"INVESTOR EDUCATION: DISCLOSURE FOR THE 1990s"
                 REMARKS BY CHAIRMAN ARTHUR LEVITT
         UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                      UNIVERSITY OF VIRGINIA
                     CHARLOTTESVILLE, VIRGINIA
                         NOVEMBER 1, 1995

     Samuel Johnson once wrote that "Where secrecy or mystery
begins, vice or roguery is not far off."  My purpose today is not
to give a lecture on morality, a subject more appropriate to a
pulpit than a podium.  Instead, I want to take advantage of this
academic setting to share some thoughts on disclosure, and the
pivotal role it plays in the regulation of our capital markets.  

     The need for disclosure was a very painful lesson for the
United States to learn.  Sixty-six years ago, the machinery of
American finance stopped on a dime.  In the span of a few months,
the value of all stocks listed on the New York Stock Exchange
plunged from nearly 90 billion dollars to around 16 billion, and
bonds from 49 billion dollars to 31.  

     Scholars often disagree about the causes of the Great
Depression -- but they rarely disagree about the marketplace
anarchy that preceded it.

     John Maynard Keynes, a masterful investor as well as a great
economist, described the stock market he knew as a "casino." 
Before the crash, stock prices often had little to do with the
fundamentals, because most of the fundamentals were never
disclosed.  

     Not only was the market a casino -- it was a casino in which
the games were rigged.  

     Shareholders signed over proxies to management to vote on
questions in which they 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.  One United States Senator even
proposed that all short sellers be imprisoned -- which may not be
such a bad idea, when you come to think of it...

     Sixty-one years later, the American securities industry is in
good order.  In 1934, $641 million was raised in our capital
markets; in 1984, $126.8 billion; and in 1994, that figure exceeded
$800 billion.  Total turnover on our stock market was $3.6 trillion
-- the next largest market, Japan, had $1.1 trillion.  

     That's a very attractive marketplace for companies searching
for capital.  What is behind this tremendous vote of confidence by
investors?  

     Although we can all recite dozens, even hundreds, of features
that distinguish the investment environment before 1933 from that
of today, none of those differences would have developed in the
absence of one dominating innovation -- disclosure.  

     Disclosure has transformed the capital markets.  Disclosure
has converted the casino into a chess game, by ensuring that
investors have available to them the information they need to make
an informed decision.

     The focus on disclosure as the primary method for suppressing
vice and roguery in the securities markets has deep philosophical
roots.  Regulation of the financial markets is entirely different
in character and in objective from the regulation of oligopolies,
such as the transportation system, where regulators have been
closely involved in the process of setting prices.  That tradition
is now breaking down.  

     Regulation of the financial markets is the exact opposite. 
Nowhere in our free enterprise economy is the business of setting
prices as intensely competitive as it is in the financial
marketplace.

     The aim of the SEC is to protect and preserve that competitive
spirit to the highest possible degree.  To that end, we try to stay
out of the way of buyers and sellers as they negotiate the price
of each trade.  We're convinced that interference is precisely what
the process does NOT need, except under the most extreme and
unusual circumstances.  

     Disclosure is the optimal tool for assuring fairness while
fostering competition.  Disclosure enables us to keep our hands
off, but our eyes open.

     Here's an example in an area that you might not immediately
associate with disclosure as such:  The exchanges stop trading in
a security when new material information arises that may have a
significant effect on the price of that security.  The connection
between that rule and disclosure is clear enough.

     But the exchanges also stop trading when a large imbalance
develops between offers and bids.  The purpose of this trading halt
is not merely to prevent a discontinuous price jump, although that
is important.  The authorities stop trading in order to provide
TIME for the imbalance to come to the attention of anyone who might
be interested.

     In the old days, the people "on the floor" would have used
this information to their own advantage.  Today, all investors have
pretty much the same opportunity to buy on weakness or sell on
strength, thanks to the publicity that the trading halt gives.

     Scholars tell us that the market is efficient because of the
rapid dissemination of information and the eagerness with which
investors and analysts assimilate it.  That makes beating the
market difficult, but it also keeps the market fair, because all
investors, large or small, have access to the information they need
to make intelligent decisions -- AND access to the market to
execute their orders.

     Just consider this:  without the wealth of disclosure that
goes into public offering prospectuses and due diligence, who would
have bought -- AND AT HOW MUCH LOWER A PRICE -- the six and one-
half trillion dollars of corporate and municipal securities sold
in the public markets over the past 10 years?

     I am not naive enough to believe that regulation has succeeded
in obliterating all the problems of the past.  But I think you'll
agree that they are rare by any standard today -- and EXTREMELY
rare when compared to markets in other countries.

     So far, I've discussed the information that is made available
to investors.  But there is another aspect of disclosure, and that
is the information that actually GETS ACROSS to investors.  

