"CULTURAL CHANGE ON WALL STREET: THE RACE TO THE TOP"
                REMARKS BY CHAIRMAN ARTHUR LEVITT
        UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                 SECURITIES INDUSTRY ASSOCIATION
                       BOCA RATON, FLORIDA
                        NOVEMBER 10, 1995

     Let me begin by saluting 1996 Chairman Buzzy Krongard and
1995 Chairman Launny Steffens.  They are both friends and
colleagues, and they are both representative of the extraordinary
talent and energy of the securities industry.

     I feel fortunate to have come to the SEC from the securities
industry.  That background gives me a better sense of how far
we've come over the years, and how far we have yet to go.

     I believe that the industry today is more professional, more
capable, more creative, and more farsighted than at any time 
over the last 60 years.  No investor anywhere receives better
service, or fairer treatment, than the American investor.

     That is an incredible reputation -- and the best way to
maintain that is for the SEC to come down very hard on the few
bad actors who threaten to sully that reputation from time to
time.  Decisive action against bad brokers diminishes any chance
that the industry will be perceived as a haven for ill behavior.

     It's important to keep this in perspective.  I often remind
people that the vast majority of brokers are honest and highly
professional, and that the vast majority of firms guard their
reputation with almost religious fervor.  The SIA Investor Survey
announced yesterday shows that the industry is willing to assess
itself candidly, and I applaud that.  The survey found that while
people were largely satisfied with their brokers, their feelings
about the industry in general were not as favorable.  As I'll
illustrate in a moment, the firms are already working in many
ways to address the issue.

     The question of public trust has become especially important
in recent years, which have seen a mass migration of investors
away from FDIC-insured bank accounts and into our securities
markets.  The decline in interest rates from 1991 to 1993 helped
transform many savers into 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.

     Too many of these people are not sophisticated investors;
too few know about their rights as investors.  The industry could
easily have made no adjustment when they arrived on the scene --
 it might even have profited from their lack of knowledge. 
Instead, securities professionals by and large responded to the
presence of these newcomers by making the industry more investor-
friendly than ever before.

     What's more, for the most part, this has not been the result
of new regulations; it's been a conscious decision by the firms
themselves -- many of them represented here in this room today -
- to compete with one another to raise standards and treat
investors superbly.  

     Now before I go any further, let me say that last year,
against the wishes of my staff, I cited by name some firms whose
actions were representative of industry efforts to better serve
investors.  In response, in addition to nice phone calls from
some firms I did mention, I received irate phone calls from some
firms I did not.  Nevertheless, I'm going to do it again this
year, with the caveat that this is not an endorsement, but merely
an incomplete list of what seem to me to be positive practices.

     What happened with compensation is a perfect example of the
kind of "race to the top" that I perceive on Wall Street today. 
The SEC was concerned that certain practices have the potential
to create conflicts of interest between broker and client.  But
it's not our aim to dictate how people ought to be paid.  We
asked an industry committee to study the question and identify
not the worst practices but the best practices currently in use. 
This committee, which was led by Dan Tully and included people
like Warren Buffett, turned in its report last April.

     The report identified such "best practices" as paying the
same commission for in-house products as for others; paying a
portion of compensation based on client assets, so that brokers
receive some remuneration even if they advise a client to "do
nothing"; prohibiting sales contests tied to specific products;
and even eliminating up-front bonuses.

     And as you know, many firms have already put an end to some
of the more troublesome practices -- for example, Merrill Lynch,
PaineWebber, Prudential, Dean Witter, and Smith Barney have all
eliminated extra compensation for selling in-house products. 
PaineWebber, Smith Barney, Merrill Lynch, and Dean Witter have
eliminated accelerated payouts for newly recruited brokers, and
Prudential has reduced them.  And Merrill Lynch, PaineWebber, and
Smith Barney have put an end to product-specific sales contests.

     To me, the changes in compensation are emblematic of a much
larger change taking place in the industry today -- a change in
the very way that firms compete.  Firms are trying to outdo each
other in holding the customer's interests above their own.

     This is an extraordinary development, and no one -- least of
all we regulators -- should take it for granted.  

     I believe that what we're witnessing is a kind of cultural
change.  There's always been a tension between the interests of
the customer, on the one hand, and the interests of the broker
and the firm, on the other.  In years past, while the industry
said, "Investor interests come first," there were times when
actions told a different story.

     Today, the priority of investor interests is much more than
a slogan -- it's becoming a reality.

     There's a truth about our markets that bears repeating:  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 people in the industry know 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. 

     This is an enlightened view.  The fact that so many brokers,
supervisors, and managers share it today is a remarkable tribute
to an industry that is willing and able to look beyond short-
term profits at long-term interests.

