"FINAL THOUGHTS ON LITIGATION REFORM"
                REMARKS BY CHAIRMAN ARTHUR LEVITT
        UNITED STATES SECURITIES AND EXCHANGE COMMISSION
           23RD ANNUAL SECURITIES REGULATION INSTITUTE
                      SAN DIEGO, CALIFORNIA
                        JANUARY 24, 1996

     This will be my third speech on securities litigation reform
before this group, and you will forgive me if I say that I hope and
pray it will be my last.  This wishful thinking is incorporated
even into the title of my presentation -- "Final Thoughts on
Litigation Reform."  I'm not going anywhere, but the Private
Securities Litigation Reform Act of 1995 has now become law and I
am a bit tired of talking about the subject -- in fact, I know few
people who aren't . . . except you, the students here at the 23rd
annual Securities Regulation Institute -- or so David Ruder assures
me, at any rate.

     Before I go into that subject, let me say a few words about
another issue that I anticipate may be on your minds, and on the
minds of many people in this state today -- the SEC's actions
regarding Orange County.  

     This morning, the Commission took three steps in its
continuing investigation.  First, the Commission filed and settled
a civil injunctive action against the former County Treasurer,
Robert Citron, and the former Assistant Treasurer, Matthew Raabe. 
They have been enjoined from future violations of the antifraud
provisions of the federal securities laws.  The Commission also
instituted and settled an administrative proceeding against Orange
County, the Orange County Flood Control District, and the Board of
Supervisors of Orange County ordering them to cease and desist from
violations of the antifraud provisions.  Finally, the Commission
issued a report of its investigation into the conduct of the
individual members of the Board of Supervisors of Orange County in
authorizing the issuance of certain municipal securities. 

     The municipal bond market is of critical importance to our
nation's future.  It represents the schools that teach our
children, the water we drink, the power that enhances our lives and
drives our economy, the roads that take us where we need to go.
American investors trust municipal bonds as they do few other
instruments, and this has helped make them a popular investment. 
A decade ago, individual investors held about 45 percent of
outstanding municipal securities; today, they hold more than 70
percent.  Investor faith in municipal bonds has also benefitted
taxpayers with low interest rates and, as a result, lower taxes. 

     But trust is hard to win, and easy to lose.  While the origins
of this particular case may be unique, the violations of the
securites laws are not.  The case boils down to problems with
statements made to sell securities -- in other words, with
disclosure.   Investors depend on the information provided in
public offerings of securities.  The law requires that the accuracy
and completeness of that information be held sacrosanct.  

     As the Commission charged in the papers filed today, Orange
County made material misstatements and omissions of fact regarding
some $2 billion of municipal securities it sold to investors in
1993 and 1994.  Many of these offerings were made for the purpose
of reinvesting into pools run by the Treasurer.  Citron and Raabe
leveraged the deposits in the pools.  But when the time came to
persuade investors to buy its bonds, the County either
misrepresented or did not disclose information that brought into
question the County's ability to repay its securities, information
concerning the pools' investment strategy and results, and other
material matters.

     Today's action involves no new laws, but principles that were
established long ago.  It has been the longstanding view of the
Commission that, "Although municipalities have certain unique
attributes by virtue of their political nature, insofar as they are
issuers of securities, they are subject to the proscription against
false and misleading disclosures."  For almost 20 years now, since
the New York City fiscal crisis of the 1970s, we've been cautioning
officials who authorize the issuance of municipal securities that
they have a critical role in ensuring that official statements
representing those securities are accurate and not misleading.  

     Borrowing the public's money is a huge responsibility.  But
the essentials are simplicity itself:  You tell the truth, the
whole truth, and nothing but the truth.  And if you fail to do so,
you can expect the SEC to act, as we have in this case and will in
others.  I should note, before I leave this subject, that our
investigation of the Orange County matter is ongoing.

     Disclosure is the keystone of our securities regulation
system.  The main issue I'll discuss today, litigation reform, also
has to do with the disclosure of information in public offerings
of securities.  Indeed, one of the main arguments used by
proponents of reform was that liabilility concerns were preventing
companies from disclosing information -- especially forward-
looking information. 