     This has been a central focus of the current Commission, for
many reasons.  One of the most important has to do with the mass
migration of investors away from FDIC-insured bank accounts and
into our securities markets.  In 1993, for the first time in
history, investment company assets, at some $2.4 trillion,
surpassed the deposits of commercial banks.  

     The decline in interest rates from 1991 to 1993 helped
transform us from a nation of savers to a nation of investors.  One
out of three American families now holds an investment in mutual
funds or the stock market, directly or through defined contribution
retirement plans.

     This huge influx into our securities markets has provided new
opportunities for investors -- and new opportunities for America. 
But it's also increased risk -- and it's created confusion and a
greater potential for abuse.  Investors are not as informed as they
should be.  It's a complex field, inhabited by creatures with names
like "collateralized mortgage obligation," "bull-bear butterfly
spread," and "inverse floater."  And there are misconceptions even
about such basic instruments as mutual funds.  It's clear that
people need to become better informed as investors.  

     This is not a question of being smart -- indeed, these
investors are smart enough to know that with CD returns of 2 to 4
percent, the stock market is a good place to be, if you can ride
out the bumps.  

     But there's a difference between being smart and being
sophisticated.  You can be born smart; but it takes years of
experience to become sophisticated.  I'm concerned that too many
investors today don't understand the risks involved in our markets. 
This is especially troubling because most of these new investors
have experienced only a bull market; I fear that in a downturn,
those who don't understand risk may react precipitously and
carelessly, at great cost to themselves and our markets.

     This new generation of investors has great ramifications for
disclosure.  When the markets are inhabited by relatively
sophisticated investors, you may be able to focus on making
information available.  People know what to look for, where to find
it, and what it means.  

     But when a great influx of new investors occurs -- especially
investors who are drawn more to no-load mutual funds than to
brokers and the advice they provide -- you had better get very
active about CONNECTING people with the great volume of information
that's out there, or you may well end up with a mess on your hands. 


     This actually happened once before in the United States, in
the decade between the end of World War I and the stock market
crash.  Joseph P. Kennedy, the first Chairman of the SEC, was a
witness to this history, and made a special note of it in his very
first speech as Chairman in July of 1934:

     "The billions of dollars of capital required by the war," he
said, "and the many billions since, have made in this Nation a vast
number of security holders.  From a few hundred thousand before
1916 who held securities, more than 20 million became investors
during the war, mostly in bonds.  And in the period succeeding the
war, these people turned to the leading exchanges and to the
investment bankers and brokers for further investment."

     Like our situation in the 1990s, these investors were novices
and needed protection.  The government, through the SEC, was about
to provide it, and its main ingredient would be disclosure, which
was then called "publicity."  Kennedy went on to say,

     "Publicity will be an important element in the new conditions,
publicity, not of an occasional nature, but regular and
informative.  It will not be enough for a new enterprise to be
candid in its original prospectus; it will supply its investors,
from time to time, with publicity of such a nature that all will
be as well informed as any individual could be."

     In the parallel situation of the 1990s, we've taken this
message to heart.  We've responded with a series of initiatives
designed to ensure that investors are truly "as well informed as
any individual could be."  

     The centerpiece of our effort is an emphasis on simplicity,
precision, and economy in communications with investors, and
especially the use of Plain English.  

     George Orwell once blamed the demise of the English language
on politics.  It's quite possible he never read a prospectus.  

     To say that prospectuses can be tough to read is to make a
vast understatement.  The prose trips off the tongue like peanut
butter.  Poetry seems to be reserved for claims about performance. 


     In fairness, much of the reason for the arcane language has
to do with well-founded legal concerns.

     I wish I could say that the SEC had nothing to do with the
status quo, but I can't.  We've contributed to the situation,
albeit with the best intentions -- and so have our fellow
regulators and the courts.  We ask funds to simplify and clarify
their discussions of derivatives, for example.  Within days,
battalions of fund managers and lawyers descend on paneled
conference rooms, thousands of legal pads slap down on shiny
tables, and a new contest begins between the forces of Clarity and
the forces of Confusion.  

     It's no wonder many investors wouldn't know a derivative if
they saw one.  The law of unintended results has come into play: 
Our passion for full disclosure has created fact-bloated reports,
and prospectuses that are more redundant than revealing.

     It's my aim to have prospectuses begin to speak a new language
-- the ENGLISH language.  Today, when a prospectus or other
investor document is submitted to the SEC for comment, one of our
foremost considerations is whether it effectively COMMUNICATES with
investors.  In the last year alone, in a cooperative effort with
the industry, I believe that we've been successful in setting a new
standard of clarity.  The unmistakeable trend in investor
communication is away from impenetrable masses of linguistic
underbrush, in favor of economy and accessibility.