     Let's remember that it wasn't always this way.  In our stock
markets six decades ago, if industry leaders had proposed a "new
dialogue with investors," as the SIA has done this year, they
might have been laughed at.  In 1935, the industry was not even
sure that it wanted to have a dialogue with the SEC.  Many were
convinced that Franklin D. Roosevelt would lose the next
election, and that a Republican administration would dismantle
the Commission.  Wall Street's "problems" would be over.

     That shows how little faith we ought to put in political
winds, which blow this way one day, and that way the next.  Few
would have predicted such a sweeping and dramatic end to
Democratic control of Congress, for example, and few today can
predict what the political landscape will look like even a year
from now.  Only two things are certain -- control will always
change hands sooner or later; and, no matter which party happens
to be in power, this industry's concerns will always remain the
same -- to have a market that is so trusted by investors that
they are willing to consign to it a good measure of their
personal wealth and future well-being.

     Wall Street's worst problems did end in the 1930s -- not
because the SEC failed, but because it succeeded.  The Commission
helped restore public trust in the market, much to the gratitude
of the industry.

     The market was not made perfect; it was, and remains, a work
in progress.  Nor is the SEC a perfect organization -- we, too,
are a work in progress.  But I think it's clear that the history
of the last 61 years is a history of increasing fairness for
investors, and steady advances of their interests.  

     The truth is, in almost every instance, what's good for
investors is good for the market.  But this has not always been
self-evident.  SEC attempts to improve the position of investors
have sometimes been greeted with dire predictions about
consequences for the industry.  The unfixing of commission rates
in 1975, in particular, brought with it much wailing and gnashing
of teeth.  Lower Manhattan was filled with a mournful sound.  

     What were the dire results?  Unfixing commission rates
turned out to be healthy for the New York Stock Exchange, making
it competitive with regional exchanges that had been steadily
absorbing its business.  It was healthy for investors, too,
saving them hundreds of millions of dollars over the years.  And
in the long run it was healthy for the entire industry, whose
profitability actually went up.

     Contrast the industry response of the 1970s -- or the 1930s,
for that matter -- to the kind of response we receive from the
industry today.  We asked mutual funds to take a closer look at
investments made by portfolio managers, for example.  Not only
did they do so -- they went further than we asked and developed
their own suggested standards of conduct.  They made a bid to
better protect investors.

     We approved rules to protect limit orders on the Nasdaq
market and to enhance disclosure of payment for order flow, and
we have begun an industry-wide dialogue on how to achieve best
execution for investors.  Instead of complaining, firms are
making best execution a marketing device -- Madoff and Schwab are
two who come to mind.  There are others.  Merrill Lynch has begun
to provide customers with clear, detailed statements about how
their orders are being executed and how much price improvement
they're receiving on some orders.  They, too, are making a bid to
better protect investors.

     We called for greater clarity in mutual fund prospectuses;
in response, the industry created and piloted a "Profile
Prospectus," which features a concise summary of eleven salient
points about the fund.  Vanguard is now in the midst of a
complete overhaul of its prospectuses, replacing fuzzy language
and obscure meaning with plain English that speaks directly to
investors.  "There is no assurance that the Fund will achieve its
stated objective" has become, "your investment in the Fund . . .
could lose money."  

     Other funds have also undertaken efforts to develop
prospectuses that are more user-friendly in language and format -
- for example, American General and T.Rowe Price in variable
annuities, and Fidelity in defined contribution plans.  
Investment companies are competing to provide the clearest, most
comprehensible and useful prospectus.  

     It's a race to the top -- and the American investor is among
the winners.

     As the industry's chief regulator, I can think of few
developments that speak more directly and eloquently to the
professionalism of the vast majority of the people and firms that
make up our markets.  I've tried very hard to recognize this, and
to support your efforts by maintaining open and constructive
lines of communication between the SEC and the industry.  This, I
believe, has accounted for less ambiguity, fewer surprises, and
the consensus resolution of a number of contentious issues.

     Of course, not every issue has been resolved.  Many
challenges remain, and we'll work to address them in the year
ahead.  But we'll work together, we'll strive to be better, and
all of us will benefit from the efforts of each of us.  

     Our first goal for 1996 is to achieve a higher standard of
clarity and understanding for investors.  This is of great
importance not only for individuals, but also for our markets.  

     As I noted earlier, one in three American families is now
involved in our markets.  Many of these investors have
experienced only a bull market; I fear that in a downturn, those
who don't understand risk may react precipitously and rashly, at
great cost to themselves and our markets.  The SEC will continue
its investor education and "plain English" efforts in 1996, and
we'll work to coordinate our efforts with the SIA, the SROs, the
firms, and our counterparts at the state level.

     Better coordination is itself an important SEC goal for the
year ahead.  We regulators could certainly be coordinating better
-- especially when it comes to duplicative state regulation.  The
truth is, the current combined state-federal system of securities
regulation is not the system we would create if we were starting
from scratch.  Although great strides have been made, you could
be forgiven for thinking its structure has more in common with
Rube Goldberg, than with Thomas Jefferson.