     As you may know, I'm not a lawyer, and therefore I won't try
to give this gathering a detailed legal analysis of the newly
adopted legislation.  You can get your fair share of that, and
more, in the various sessions of this important Institute.  Rather,
I'm here today to reflect a bit on a legislative system that, while
not flawless, works reasonably well.  

     I know you've heard various pundits complaining that the
legislation just passed goes too far, or doesn't go far enough, or
will allow people to defraud investors without remedy, or doesn't
provide adequate protection against frivolous suits.  Believe me,
I've heard all of those complaints dozens, perhaps hundreds of
times.  The SEC has been in the middle of the controversy -- I have
felt all along that it had to be -- and when I leave this world an
autopsy will no doubt reveal arrow wounds from both directions.  

     For me, a relative newcomer to Washington, the legislative
process that brought us litigation reform was like a sprint through
the no-man's-land between warring camps -- a baptism by fire into
the frenetic, no-holds-barred way that laws are made, and unmade,
in our nation's capital.  Along the way, I was castigated as a tool
of business interests, genuflecting before the new Republican
majority in Congress.  I also was denounced for letting the
interests of investors blind me to the long-term need of business
to be freed from meritless lawsuits.  Some said that I held the
fate of reform in my hands; others asserted with equal fervor that
I was nowhere near being "in the loop."  

     Perhaps I'm wrong, but anyone who has been attacked this way
by both sides must be in about the right place.

     As some of you will remember, early in my tenure I appeared
at this Institute and set out the reasons why a degree of reform
was desirable.  My experience in business taught me something about
the dangers and expenses involved in meritless litigation.  It
doesn't help investors or the markets if we're too accommodating
of those who think they should be able at the drop of a hat -- or
the drop of a stock -- to file a lawsuit immediately, hoping to
wring out a profitable settlement, whether or not the company or
its officers did anything wrong.

     It was understandable that my speech would set off some
alarms.  Traditionally, as you know, the SEC has aligned itself
with plaintiffs' interests, not defendants', and with good reason. 
The threat of litigation serves a valuable purpose in our system,
encouraging corporations to observe their disclosure obligations
carefully.  That's good for investors and good for our markets. 
It's a vital part of the framework that has given us the best,
deepest, most liquid securities markets in the world.

     So it was unusual for an SEC Chairman to acknowledge that the
litigation system required reform.  But the pendulum had swung too
far toward plaintiffs, and it needed to be brought into better
balance.

     At the time, we had a long-tenured Democratic Senate and
House.  The only legislation addressing the question, introduced
by Senators Dodd and Domenici in the Senate and by Congressman
Tauzin in the House, wasn't given much of a chance of going
anywhere.  But it seemed an important issue on which to take a
stand, in order to set out a middle ground where the sharply
polarized interests might eventually be persuaded to meet.  

     A year later, you invited me back.  There had been
Washington's equivalent of an earthquake in the interim -- for the
first time in 40 years, the Republicans had a majority in both
houses of Congress.  All of a sudden, securities litigation reform
was very real: it was part of the Contract with America. 
Responsibility for introducing legislation was in the hands of
Congressman Chris Cox of Orange County. 

     In that second speech, I told you that while change was
important, we needed measured reform, not wanton revolution.  I
said that Congressman Cox's bill had the virtue of jump-starting
the debate, but that it went too far in several important ways. 
I repeated my message of 1994:  meritless litigation costs capital
and discourages disclosure, but in fighting it, we must be careful
not to eviscerate important investor protections.  That would be
a cure far worse than the disease.  I also discussed the SEC's
redoubled efforts to address the problem, including our examination
of ways to expand the safe harbor for forward-looking statements. 


     After that speech, the legislative process moved forward in
earnest.  The Commission ignored all requests to publicly support
or denounce the legislation that was making its way through
Congress.  Instead, we went furiously to work, debating the issues
among ourselves, and then focusing our efforts, along with elected
officials on both sides of the aisle, toward making sure the
legislation struck a proper balance.