     Closely related to this is the new "Profile Prospectus,"
piloted by the mutual fund industry at our request and now in
active use by several fund families.  As we explored ways to make
prospectuses simpler, our focus groups found that investors didn't
necessarily want more or less information, they wanted more
UNDERSTANDABLE information.  

     The "Profiles" include a concise summary of salient
information, in a readily identifiable and useful format that
greatly facilitates comparison among funds.  Eleven key points are
highlighted, including the fund's investment objectives, its risks,
and its fees.

     We're also looking into the feasibility of some sort of tool
to convey the relative risk of mutual funds.  Too many times in
recent years, investors have been taken by surprise when high-risk
instruments, such as derivatives, have suddenly laid waste to their
portfolios.  There is nothing inherently wrong with derivatives. 
They're something like electricity -- dangerous if mishandled, but
also capable of doing enormous good.  But investors need a better
sense of just how exposed they are to risk.  

     Again, this is a question of communication -- and in
attempting to answer it, for the first time in SEC history, we have
sought the advice and comment of those most directly affected --
 investors themselves.  And it's WORKING.  We had a record 3700
comments on this proposal, the vast majority from individual
investors.  This shows that there is a great desire among them to
participate in the regulatory process.  

     To understand what a dramatic change this is on the SEC's
part, you need to know something about how the Commission works. 
Most of the actions we take every day affect the industry directly,
and investors INdirectly.  When we make a phone call, or write a
letter, it's often to one of the exchanges, or a mutual fund, or
a brokerage firm -- not to an investor.  There's an irony in this.

     We've been PROTECTING investors . . . but not always TALKING
to them.  

     The new realities of our marketplace call for a new approach. 
Instead of working almost exclusively through the industry, we're
now also working at the grass roots, by listening to the needs of
investors, and including them in our rule proposal and comment
process.

     I've spoken thus far about a new kind of disclosure --
disclosure that doesn't surround itself with legalistic barbed
wire; disclosure that doesn't sail over the reader's head;
disclosure that does its level best to CONNECT with investors.  But
the truth is, investors are equally obliged to seek out and
understand the disclosure.  And that's where education comes in.

     We've taken the SEC's old Office of Consumer Affairs and
turned it into an Office of Investor Education and Assistance
that's ready for the 21st century.  Through it, we've designed
brochures that explain the basics of investing in stocks and in
mutual funds, and we've made them available to all.  We've created
a toll-free investor information line with pre-recorded answers to
commonly asked questions.  We've reached out to new investors
through television and radio interviews, magazine articles, and
speeches.

     Just a month ago, we put up an SEC site on the portion of the
Internet known as the World Wide Web, making available SEC News
Digests, litigation releases, speeches, testimony before Congress,
rule proposals, press releases, and more.  The Web site offers
access to our huge "EDGAR" database of corporate information --
this means access to the disclosure documents of most public
companies, from the comfort of your own living room.

     It's not an overstatement to say that this initiative may very
well change the face of disclosure from here on.  Technology
facilitates disclosure that is quicker, more direct, more
accessible, and more USEFUL.  We won't put any financial analysts
out of business, but we ARE putting more investors in direct touch
with the information they need to invest wisely.

     We've also conducted a series of highly popular investor town
meetings across the United States to offer tips on how to invest
wisely, and to raise awareness of the hazards to watch out for. 
This, too, is a bit of a novelty at the SEC, which usually tries
to change marketplace behavior from the "top-down" -- that is, by
proposing rules to compel market participants to do the right
thing.  What is different about the last two years, is that we've
also been working to influence market behavior from the "bottom
up."  

     It's a simple theory, based on the securities industry's
responsiveness to the demands and needs of its clients.  I know
from my own experience as a broker and manager that the only voice
that has a stronger impact on the industry than government is the
CUSTOMER.  We believe that educated investors will do more than
help themselves -- by knowing what questions to ask, and knowing
how to demand the best deal, the best execution, and the best
service, they will help the SEC raise standards and improve
practices in the industry.  

     This approach happens to be cost-effective:  It costs
taxpayers far less to PREVENT a fraud from taking place, than to
investigate and prosecute wrongdoers AFTER they've taken away
investors' hard-earned money.  Moreover, it costs less to the
market itself, for business disruption expenses are ultimately
passed on to OTHER investors.  

     It is also, I believe, a profoundly DEREGULATORY approach,
because rather than interposing a new rule or regulation between
investors and investments, we are asking investors themselves to
become more responsible for their investment decisions.  The more
investors become informed, the less need there will be for
government intervention in the marketplace.

     Educating investors is an interest we hold in common.  The
McIntire School of Commerce of the University of Virginia is justly
known for the quality of its financial education.  In a sense,
we're both in the business of disclosure -- and we both believe in
the benefits of information to our society.  

     If we do our jobs well, not only will people make better
investments in the market -- they'll make a better market for
investors.  And that's a result EVERYONE will applaud.              

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