________________________________________________

                    REMARKS BY ARTHUR LEVITT
        CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION
           NATIONAL ASSOCIATION OF SECURITIES DEALERS
                     THURSDAY, MAY 19, 1994
        ________________________________________________


     Good morning.  I thank Joe Hardiman, President of the NASD,
not only for inviting me to join you today, but also for devoting
the resources of the NASD to several projects that will enhance
the industry.  From the consumer brochure we published earlier this
year, to the Continuing Education Task Force, which I'll tell you
more about shortly, Joe has been unstinting in his enthusiasm for
the industry, and uncompromising in his efforts to strengthen it. 
I'm deeply grateful.
     I want to talk with you this morning about the very special
franchise held by brokers -- and the responsibilities that go with
it.
     The United States leads the world today not because of its
missiles but because of its markets.  Ours are the strongest,
richest, most liquid markets in the world, the envy of every nation
-- of autocrats and democrats, of communists and capitalists.
     And who sustains our markets?  To ask this question is to
highlight the link between our international pre-eminence and the
American broker.
     You've raised more than capital -- you've raised the quality
of life.
     You've built great skyscrapers and huge factories, as much as
any builder.  
     You've pioneered amazing medical and technological
breakthroughs, as much as any scientist.  
     You've made housing, clothing, nutrition, and a thousand other
human needs more affordable through the efficiency and shared risk
of our markets.
     Now, before we get too sentimental about this, let's remember
the wisdom of Adam Smith:  It is the pursuit of private wealth that
achieves this public gain.  By serving your clients well, you serve
yourself, your firm, and our society well.
     Yours is an honorable profession.  At his best, a broker is
much more than a salesman -- he's a trained and talented
professional who performs a vital service. 
     I have some personal knowledge of this.
     For I come out of the industry.
     I was a broker.
     I was a supervisor.
     I know the pressures -- and I know the rewards.
     We have every right to be proud of the industry that has been
so good to us -- and is so good for America.
     But we must also be realistic about its problems.
     Individual investors are seeking security and growth in the
stock markets today as never before.  Many are inexperienced and
don't understand the markets.  
     A stock broker is their advisor -- their guide through the
maze-like world of finance.  A broker's impact can be every bit as
profound as a lawyer's, or an accountant's, or sometimes even a
doctor's.  He is a professional who knows, and responds to, a
person's needs, goals, and concerns.  That professional reputation
must be preserved.
     And by and large, it is being preserved.  All but a few
brokers are honest, and all but a few transactions are executed
without a problem. 
     But every time a broker places his own interests, his firm's
interests, or even his industry's interests above those of his
client, the profession is tarnished;
     every time a broker doesn't understand the product he's
selling, and instead simply reads from an aggressive marketing
script, the profession is tarnished; 
     every time a broker churns and burns a client and then bounces
to the next firm with no problem, the profession is tarnished;
     every time a broker uses high-pressure cold-calling tactics
that border on harassment, the profession is tarnished.
     You are the custodians of a good share of Americans' hard-
earned savings.  A family's dream of owning a home, or of sending
their child to college, often rests on the advice you give.  
     Your professional reputation is your greatest asset.  It is
also the market's greatest asset.   
     Fundamental to our markets is investor confidence that they
are fair, that they are open, that they are level.  Investors
develop -- or fail to develop -- that confidence based on your
actions in dealing with them.  
     It doesn't matter how high-tech the industry has gotten --
ultimately, the relationship with investors is very personal, very
intimate.  
     Every broker is an ambassador for the marketplace.  You are
its primary link with investors.  You represent it, and everything
you do affects not only your reputation, but that of our markets. 

     And lately, that reputation stands threatened.  Public opinion
surveys show that of all professionals, people have the least
confidence in lawyers, lobbyists, and brokers.
     This state of affairs hurts you -- and it hurts our markets.
     It's in your interest to change that.
     It also happens to be in mine.
     The first priority of the SEC is to protect the individual
investor.  Consumer protection is our birthright, our focus, our
mission, and our passion.  
     My colleagues on the Commission have long been calling
attention to sales practice issues.  We take it personally when
someone gets hurt by a bad broker -- and we'll do everything we
can to prevent it.
     That there are bad brokers does not absolve investors from
taking pains to inform themselves about the marketplace.  The SEC
has been telling American consumers that to invest wisely, they
must be educated and informed -- and they must know their brokers. 

