REMARKS BY CHAIRMAN ARTHUR LEVITT U.S. SECURITIES AND EXCHANGE COMMISSION SECURITIES INDUSTRY ASSOCIATION BOCA RATON, FLORIDA NOVEMBER 7, 1997 This past year has presented our industry with enormous and sometimes difficult challenges -- and each time you have risen to the occasion and met them. It has been a record- setting year in so many ways, that it's hard to count all the milestones we've passed. In the equities markets, an all-time high on the Dow. An all-time record number of investors participating in the market. And an all-time record for weekly trading volume. In the options markets, it looks to be a record-setting year as well. With 296 million contracts traded through October, we should be breaking all previous records any day now. In the bond markets too, we're on pace for a record year, with issuance of over 6.9 trillion dollars during the first three quarters of 1997. And finally, in the mutual fund industry, another banner year, with net sales having grown by more than 450 billion dollars since last October. This success is recognized world-wide. Just last week, we learned that the number of foreign private companies registered in the United States and reporting to the SEC broke the 1,000 mark. By comparison, there were only 434 such companies at the end of 1990. Even more remarkable, those 1,000-plus foreign companies represent 51 countries. When it comes to raising capital, America continues to win the world's confidence. Industry processing capacity has also broken records. Not long ago, it seemed awesome when a hundred million shares traded hands in a single day. Now, as we've seen in the past few weeks, our markets can handle more than 2 billion shares a day. Monday, October 27 and Tuesday, October 28 are days that few of us will soon forget. Monday's loss of 554 points on the Dow riveted everyone's attention -- as did Tuesday's largest-ever point gain. On the New York Stock Exchange, Tuesday's volume hit 1.2 billion shares, and on Nasdaq, volume topped 1.3 billion shares. Every part of the system was tested last week, and record volumes were handled smoothly. Trading was orderly, clearance and settlement functioned properly, margin calls were met. True, there were some bottlenecks in the process, affecting even the most efficient exchanges and broker- dealers. But all in all, our market-makers and specialists proved their mettle. Asked about the direction of the market, J.P. Morgan famously quipped that "prices will fluctuate." His insight is valuable when we think of the resilience of our markets today: no matter which way prices are headed -- or how fast they're headed there -- the system works. No one should be surprised that the system worked well last week. You've often heard me say that the best time to fix the roof is when the sun is shining. The years since 1987 have been sunny for our markets, and the industry has done much to repair the roof. When the rains came last week, it proved water-tight. But it is the brokers of America who are the custodians of investors' confidence in the integrity of the markets. Through the years, I've been queried about why must the commission publicize actions that appear to denigrate the industry and tar the image of the vast majority of the industry who are honorable professionals. Probably, the media focuses too much on those few, those very few, bad apples in our industry, and not enough time is spent on the remaining 99% who work every day to provide conscientious service to clients and customers. It's always risky for me to single out particular examples of excellence, because I will inevitably leave out some people in the industry who deserve recognition. My staff begs me not to name firms or individuals for fear of appearing to endorse them. But I've left my staff back in Washington -- so, if you agree not to tell them, I hope you'll allow me to recognize a few individuals and firms among you who have truly distinguished yourselves this year in helping to live up to the highest standards of service to the customer. Al Maggini of Merrill Lynch in Santa Rosa, California, has just become a million-dollar producer -- at the age of 80. He's been working with Merrill Lynch for 49 years -- and he has never had a single complaint. A great example is Jim Goodknight, of Edward D. Jones in Joplin, Missouri, who's been an inspiration to his colleagues and a conscientious counselor to his clients. He's known for going above and beyond the call of duty on behalf of investors. Jim originated a program in which veteran brokers with more accounts than they can handle are encouraged to bring in young talent to mentor. That way, the veteran can focus his attention on fewer customers, and a younger broker can get started under the guidance of an experienced pro. Edward D. Jones liked the idea so much, they named it the Goodknight Plan. Gail Utter of A.G. Edwards -- who has managed the branch in Sherman, Texas, for the last three years -- is renowned as a mentor to the brokers in her office, teaching them the highest standards of the industry's ideals. Consistently a member of A.G. Edwards' top performance group, she's also been a leader in community and civic groups. Richard Otter of Smith Barney in San Francisco has served as a broker for 37 years -- without a single complaint. He was raised by his grandmother, who relied on her income from dividend checks over the years. Remembering the needs of folks like his grandmother, he has specialized in handling investments for senior citizens. He has evidently been taking good care of their portfolios: assets under his management have grown from $85 million in 1987 to $300 million today. It's also important to recognize individuals who devote tremendous amounts of time and energy to serving on industry and