Welcoming Remarks of Chairman Arthur Levitt to SEC’s Consumer Affairs Advisory Committee

Welcome to the SEC and this important meeting of the Consumer
Affairs Advisory Committee.  It’s good to see so many of you here
again.

Before we get started, I would like to acknowledge and welcome
our newest member, Mort Wagner.  Mort is an executive vice
president with Smith Barney in New York.  He also serves as the
co-chair of the Alliance for Investor Education.

At some point during virtually every day I’ve served as SEC
Chairman, I have been reminded in some way why it is that
protecting investors -- and helping investors protect themselves
-- is and must always be our preeminent mission.

This Committee plays a crucial role in determining how we fulfill
that mandate.  Let me say again what some of you have now heard
several times.  Your ideas, your creativity and insights, your
shattering of status quo thinking and conventional wisdom -- the
remarkable ferment that can and should take place when you gather
together -- can lead to marvelous innovations and inspired new
approaches to the many challenges faced by the Commission.

Much has happened since last we met.  For the first time in
history, the Dow surpassed 8,000 -- more than doubling since I’ve
been here.  IPOs, secondary underwritings, mergers and
acquisitions, mutual fund flows, and securities industry profits
are all in the midst of extended record runs.

In 1993, Business Week was so dazzled by the growth in the mutual
fund industy that they prepared a rather breathless cover story
on the subject, boldly -- and according to some in the industry,
irresponsibly -- predicting that mutual fund assets would top $4
trillion by the year 2000.  Well in one sense they were right.
In June 1997, fund assets surpassed $4 trillion, and stand at a
tidy $4.3 trillion now, with more than two years to go before we
get to the millenium.  Americans now have nearly $1 trillion more
invested in mutual funds than they have on deposit in commercial
banks.

For the capital markets, last year was one of the best in
history, and this year appears equally good.  Some people look at
this happy scenario of record highs and see proof that the
markets are strong, that nothing is wrong with the industry, that
the SEC ought to leave everything alone.  But as President
Kennedy once said, “The time to repair the roof is when the sun
is shining.”

There is a universe of investors out there who have never been
tested -- whose only experience has been a bull market.  We have
to take advantage of good times to make sure these investors
understand how our markets perform over time and to ensure that
our markets are as trusted, efficient, and professional as
possible.

Our growing securities markets and healthy economy have provided
new opportunities for investors -- and new opportunities for
America.  But rapid growth has also increased complexity and risk
-- which can in turn lead to confusion and a greater potential
for abuse.  Not all investors are as informed as they should be.
And not all brokers are as ethical as they should be.  While
their number is few, problem brokers do great damage to
confidence in our markets and great damage to people’s lives.

As you’ll hear during our first panel this morning (and in a
later panel about the Internet), the SEC is aggressively
responding to alleged frauds -- particularly in the micro-cap
sector of the market that sells almost exclusively to individual
investors -- with a wide-ranging campaign focused on three
strategies:  prevention, enforcement, and regulatory initiatives.
We have all long believed that it’s better to prevent fraud
before the life savings of investors are destroyed, than to
simply punish the perpetrators after they’ve done their damage.

                              * * *

With respect to protecting an investor’s life’s savings, it is
essential that we take note of the monumental change in the way
Americans save for the future.  Once upon a time, employees saved
for retirement at their local banks or bought whole life
insurance and were covered by a defined benefit plan.  The
responsibility for making and monitoring those investments was in
someone else’s hands.

But as we all know that’s ancient history.  With the
proliferation of defined contribution plans, employees today are
being asked to make their own investment decisions.  To succeed
and to provide for their future, they need to become informed
about the market -- about its risks and rewards.  For this to
happen, our efforts to educate must reach all those who
participate in defined contribution plans.  Our efforts must also
reach the 40 percent of those eligible for a retirement plan, but
who are not taking advantage of it.   We must work together to
inform and motivate those employees, who because of lower average
incomes often turn out to be the people most in need of long-term
planning for retirement.

Our second panel this morning will explore some of the “best
practices” we’ve seen to date on employer-sponsored investor
education efforts.  As you’ll see, there’s no lack of good ideas
about ways to improve investor understanding.  And if we succeed
in improving investor understanding, not only do we win -- so do
the 80 million Americans who invest in the market.

