The Wall
Street Journal to plant false information on companies and false
tips on stocks.

Investors were sold securities without benefit of a prospectus or
offering circular; without ever seeing a balance sheet; without
knowing the first thing about a company beyond its name and share
price.

In the dark days of depression that followed, people cast about
desperately for solutions, some of them quite extreme.  One
United States Senator even proposed that all short sellers be
imprisoned . . . 

I know several CEOs who would readily embrace the idea.

By 1932, even Herbert Hoover was calling upon the New York Stock
Exchange to take measures "to protect investors."  But he stopped
short of calling for regulation of the securities markets.  In
contrast, his chief political rival, Franklin D. Roosevelt,
believed that only the enforced disclosure of corporate
information could make a free market an honest market.

Throughout the 1932 election campaign, Roosevelt repeatedly
challenged Hoover to "Let in the light!" on the securities
markets by compelling disclosure.  Within 14 months of gaining
the White House, not only did FDR "let in the light," but he also
built a lighthouse by creating the SEC.  

The history of our markets since 1934 is a history of increasing
fairness.  The invisible hand has become a more even hand.

And few people have welcomed this more than Wall Street.  You
might expect that every new gain for investors would mean a
corresponding loss for the industry.  Quite the opposite -- Wall
Street has thrived as investor confidence has grown.  So have the
corporations that depend on Wall Street to raise capital.  

And this brings me to the heart of my argument: the dichotomy
between investor protection and capital formation is a false one. 
Asking if investor protection is more important than capital
formation is like asking if bricks are more important than
buildings, or if roots are more important than trees.  The
difference between them is more imagined than real.  

Not only is there no conflict between the two -- the primacy of
investor protection enshrined in the securities laws has actually
been one of the greatest boons to capital formation in U.S.
history.  It has widened the public markets by tens of millions
of people, giving American businesses access to plentiful capital
at a low price.

In the United States, the largest cost associated with raising
equity capital is imposed by underwriters -- in repeat offerings,
they account for about 5 percent of proceeds, as opposed to 1
percent for regulatory costs.  The figures are obviously higher
in initial offerings: 7 percent for underwriters, while
regulatory costs are less than 3 percent. 

But to show that regulatory costs are low, in relative terms, is
not to say that they couldn't be lower.  We wouldn't want them to
be a penny higher than they need to be.  

This is a difficult thing to quantify.  How much investor
protection is enough?  Is it possible to have too much
protection, and if so, are we close to crossing that line?  

What we're really asking is, what is the price of confidence? 
And the truth is, it's almost impossible to quantify.  If
investors don't have faith that they'll be treated fairly,
they'll sit on their capital.  If they do part with it, you can
be sure that they'll demand more to let you use it.  This is
known as a "risk premium" -- the additional amount you must pay
people to persuade them to invest their money in a marketplace of
doubtful integrity.  It's difficult to put a number on this.

But if numbers can't tell us the value of investor protection,
the marketplace can.  We should listen to it, for it speaks to us
in several ways.

The first is through the agreements known as bond covenants. 
Corporations that borrow money in the bond market have the
opportunity to add specific investor protections, above and
beyond the level required by the securities laws.  They do this
by promising, in effect, to avoid taking certain steps that would
adversely affect the market value of their bonds, or the rights
of those who hold them -- usually institutions, in this case. 
These self-imposed restrictions are adopted willingly because the
extra investor protection actually reduces the "risk premium" and
thus the company's overall cost of capital.  Most corporate bonds
include protective covenants.  

The market also speaks to us through international comparisons. 
By almost any measure, the United States has the most
comprehensive investor protections in the world.  And yet, this
year, more than 750 foreign companies are listed in United States
markets -- a record number.  The fact that, by and large,
American companies don't go to other countries to raise equity
capital, but those in other countries come here, is further
evidence that protecting investors is cost-effective.

Finally, the market speaks to us through the extraordinary number
of initial public offerings fostered by the ease of capital
formation in the United States.  Consider the biotechnology
industry in the U.S. and Japan, for example.  Japan has no
bio-tech start-ups.  The cost of acquiring capital for a risky
venture is so high that no new company can pay it -- typically in
excess of 30% -- while in the U.S. it is less than 15%.  That's
why the Japanese bio-tech industry consists of large, established
firms like Kirin Brewery, Japan Tobacco, and even Toyota, setting
up bio-tech divisions.  

The result?  In the words of the Economist, "Japan has not only
failed to create a competitive biotechnology industry; it has
also become a huge importer of biotechnology products".  In the
U.S., on the other hand, the vastly more successful bio-tech
industry depends upon entrepreneurs with good projects getting
capital.  Such entrepreneurs have little problem doing so --
witness the more than 1,000 bio-tech companies in California
alone.  

Venture capitalists provide seed capital to these companies,
expecting to recoup their investments by taking the companies
public.  They expect that they can take the companies public
because regulations governing securities in the U.S. create a
fluid market, in which individuals can invest with confidence.  

That's the way the system works.  It's also what gives the U.S.
an edge in innovation -- think of the top companies today that
were small start-ups not so many years ago:  Microsoft. 
Genentech.  MCI.  Dell Computers.  Amgen.  And many more.

Through these examples, the marketplace is telling us that the
little we pay in regulatory costs brings us an extraordinary
return.  And that, in turn, tells us why investor protection is
and must continue to be not just the goal, but the plan, the
program, the priority, and the passion of the SEC.

That's not to say that we can ignore the costs of our rules to
businesses.  It is to say that we mustn't ignore the benefits. 
Since its creation, the Commission has been mindful of the cost
of regulation and routinely considers capital formation,
efficiency, and competition in its decisions.  The first Chairman
of the SEC, in his very first public statement, set a course for
the Commission when he said, "There will be an effort . . .
constantly to keep in mind the larger aspects and to avoid the
nuisance rules."

But the foremost mission of the SEC for 62 years has been
investor protection, and no matter how well-intentioned any
additional role may be, it will inevitably distract attention
from our primary focus.  That's a price we can ill afford.

Every day, somewhere in America, some securities swindler is
trying to figure out how to part people like you from your hard-
earned money.  He's likely to know that an agency of the United
States government stands between him and his goal.  I don't care
if he remembers the name of that agency, or how many staff it
has, or whether Congress likes it or not.  If a single thing gets
through to him -- if there is one fact that we all hope he
remembers about that agency, it is this: That that agency lives
and breathes to protect investors.  

To compromise on this point, even symbolically, would serve no
one well.  

                   *      *      *

I've tried to show you, in several ways, why investor protection
is and should continue to be the foremost concern of the SEC. 
I've offered historical reasons; I've offered economic reasons;
I've offered competitive reasons; and I've offered market-based
reasons.  But there's one other reason, and it's the most
compelling one of all.

There are plenty of things a market can do without.

You can have a market without quotes on the eighth or three-day
settlement of trades.

You can have a market without the Big Board or the small screen.

You can even have a market without brokers or bankers.

But you can't have a market without investors.  

That's why their interests must come first.  For as long as
America has taken care of investors, investors have taken care of
America.  And that's a record we at the SEC will do everything in
our power to preserve.

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