self-regulatory committees in addition to their regular jobs. Take Rich Brueckner, managing director of Pershing, who has chaired the NASD's National Business Conduct Committee for the last two years. He's also chairing the SIA's Education Foundation, and has played a critical role bringing investor education to more than 600,000 high school students through the stock market game. I commend the hundreds of industry professionals like him for their commitment to policing the markets and safeguarding the integrity of their profession. Their firms too, deserve considerable credit for supporting their involvement in the self-regulatory process. I should also call attention to some of the notable practices being followed at various firms around the industry. A prime example is the culture of care for the individual investor at the municipal bond firm Lebenthal & Co. -- a culture that is manifested in the firm's efforts to educate the customer. This is a firm that provides pricing information on municipal bonds free of charge. Even its marketing materials stress investor education. In San Francisco, Charles Schwab & Co. has been leading the way in applying technology to serve individual investors, through such novel applications as voice recognition and web technology. In St. Louis, Edward D. Jones has designed a supervisory structure that's unique in the industry, where supervisors report to the compliance department, thus maintaining a wall between sales and supervision. Merrill Lynch has come up with an idea to keep standards high. The firm has created an ethics hotline for brokers to report what they believe to be unethical behavior in the workplace. They can request anonymity or confidentiality, which will help people stand up for what they think is right. Many firms have taken steps toward improving compensation practices. And though we should go further, I applaud a number of firms for dealing with the difficult issue of recruiting brokers from competitors - by eliminating accelerated payouts and upfront bonuses. We have further to go. Among mutual funds, there are two fund companies, American Century and Scudder, that deserve special recognition for their commitment to lowering execution costs for their mutual fund investors. In their quest to get better prices for their trades, they've invested heavily in technology and trading prowess. The result is reduced costs, which translates into enhanced returns for their investors. It should come as no surprise that neither firm accepts soft dollars. American Century and Scudder are in fact among a growing group of buy-side traders that have been showing real leadership on markets issues. Through their involvement in the Nasdaq Quality of Markets Committee, the STA's Institutional Committee, and the ICI, these traders have shown themselves to be some of the most sophisticated and articulate advocates for investor interests, and their input has been extraordinarily helpful to the sell-side, the markets, and the commission. Another fund company worthy of note is Kemper Zurich Investments, which has designed an innovative way to give mutual fund investors more accurate information about how they're doing. Here's how they confronted a chronic problem faced by fund investors: information about a fund's performance can differ, sometimes dramatically, from a fund investor's performance. Calculations of fund performance assume a one-time investment at the beginning of the year, whereas fund investors may buy and sell fund shares throughout the year. Clearly, a fund's investors would benefit from knowing how well they did, as opposed to how well the fund did. Kemper Zurich is the pioneer in providing personalized performance information to fund shareholders. Yet another example of keeping investors well informed: the Royce family of funds produces shareholder reports that are often models of clarity and solid information. Instead of just reporting the best performing stocks, Royce prominently lists the five worst performers in their portfolio as well. On the personnel front, American Express Financial Advisors has taken innovative steps to increase cultural diversity among its professional employees. After extensive research, they tailored their recruitment efforts to increase their focus and effectiveness in hiring women and minorities. And for current employees, they've established a diversity resource center, which promotes understanding of the importance of cultural differences on Wall Street. The achievements of firms and people like these -- on behalf of the individual investor, their profession, and their communities -- represent what is best about the securities industry and the vast majority of people in it. I have spoken of the achievements of individuals and firms, but the industry as a whole -- and especially the SROs -- have done a tremendous job. This past year we've seen a number of historic changes in our markets, as they move toward ever more open and vigorous competition. The industry must be applauded for the successful roll- out of the order handling rules, made possible by the extensive cooperation and commitment of firms, SROs, and markets, who have worked tirelessly to make the necessary adjustments. These changes have dramatically increased the transparency and fairness of our equities markets. The AMEX, under Dick Syron, and the Nasdaq, under Frank Zarb, deserve to be recognized for their leadership in moving to sixteenths. And the New York Stock Exchange, under Dick Grasso, deserves to be recognized for that market's historic decision to move to decimals. We also commend the New York Stock Exchange for its decision yesterday to revamp its delisting requirements, which appears to open the door to enhanced competition for listings. The commission