“Market Oversight in the 1990s”

     I’m pleased to be here today.  As the trade association
representing those who underwrite, trade, and sell debt securities
nationally and internationally, PSA plays a huge role in our debt
markets.  Your interests range from the smallest municipal issuers
to the largest multinational corporations.  You’ve been a strong
advocate for the industry, an active partner for the SEC, and a
catalyst for positive change in the markets you serve -- which,
lest we forget, are the largest in the world.

     During my tenure, SEC activity in the debt markets has
concentrated on municipal bonds.  In some cases, such as improving
price transparency, this has been our choice; in others, such as
Orange County, events have compelled us to act.  

     As important as municipal issues are, they represent but a
narrow band of the day-to-day work of both the Commission and PSA.
I thought it might be helpful today if, instead of focusing on a
single area, I offered an overview of recent and upcoming SEC
initiatives.  That will enable me to speak about some of the
broader themes that drive our activity, not only in the municipal
market, but in all markets.

     Let me begin with our regulatory philosophy.  I see the
Commission’s relationship with the industry as a partnership, with
responsibilities on both sides.  The industry has a practical
responsibility, to see that it is innovative and competitive.  But
it also has a public responsibility, to safeguard the interests of
the investors who rely on it -- in many cases, literally to manage
their life savings.

     The SEC has responsibilities, too.  Key among them is to
respect the awesome power of the free market, and, whenever
possible, to use market solutions, such as disclosure and
competition, to solve market problems.  When we identify an issue
as fundamental to protecting the industry’s valuable franchise, we
work with the industry to resolve it.  We prefer consensus to
confrontation.  

     The process is not without its tensions -- but together, we’ve
created a regulatory framework that has helped make American
markets the most innovative and successful in the world.

     The truth is, in almost every instance, what’s good for
investors is good for the market.  SEC regulation is not a zero-
sum game in which every new advance for investors brings an equal
and corresponding loss for the firms.  Most of us recognize that
it’s quite the opposite -- every new improvement for investors
makes a better marketplace, one that’s likely to attract more
investors and more capital.  And indeed, since the securities laws
were instituted in 1933, business has thrived as investor
confidence has grown.

     That’s why few people have welcomed SEC oversight more than
the securities industry.  The fact that so many brokers and firms
share such an enlightened view today is a remarkable tribute to an
industry that, by and large, is willing and able to look beyond
short-term profits at long-term interests.

     Our work in the municipal debt market typifies our cooperative
approach.  Only a few weeks after I was sworn into office, I told
the Congress that “to some observers, the most significant flaw in
the municipal securities market is the lack of trading information
available to investors and market professionals.”

     Today, improvements in market price transparency are well
underway.  Working with the Public Securities Association and a
broad spectrum of industry groups, the SEC crafted a framework for
secondary market disclosure through the amendments to rule 15c2-
12.  These measures went fully into effect this past January first.
In addition, PSA undertook an initiative to make selected trade and
price information available to the public on a regular basis.  We
now need to bring to a completion the plan of the Municipal
Securities Rulemaking Board to make same-day price reporting of
retail trades a reality.  

     Other problems were waiting in line to be addressed.  In my
years in the securities industry, I had found myself attending too
many fundraisers for candidates I didn’t know, seeking office in
places I didn’t live.  At the time I was sworn in, young people
entering the municipal securities business were still learning the
pernicious practice of “pay-to-play,” in which political campaign
contributions open the door to underwriting business.

     Today, following its own voluntary ban on the practice, the
industry has imposed rules that are bringing an end to pay-to-
play.  We’re now at the next stage of that initiative:  how to
prevent lawyers and lobbyists from acting as surrogates for firms
and making contributions on their behalf.  We’re asking issuers,
firms, and potential surrogates alike to address this issue and
bring everyone up to the same high standards.

     I’ve already  mentioned Orange County.  Over the past 3 years,
our Division of Enforcement has brought 20 cases involving the
municipal securities markets.  These actions have involved
virtually every market participant: national and regional
underwriting firms, national and local financial advisory firms,
employees of those firms, bond counsel, underwriters counsel, and
consultants as well as elected officials.  

     In more than a few instances, there have also been parallel
criminal proceedings, which is a pretty good sign that the conduct
involved was not “borderline.”

     This weeding-out process doesn’t mean that the entire garden
has gone bad.  To the contrary, the vast majority of market
participants have been playing by the rules.  Weeding can only make
the garden healthier, and these cases make it clear to any observer
that discipline is being maintained.

     At the same time, we have been working with groups such as
PSA to further educate market participants as to their
responsibilities under the federal securities laws.  The recent
PSA teleconference on underwriter responsibilities is an excellent
example of how we can continue to work together to improve this
market.  

     We are especially concerned about the municipal market in
light of its transformation in recent years from an institutional
investor market to one in which individuals predominate.  This
reflects a wider trend; indeed, individual investors today own
roughly half of all American securities.  Many of these investors
entered the market through mutual funds, which have grown
enormously in popularity.  In 1980, one out of sixteen American
households owned mutual funds; today, that figure is one out of
three.

