SEC Chairman Arthur Levitt Says Investor Protection Must Be Paramount Under Any Plan to Invest Social Security

In a speech today at
Harvard’s JFK School of Government, Securities and Exchange
Commission Chairman Arthur Levitt discussed publicly for the
first time the Commission’s perspectives on investing Social
Security funds in the stock market.  Rather than advocate any
particular reform proposal at this early stage of the debate,
Chairman Levitt raised four issues that particularly concern the
Commission:  investor protection; investor education; program
costs; and the implications of government investment in equities.

     Chairman Levitt said, “I am not here today to support any
particular proposal or plan to invest Social Security in the
stock market.  Nor do I assume that some sort of private-sector
investment is inevitable.  Earlier this year, the President
called for a national discussion on Social Security.  I believe
this is the right time for the SEC to outline areas that have
direct relevance to our responsibility, our experience and our
expertise.”

     He added, “We have an obligation to think long and hard
about the implications of Social Security reform.  Investing
Social Security in the stock market -- by its very nature --
involves heightened obligations, difficult questions and new
challenges.”

     At Chairman Levitt’s request, SEC Commissioner Paul Carey
has agreed to spearhead the Commission’s involvement in this
issue.

Investor Protection

     Chairman Levitt said, “The SEC’s mission is to protect
investors.  And the potential for investing Social Security in
equities raises important issues that go to the very heart of
investor protection.  This mission -- above all -- will guide the
SEC’s thinking as the discussion moves forward.”

     He added, “If we are to have self-directed individual
accounts, we must be ready to undertake an unprecedented level of
broad-scale policing of the equity markets.  Without such
policies, fraud and sales practice abuses may be perpetrated
against an army of novice investors.  And many of those novice
investors are our society’s most vulnerable citizens.”
                                
Investor Education

     Chairman Levitt said, “There is an unacceptably wide gap
between financial knowledge and financial responsibilities.
Closing this ‘knowledge gap’ is among the most important problems
we face today.  It becomes even more of an imperative if Social
Security is privatized.”

     “The government can have all of the resources and power in
the world to protect investors.  But, such power is useless if
investors don’t know the basics of saving and investing.  No
matter how perfect the plan to reform Social Security, it won’t
be as nearly effective as it could be if investors don’t
understand their options.”

     He added, “Increased risk, through greater choice, holds the
potential for greater returns.  But uninformed investors often
won’t be in a position to capture that potential.  They risk
making poor investment decisions -- perhaps even because they
fell prey to fraudulent advice or misleading sales practices.
Simply put, understanding risk has to be a key part of an
investor’s education.”

Program Costs

     Chairman Levitt said, “There is a word every investor in
America needs to understand: cost.  Investing in our markets
costs money.  Executing transactions, sending account statements,
even switching investment managers entail expenses that are paid
by the investor.  And, fees matter to an investor’s bottom line.
A one percent annual fee will reduce an ending account balance by
17 percent after 20 years.”

     He added, “These issues merit a thorough and detailed
questioning: should fees be a flat amount per year, regardless of
the size of the account, or a percentage of the account’s
balance?  Would private firms even find it profitable to offer
accounts to a great number of workers?  Would private firms be
forced to open accounts for any interested worker?”

Implications of Government Investment in the Stock Market
     
     Chairman Levitt noted several pluses and minuses of having
the government invest Social Security funds in the stock market:
Advocates believe that privatization will enable market risk to
be spread across society and generations and that economies of
scale will help reduce costs.  Others point out that government
control could lead to political interference in deciding which
companies to invest in and how those companies are run.  Chairman
Levitt asked, “Could the government invest in a tobacco company?
What about a company that was a toxic polluter a decade ago?”

     Chairman Levitt said that “while investing the Trust Fund
may minimize risk to individual investors, it may have large-
scale market effects.  Would the government have an ever greater
incentive to control market fluctuations, if not the market
itself?”
                                
[THE FULL TEXT OF THE SPEECH IS AVAILABLE BY CALLING
202.942.0020, OR ON THE SPEECHES PAGE OF THE WEBSITE,
http://www.sec.gov/news/spchindx.htm ]