Let me briefly recap what we’ve achieved in terms of educating
investors and improving operation of the securities markets in
the last year:

In December 1996, the SEC approved the “cold-calling” rules
proposed by the NASD and the MSRB.  This past spring, we approved
similar rules proposed by the AMEX and the NYSE.  The “cold-
calling” rules require that securities professionals call
investors only between 8:00 a.m. and 9:00 p.m.; say who’s calling
and why; put investors on a “do-not-call” list if they ask; and
get written approval before taking money directly from investors’
bank accounts.

To inform investors about these rules, our Office of Investor
Education and Assistance prepared an educational brochure, “Cold
Calling Alert,” which should be in your briefing books.  I
announced the release of “Cold Calling Alert” during a U.S.
Senate hearing on fraud in the micro-cap market.   We are working
closely with the North American Securities Administrators
Association to distribute the brochure as widely as possible.
Investors can get a copy by calling (800) SEC-0030 or visiting
our website at www.sec.gov.

Earlier this year, the SEC approved new order handling rules that
reinforce our settlement with the NASD and help protect investors
in all markets. We are studying the impact of the rules on the
markets and early signs are very positive.  Since the rules were
implemented, the markets have witnessed a historic decline in
spreads.  Some reports have put the decline at better than 30
percent.  And all this, with no significant decrease in liquidity
or increase in volatility.  This is great news.  It means that
investors are getting much better prices -- and that’s better for
all of us.

In the area of disclosure, the SEC is now undertaking the most
sweeping revision of our rules and regulations in many years.  We
have put forth proposals that will change the face of both
corporate and mutual fund prospectuses.  These new rules may not
represent the Holy Grail -- but they will make prospectuses
simpler, clearer, more useful, and, we hope, more widely read and
understood.

Most of our efforts focus on that most important disclosure
document: the prospectus.  It is possible that no document on
Earth has committed as many sins against clear language as the
prospectus.  The prose trips off the tongue like peanut butter.
Poetry seems to be reserved for claims about performance, and
conciseness for discussions about fees.

In fairness, much of the arcane language is aimed at legitimate
legal concerns.  But the fact remains that disclosure fails in
its essential purpose if it doesn’t communicate.  The time has
come to pierce the shroud of jargon and boilerplate surrounding
the prospectus.  It’s my aim to have prospectuses begin to speak
a new language -- the English language.

Our efforts began with the profile for mutual funds.  Eight major
fund families stepped forward to volunteer for a pilot project to
develop a standardized summary prospectus that highlights key
information about a fund.  At the beginning of the year, the
Commission proposed a new rule that would all companies to use
the profile.  At the same time, the SEC proposed a complete
overhaul of the mutual fund prospectus to make sure it focuses on
information that helps people decide whether to invest.  I am
hopeful that both of these key projects will be presented to the
Commission for final approval before the end of the year.

In 1996, we extended our reform efforts to include corporate
disclosure.  The Division of Corporation Finance, with help from
our Office of Investor Education and Assistance, began a pilot
program to promote the use of plain English.  We worked closely
with companies to create new documents, pledging to review these
documents in an expedited manner.

This program has gone very well.  Our volunteers’ ranks are
swelling, and in the months ahead we will have many more examples
of plain English filings.

Through these pilot programs, we’ve gained considerable knowledge
about how to create clearer disclosure documents.  To assure a
smooth transition, we have also conducted workshops and our
Office of Investor Education and Assistance has drafted A
Handbook on Plain English: How to Create Clear SEC Disclosure
Documents.  This handbook -- which we’ve included in your
briefing materials -- features proven advice from our pilot
participants and others who have created plain English documents,
as well as a foreword by Warren Buffett.  We have issued a draft
of the handbook to the public and posted it on our web site.

Investors support the use of plain English -- and so do many
lawyers and corporate officials.  They agree that the time has
come to jettison the legalese and speak plainly to investors.
They understand that plain English does not mean “dumbing down,”
or leaving anything important out of a disclosure document.  It
just means presenting complex information clearly.

We’ve achieved a great deal.  But there’s a limit to what we can
do alone.  Regulation is a blunt instrument, with many unintended
consequences.  Wall Street is the free market, and we prefer to
use market forces.  We’ll regulate where warranted -- but many of
the areas I want to address are gray, not black and white, and
don’t lend themselves easily to rulemaking.  That’s why the input
of this Committee is so important.

                              * * *

I would now like to introduce our first speaker:  Bill McLucas.
Bill, as many of you know, has been the Director of the SEC’s
Enforcement Division for a decade now.  He will start our
consideration of how to combat abuse in the micro-cap market by
taking us behind the scenes and telling us in detail how one
fraud operated.