     But during those same years, mutual funds have become far more
complex.  The number and types of funds have proliferated, as has
the use of increasingly complex and sometimes risky instruments,
including derivatives.

     That’s why we’re working to ensure that mutual fund
prospectuses are not only comprehensive, but comprehensible.

     George Orwell once blamed the demise of the English language
on politics; he obviously never read a prospectus.  

     The law of unintended results has come into play:  The SEC’s
passion for full disclosure has created fact-bloated reports, and
prospectuses that are more redundant than revealing.  So we’re now
taking a different tack:  We asked several funds to pilot a
“Profile Prospectus,” which includes a concise summary of key
information in plain English.  We’ll soon be sitting down with the
industry to determine how the Profiles have been working.

     We’re exploring ways to provide investors with better tools
for understanding a fund’s risk level.  This, too, is a question
of communication.  Funds typically describe risk with highly
technical definitions of inverse floaters and derivatives.  This
may be useful in curing insomnia, but doesn’t improve understanding
of the fund’s overall risk level.  

     We can and must do better.  It’s my aim to have prospectuses
speak a new language -- the English language.  Later this year,
we’ll also begin to hold workshops for lawyers who write disclosure
documents; we believe that if they express themselves more clearly,
investors will benefit.  

     This Commission believes in direct contact with investors.
We’ve decided that the Federal Register is not the best way to
communicate with the American people.  Last year, for the first
time in history, we called on investors themselves to suggest ways
to better convey risks in fund prospectuses.  

     Nor is that the only departure from SEC tradition.  Where once
we interacted largely with brokers and bankers, the SEC is now
reaching out to investors proactively, through brochures, speeches,
and interviews on television and radio.  We’re even on the Internet
-- I encourage you to check out our site on the World Wide Web,
which includes portions of our EDGAR database of corporate
information.

     In addition, with the help of brokerage firms, local media,
and state regulators, we’ve been holding investors’ town meetings
across the country, from Los Angeles to Boston, and from Chicago
to Houston.  We’ve had an increasingly enthusiastic response -- the
two we held in Texas last year were attended by more than 1,500
people.

     Another area in which we’ve made progress is broker sales
practices.  We conducted two national sweeps with the self-
regulatory organizations and state regulators, and taken strong
action where we’ve found deficiencies.  At the same time, we know
that the best time to deter fraud is before it happens, so we
helped the industry develop and institute a continuing education
program for brokers.  And we encouraged a fresh look at how
compensation and contests can put brokers at odds with their
customers’ best interests.  As a result, an industry committee led
by Dan Tully issued a series of “best practices” for the industry
to aspire to.

     We’ve also focused a great deal of attention on questions of
market structure.  We pressed Nasdaq to prohibit brokers from
“trading ahead” of their customers’ orders, in order to promote
the investor’s best interest.  And the NASD, at our behest, has
just completed a sweeping re-evaluation of its governing structure
which saw representation of the public interest grow to an all-
time high.  In fact, I’ve talked with all the exchanges about the
need to assure better public representation on their boards.

     And as I speak, we are engaged in a dialogue with the
governing body of the Financial Accounting Standards Board to
strengthen and safeguard the independence of financial accounting
standard-setting.  

     This is one of the most important issues we’ve had to face.
Accounting standards have been set by the private sector for more
than sixty years.  This is a huge responsibility, for our system
of securities regulation is only as good as the numbers on which
it rests.  If they go wrong, we go wrong.  If standards are drawn,
or even seem to be drawn, to favor corporate interests over those
of investors, faith in our markets will erode.  

     While tension between the business community and standard-
setters is inevitable, 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’m not persuaded that our government should take over this
responsibility.  A better way to strengthen both the substance and
perception of FASB’s independence would be to increase public
representation among the trustees of the Financial Accounting
Foundation, which oversees the standard-setters.  Earlier this
week, I wrote to the head of the Foundation and asked him to move
quickly toward this goal.

     These initiatives all have a common theme:  in American
capital markets, the interests of investors come first -- and that
is in the best interest of everyone.

     In the same spirit of cooperation that brought about those
accomplishments, I’d like to devote the rest of my talk to three
important issues the SEC will be confronting in the year ahead:
eliminating duplication in our combined federal-state regulatory
system; reducing the cost of capital formation; and ensuring that
customer orders are handled more competitively and conscientiously.

     I know how concerned you’ve been about reducing federal-state
regulatory duplication.  It would go a long way to reduce the costs
of securities regulation.

     The truth is that the current system is not what we would
create if we were starting from scratch.  Its structure looks more
like the product of Rube Goldberg, than of Thomas Jefferson.

     From the start, I’ve made it a high priority to work with
state regulators to better coordinate our efforts and eliminate
duplication.  Last fall, the issue was brought into sharper focus
by a proposal by Congressman Jack Fields to pre-empt state
securities regulation.  

     I give Jack Fields a lot of credit.  I may not have agreed
with every item in his bill.  But it did all of us a service by
questioning cherished assumptions, and forcing us to take a fresh
look at how our markets are regulated.  