has been busy too, working to ensure that our securities laws and our oversight of the markets keeps pace with innovation and evolving industry practices. We continue to press for an overhaul of the outdated rules that govern our financial services industry. These antiquated restrictions have limited competition among banks, insurance companies, and securities firms, and have handicapped U.S. firms competing abroad. Legislation now pending in Congress would go some distance toward achieving these goals. We're about to issue a proposal that would allow firms to establish an affiliate that could act as a counterparty for a wide range of OTC derivatives products. This limited- purpose affiliate would be subject to different regulatory requirements, including more flexible margin rules and net capital requirements based on value-at-risk models. We've been exploring ways to ease the restrictions faced by the foreign affiliates of U.S. firms who do business with U.S. institutional investors. We've developed a program to coordinate SRO exams among the NYSE, NASDR, AMEX and CBOE. Firms choose whether to have a coordinated SRO exam; the result can often mean considerable time savings and efficiencies. We're also working to coordinate our examinations with other regulators. We've been working with the industry and with the states on modifications to NASAA's proposed books and records rules. In fact, we believe we've reached a compromise that should give firms significantly more flexibility on where and how they must maintain their books and records. One of the most significant areas we've been focusing on is automation and the many technological challenges facing the industry. We recognize that firms are confronted with many systems projects, each of which must compete for valuable technology resources. The commission has been working on a number of fronts to assist the industry in balancing these competing priorities. First and foremost among them must be preparing for the year 2000. The commission has been working closely with industry organizations to ensure a successful transition to the next millennium. Recently, I sent a letter to about 8,000 broker-dealers and transfer agents, urging firms to have all the necessary modifications in place by the end of 1998, to allow for participation in street-wide testing scheduled for 1999. I cannot stress enough the importance of this initiative. It requires the attention and focus of management at the highest level to ensure that you're braced for the midnight tick of the clock at the year 2000. I scarcely have to remind you of other technology challenges you face. These include the European Union's move to a single currency; the roll-out of the new Nasdaq audit trail; and the systems changes necessary to accommodate trading in decimals. These changes will have to be accomplished over roughly the same period as the changes to fix the year 2000 problem. The commission appreciates the concerns that have been raised about the timing of these systems projects and about the competing demands for resources. We are working to provide the industry with as much flexibility as possible, because we must ensure seamless implementation of these changes in the interest of investors and the markets. Indeed, we expect to convene an industry roundtable on technology early next year to consider some of the important regulatory issues confronting you. I hope you and your colleagues will participate and contribute your expertise to this forum. We're already working on a number of fronts to remove unnecessary regulatory restraints on the use of technology. We've been coordinating with the firms and the SROs to create a workable policy for the supervision and retention of e-mail. We've been working with the industry to reduce the cost of storage and retrieval of electronic books and records. And recently, we issued a "concept release" to discuss ways to eliminate unnecessary regulatory constraints on exchanges and to facilitate the use of electronic trading mechanisms. These efforts should help maintain the position of our capital markets as the most honest, efficient and liquid in the world. As we finish yet another successful year, we should remember, however, that continued success depends upon continued vigilance -- both in keeping our markets up- to-date with the most innovative technologies, and in keeping them down-to-earth with the most reliable, old- fashioned values of trustworthiness. As challenging as the closing year has been, the coming year promises to rival it. We have more roof repairs to make; we can only get them done by working together, communicating often, and remaining vigilant. For our part, the SEC's agenda is full: We will facilitate the use of technology when investors stand to benefit; We will work with the securities bar to bring plain English to investor communications; We will fight to end small cap abuses; We will push to improve brokerage sales practices; We will work to facilitate competition in and among our markets; We will encourage vendors and markets to increase capacity; And finally, we will review our rules and regulations to ensure they are neither outdated nor unpredictable. Our markets -- individuals, firms and SROs -- have outclassed themselves this year. I expect you will apply the same creativity and dedication to addressing these new challenges. I remain proud of this industry, grateful for the role it plays in our nation's economy, and excited by the prospects that lie ahead. And I commit to you that the SEC will support you in our common interest to raise the standards of service, performance and ethics. By doing so, we will not only improve the perception of the industry, but we will improve the industry itself. Thank you very much. # # # # #