     The bill that eventually became law is not perfect -- but that
may be said about almost every other statute that runs the
legislative gauntlet.  Even our most honored legal document, the
Constitution, has required amendment 26 times since its adoption.
I believe that if you can cut through the rhetoric and emotionalism
that has surrounded this issue, and read the message issued by the
President when he vetoed the bill, you will agree that his veto was
a reasoned, moderate attempt to improve the bill.  He did not
reject reform.  He tried to strengthen the bill in a way most of
us can agree with.  The President asked for three specific
revisions: that the legislation specifically reflect the Second
Circuit's standards for pleading scienter -- which was the avowed
intention of the bill's drafters; that the Statement of Managers
accompanying the bill be modified to avoid eroding further the
"bespeaks caution" standard embodied in the bill itself; and that
the Rule 11 sanctions provisions be clarified.  With those changes,
he said (and I quote) "I will sign such a bill as soon as it
reaches my desk."

     As you know, the SEC is an independent agency, and we guard
our independence zealously.  I mention the President's veto message
simply to demonstrate that the concepts contained in the
legislation had widespread acceptance.  The points raised by the
President were an attempt to make the bill a bit better.  The
Congress decided to go ahead with the legislation as it was.  So
be it.

     I have to say that I found the legislative process fascinating
-- I only wish that I had had an anthropologist there with me.  A
key turning point in that process comes when lobbying groups bring
the fight to the media.  Advertisements are created that overstate
the problem, overstate the consequences, and overstate the
solution.  As this rhetorical whirlwind starts to spin, a huge
centrifugal force is created, pushing people outward toward the
extremes.  Supporters and opponents of the measure become
polarized.  

     By its nature, a middle position will have some views in
common with each side.  But in a polarized debate, the middle
disappears, and every statement that arises there is allocated to
one side or another.  In this context, my view that the system
needed fine-tuning was misconstrued by both sides.  Much to my
surprise, I briefly became one of the most quoted people in
Washington -- but only because I was being quoted by both sides.

     To avoid being misquoted or misunderstood, the Commission put
its views in writing.  We expressed concern about some sections of
the bill, and supported other sections.  Still, some on each side
took quotes out of context to bolster their own views.

     But in the end, even as the rhetorical breach widened, the
policy differences narrowed.  And the result was a bill that many
people regard not as radical change but as fine-tuning.

     As I consider what we accomplished in the process of working
with the Congress on this legislation, I think of the old saying
that success has a hundred fathers but defeat is an orphan.  Judged
by that standard, the litigation reform bill must be a success, for
there are certainly many people claiming paternity.  But I'm also
reminded of Bismarck's aphorism that "Laws are like sausages -- it
is better not to see them being made."  

     Most of the interaction between the SEC and Capitol Hill
centered on the bill's safe harbor provisions.  Our goal was to
encourage companies to provide more meaningful forward-looking
information to the market by affording them greater protection. 
At the same time, if a call was close, we tried to err in favor of
plaintiff investors, in view of the important role they have
traditionally played in policing fraud our markets.

     As finally adopted, the general safe harbor applies only to
companies that are subject to SEC reporting, and to people who are
making statements on behalf of such a company or on the basis of
information provided by such a company.  It doesn't apply to
initial public offerings or partnership offerings.  It doesn't
apply to tender offers or going-private transactions.  It doesn't
apply to often-problematic penny stock or blank check companies,
or to companies that have been found to have violated the
securities laws within the past three years.  It doesn't apply to
financial statement information.  These exclusions, as well as some
others I didn't mention, ended up in the legislation because the
SEC asked for them.  

     As sought by the Commission, the legislation authorizes the
SEC to provide additional safe harbors, consistent with the public
interest and the protection of investors.  This will allow the
Commission to provide protection for statements outside the
legislative safe harbor on a basis tailored to address specific
needs.  The Commission has already announced that it plans to use
this authority to propose safe harbor rules for the required
valuation of employee stock options and derivative securities.  In
these areas, we thought  that it was better to work through the
rule-making process, where the SEC is better able to consider
various alternatives, take comments from a variety of people, and
adopt well-targeted rules.  The Congress evidently agreed.

     The safe harbor provision underwent several critical changes. 
 In earlier drafts, a company that offered any reasons their
projections might not materialize would have gained the protection
of the law.  We felt this was a formula for fraud.  The final
version, as you know, generally requires that companies identify
important reasons why their projections might fail to come true. 
The additional requirement that the disclosure be "meaningful"
should work to discourage the omission of important information. 
I also note that the safe harbor doesn't provide any protection
from SEC enforcement action.  And nothing in the safe harbor
permits misrepresentations or omissions about existing facts.  