     It also offered a rare opportunity to make progress in
eliminating duplication.  Soon after Congressman Fields introduced
his legislation, I met with state regulators and offered ideas in
several key areas.

     It’s been our experience that state regulators are the front
line of defense.  They’re often the first to identify potential
problems, before too many investors are harmed.

     I told the states that I believe they should continue to
receive the funds they currently receive.  The local cop must be
there walking the beat.

     But at the same time, with a limited number of cops, it’s
important that we don’t all walk the same beat.  

     I’m pleased to say that the states recognize the need to
eliminate wasteful duplication and they’ve been responsive to our
suggestions.  The North American Securities Administrators
Association immediately appointed a blue-ribbon panel to study the
relative roles of state and federal securities regulation.  The
panel includes some of the most distinguished people in the field,
and its report is scheduled for release later this year.

     At the same time, a bipartisan effort addressed many points
of contention in the original Fields Bill, improving the chances
that it will be passed.  As reported out of Subcommittee, the bill
was much improved.

     Whatever the fate of this particular legislation, any approach
that strikes a fair and workable balance between the states and
federal interests will have my support.  Better utilization of
resources will offer better protection to investors and fewer
burdens to those subject to our regulation.  

     I should note that we’ve already taken steps of our own to
make life easier for those we regulate.  Last year, our Office of
Compliance Inspections and Examinations signed a Memorandum of
Understanding with the SROs and state regulators to better
coordinate our examination efforts.  We’ll share a computerized
tracking system for all of our examinations, and we’ll hold an
annual planning summit to share schedules, discuss priorities, and
review completed examinations.

     Besides working to eliminate duplication, we’ve also focused
attention on making the regulatory structure already in place more
efficient.

     We’re re-examining our regulatory requirements to find ways
we can improve things for the thousands of companies that go to
market each year -- saving money for them and their shareholders,
and helping to preserve the international competitiveness of our
businesses and pre-eminence of our markets.

     In August 1995, I created the Task Force on Disclosure
Simplification to review all the forms and disclosure requirements
we impose on public companies.  We were fortunate enough to have
Philip Howard, an outspoken advocate of regulatory common sense,
serve as outside advisor.  The Task Force issued its report in
March; although I won’t burden you by describing every one of its
recommendations, I will tell you that if all of them were
implemented, they would eliminate or modify fully a quarter of the
rules and half of the forms and schedules related to corporate
finance.  The Commission has taken this report to heart and we’ve
already proposed elimination of many of the regulations singled out
by the Task Force.  

     We’ve also established a capital formation advisory committee,
chaired by Commissioner Steve Wallman.  The committee is weighing
the efficiency and costs of regulation against its benefits in
public offerings.  I’ll illustrate the scope of the committee’s
mandate by sharing one simple, but fascinating question they are
examining:  Should the SEC consider registering companies, as
opposed to securities?  If you know the SEC, you’ll know that that
idea is nothing short of revolutionary.   We expect to receive this
committee’s recommendations shortly.

     Finally, in the next few months, you can expect to see the
SEC focus on market structure, especially order handling practices
that call into question whether the interests of investors are
being served as well as they should be.

     In certain markets today, brokers can trade with you at one
price publicly, while quoting a better price privately on a hidden
network.

     Quotes may not accurately reflect the real price of an issue,
because limit orders are not included in the quote.  

     And brokers are able to route trades for execution based not
on the lowest cost to the customer, but on the highest payback to
the broker.    

     These practices debase the pricing mechanism on which our
markets depend.  They raise the cost of capital for issuers.  They
stack the deck against investors.  And they strike at the heart of
the relationship between a broker and customer, because they
violate the understanding on which it rests.  

     In response, we’re renewing our emphasis on a broker’s agency
obligation.  Where it is possible to seek a better price for a
customer, the Commission expects that a broker will do so -- as
many do today.

     In addition, the Commission last fall proposed four new order
handling rules for stocks to restore competition based on prices.

     The rules ask specialists and market makers to publicly
display limit orders; to take the price quotes they enter on
“hidden systems” like Instinet and SelectNet, and make them
available to the public; and to offer customers an opportunity to
get better prices for their orders.

     These proposals come not from the ivory tower, but from the
trading floor -- in fact, they would codify for all markets some
of the best practices already being followed by broker-dealers
today.  Whatever their fine points, they arise from two very basic
principles:  Prices should be set by open competition.  And when
you trade in our markets, there is one person you should never have
to compete against, and that’s your own broker.  

                          *     *     *

     I’ve raised many issues with you today, perhaps too many.  But
our markets are racing forward, and Congress is moving toward some
fundamental changes.  

     Our capital markets stand among our nation’s most spectacular
achievements -- they’re the envy of the world.  They’ve raised more
than capital: they’ve raised the quality of life.

     Those markets are a rich legacy you and I have inherited, but
do not own.  They are a national asset we hold in trust for
America.  We owe it to those who will come after us to leave those
markets stronger, sturdier, more productive, and more prolific than
we found them.  And, by continuing to work together, I have no
doubt that we will.  Thank you.