     This is a system that cries out for reassessment.  The world
has changed since 1933, and so has the nature of the securities
business.  Communications technology is far more advanced because
of computers; international travel and mobility are much easier;
and investment instruments are more complex.  Most importantly,
today we are a global market -- we are not 52 separate markets.

     The sovereign states of the European Union have agreed that,
as of next January, an offering of securities approved by one of
them, is approved by all of them.  Surely we should be watching
that experiment to see if it holds any lessons for us.

     There are other reasons for us to work better with the
states.  In an era when all of our budgets are being cut, state
and federal regulators need to cooperate more efficiently, divide
responsibilities more clearly, and use our limited resources more
strategically.  We also need to be more sensitive to the
disruption we cause the firms. 

     This is not to deny the important role state regulators play
as a first line of defense against wrongdoing.  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.  

     There are too many horror stories out there like the one I
heard just last month -- a brokerage firm was subjected to 15
sets of examiners in the span of 24 months.  There's absolutely
no excuse for that.

     One of the measures I'm taking is to convene a "Planning
Summit" that will bring the SEC, the SROs, and the states
together to address these and other issues.  We need to find a
way to examine firms effectively without tripping over one
another.  

     We'll also try to address the duplication of effort in
mutual fund regulation.  Some of the stories told about the
current system could have been written by Kafka:  What is a
national investment company supposed to do when several states
impose investment limitations that conflict with federal law --
and conflict with one another?  I believe that in this area,
federal regulation is so comprehensive that reducing state
oversight would not compromise investor protection.  

     Another question that involves the SEC, SROs, and the states
is that of making unadjudicated investor complaints available to
the public on the CRD system.  This issue pits a broker's right
to due process against an investor's right to know her broker's
background.  I've told my fellow regulators that I would be more
inclined to accept making unadjudicated complaints public if we
found a reliable mechanism to take meritless or unpursued
complaints off the system within a reasonable time -- let's say 2
years.  

     It's true that investors need to know whom they are dealing
with.  But it's also true that a complaint is not a conviction
and should not stain a broker's record permanently.  

     We must also continue to work to raise standards at the
retail level, through continuing and higher education for
brokers.  I'd like to see a special continuing education program
for branch managers -- they are our front line.  Compensation,
which has been addressed so professionally by the biggest firms,
remains a challenge for some of the smaller ones.  And of course,
in 1996 as always, you can expect our aggressive support in your
efforts to keep the industry free of bad brokers, and to undo the
damage they inflict on investors and on the industry's
reputation.

     In the international arena, we will continue our work to
preserve the preeminence of our nation's capital markets and
expand the choices available to American investors.  A record 715
foreign companies from 44 countries now file reports with the
SEC.  Our SROs are striving, as Richard Grasso would put it, to
"open the window" further for U.S. investors eager to invest in
some of the world's most dynamic markets without sacrificing any
of the protection they enjoy here at home.

     This past spring, I traveled with Big Board representatives
to Thailand, Malaysia, Singapore and Indonesia, to strengthen
ties between the U.S. and markets in  Southeast Asia.  In the
year ahead, we'll continue our efforts, together with all the
SROs, to bring more foreign companies to U.S. public markets.

     There are many interesting developments on the international
front.  A year ago, Morgan Stanley broke new ground when it
received approval to establish a joint-owned investment bank in
China.  Through this unique entity, the experience, expertise and
creativity of the U.S. financial services industry will be
channeled into the promising new markets of the world's most
populous nation.  

     I've saved the Commission's most important and challenging
task in 1996 for last.  It has to do with market oversight.  We
need to ensure that the self-regulatory system is functioning
well as the front line of industry regulation -- one that is
effective, as well as fair, to investors, brokers, dealers, and
market makers alike.

     The self-regulatory system is the cornerstone of market
integrity.  If it is seen to be unworkable, or unreliable, in any
of our markets, then self-regulation itself is in serious
jeopardy.  Rather than allow the securities industry's unique
regulatory system to be imperiled after so many decades of
success, it's our aim to strengthen it -- though some tough
medicine may be necessary to achieve that goal.  

     There's one other thing you can plan to see in the year
ahead:  I will continue to take every opportunity to express, as
forcefully as possible, my thanks to those professionals who have
worked energetically with the Commission to make our securities
markets better and stronger.  That kind of constructive dialogue
rarely attracts headlines.  But I believe it's at the root of why
the U.S. securities markets are the most robust, admired and
effective of any in the world.

     Those markets are a rich legacy you and I have inherited,
but do not own -- a national asset we hold in trust for America. 
And no one knows better than the people in this room how to
preserve assets and make them grow -- you're proving it once
again by raising standards and affirming the primacy of the
investor.  I salute your efforts, and look forward to continuing
to work with you to address the many challenges we face in the
year ahead.

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