     Where do we go from here?  The Private Securities Litigation
Reform Act of 1995 is now the law of the land.  If it succeeds,
investors can expect two distinct benefits: more and better
forward-looking information coming into the marketplace from public
companies,  and less shareholder assets siphoned away by meritless
litigation.  This would be a very positive achievement in behalf
of American investors.  Of course, only time will tell whether the
bill will achieve the aims set out by its authors.  But you can be
sure that the SEC will enforce the law vigorously -- I've asked the
Division of Corporation Finance to pay close attention to forward-
looking statements issued under the law's safe harbor, and the
Division of Enforcement to pursue abuses aggressively when they are
found.

     The question of litigation reform has now moved to the courts
-- and to states such as California, where ballot initiatives will
debate the issue further.  For the SEC, the closing of this episode
provides an opportunity to redouble our efforts in our core mission
of investor protection.  That is especially important in the wake
of litigation reform, because to the degree private rights of
action are curtailed, further demands will be placed on the
Commission's already stretched resources.

     And we'll do our best to meet those demands . . . assuming
we're still open for business.  The SEC is one of the agencies
caught in the Battle of the Budget.  As things stand right now,
we're funded only through next week.  

     Perhaps I haven't been in Washington long enough, but I'm
hopeful that our funding situation will get resolved.  If that's
the case, it may be helpful to you if I close by singling out four
of the key initiatives you can expect to see the Commission work
on in the year ahead:

     First, we will continue our efforts to achieve a higher
standard of clarity and understanding for investors, through a
combination of simplified prospectuses, investor education,
emphasis on the use of plain English in disclosure documents, and
greater electronic access to disclosure.  This decade has seen a
huge influx of new investors into the marketplace, especially
through mutual funds.  Too many of them don't understand risk; too
few of them have seen a bear market.  We're working to better
prepare these newcomers for the risks of being in the market.  As
you may know, we have proposed for public comment rules that are
intended to assure that investors receive a higher quality of order
execution, no matter in which market their order is entered.  We
put a high priority on addressing the issues raised by these
rules.The core mandate of the Commission is vigorous investor
protection -- protection from fraudulent practices and protection
in terms of market structure that ensures the primacy of investor
interests.

     Second, we will work to raise standards in the retail
brokerage industry.  The SEC's aggressive efforts to keep the
industry free of bad brokers will continue, especially in view of
the newcomers in the market.  But a comprehensive approach to fraud
includes prevention as well as prosecution.  I'm proud that, within
the past year, many firms within the industry have restructured
their compensation methods to bring the interests of brokers more
in line with the interests of their clients.  Continuing education
for brokers has also become a reality, and we're now exploring the
possibility of advanced education leading to some sort of
certification.

     Third, we will continue to keep a close eye on the municipal
debt market.  The SEC's intense interest in the municipal market
follows its transformation from a market dominated by institutional
investors to one in which individual investors predominate.  We
will work to ensure that it maintains the standards of integrity
and disclosure expected by investors and required by law.  

     Finally, the Commission is taking a serious look at our self-
regulatory system.  As you know, the industry itself is the front
line of regulation.  It is especially important that its regulatory
arms be effective, as well as fair, to investors and market
professionals alike.  It is the SEC's responsibility to oversee
self-regulation; and if the system is working less than ideally,
it is our job to hold the self-regulatory organizations
accountable.  In the year ahead, you'll see the SEC work to address
some of the questions that have been raised about the self-
regulatory system, in order to strengthen it.

     I've raised many issues with you today -- from Orange County
to litigation reform and our agenda for 1996.  But as different as
these issues may seem, one thread unites them all, and that is the
SEC's overriding concern for investors, whose trust has made
American markets the greatest in the world.  It is not exchanges,
not computers, not stocks, and not bonds that make a market, but
people willing to entrust others with their hard-earned money --
 their future.  We must never take their trust for granted. 
Whatever our various roles -- you and I and everyone involved in
our markets -- we must always be worthy of that trust, and we must
work constantly to increase it.

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