     We're working to make sure investors do their share -- it's
only fair that we should ask you to do yours.
     Respect for a profession is based on the integrity of that
profession.  We need the highest standards of professionalism in
order to stimulate public confidence.
     And that's precisely where our interests coincide:     
     For we can help protect investors and build public trust in
the profession, by better addressing the problem of unethical
brokers.
     I'm here to share with you our belief that it can be done,
and our proposals to help ensure that it will be done.
     The plan we're announcing today has three elements:
*    First, running unethical brokers out of the industry for good,
     and taking steps to deter them in the future.  We'll be
     putting pressure not just on bad brokers, but on see-no-evil
     supervisors as well;
*    Second, enhancing education in the profession, so that brokers
     are always informed and knowledgable about the markets, about
     the products they sell, about the rules, and about new
     developments in the markets;
*    Third, taking a fresh look at compensation, and whether some
     of the temptation to trade inappropriately can be relieved by
     an emphasis on quality of advice, not just quantity of
     transactions.

     Let's start with bad brokers.
     The SEC -- together with the New York Stock Exchange and the
NASD -- has just concluded and is today releasing a report about
bad brokers.  We focused on 9 of the largest retail brokerage
firms.
     Of 161 branch office examinations conducted as part of this
project, one-quarter resulted in referrals to enforcement.  That
is significant evidence that sales practice abuses by brokers
continue to require our attention.
     We also examined registered representatives who had been the
subject of sales practice complaints, litigation, or disciplinary
actions.  
     More than one-third had already left the securities industry
by the time of our study.  But of those still in the industry, the
majority had been able to change jobs at least once, indicating a
willingness among firms to hire individuals with a history of
customer complaints.
     Interestingly, only a small fraction of those examined were
among their firms' largest revenue producers -- evidence that
complaints are not simply a factor of sales volume.
     What conclusions can we draw from this report?
     Frankly, we were not surprised to find sales practice abuses. 
But the problems we found were not indicative of a systemic
breakdown.
     We found that some firms were much better than others in
minimizing bad practice, showing that the tone set at the top can
make a real difference.  Managers and supervisors can and do set
standards that have an impact.
     Indeed, branch managers have a crucial role to play in
avoiding bad sales practices.  Absent a careful, competent manager,
the possibility for egregious sales practice increases.
     Now before I go into the recommendations of our report, if
you'll indulge me for a moment, I'd like to contrast some of the
practices of the profession today with those of an earlier time.
     There used to be more institutional loyalty, where you stayed
at your firm over a period of time and built up a business
together.  Having a steady client base was an incentive to
professional sales practices -- and it strengthened our reputation
as a responsible industry.
     Today high turnover in the industry is almost an accepted fact
of life.  Where paying "front money" for high producers was once
rare, today it's commonplace.  And while I believe deeply in
incentives, because I know they work, I have to say that the sums
paid to lure brokers from one firm to another are reaching
disturbing levels.  
     Strong competition for brokers is healthy -- but in a self-
regulated industry such as ours, if a broker has no ties to his
firm, his supervisor is in a very weak position to impose any sort
of discipline. 
     And what does it say to the investor, if his broker can simply
be bought by the highest bidder?  Maybe I'm old-fashioned, but it
just doesn't strike me as professional.
     When a broker moves from firm to firm because of up-front
money, she tells her clients that the old firm had problems and
the new one is great.  Talk about institutional loyalty!  Perhaps
we should require the broker to tell her ex-clients about the terms
of her compensation package at the new firm...  Shouldn't the
client, in the spirit of full disclosure, know these terms in order
to make an informed decision to go or stay?
     "Cold calling" is another sensitive issue.  From my earliest
days in the business, I -- and the brokers who worked for me --
called prospects on the telephone.  But how it's done can make all
the difference.  An informed, candid pitch for a suitable
investment that fits the client's objectives is one thing.  A high-
pressure, scripted, mechanical call that intrudes on a client --
 that's another thing altogether.
     These all add up.  It's terrible when a broker defrauds his
customer of her life savings.  But I have a feeling that, as bad
as such big cases are for the industry's reputation, when all is
said and done, the little things count just as heavily -- and they
require our attention, too.
                             [pause]
     Overall, the report we are issuing today could very well have
been a lot worse.  The system is not in disrepair.
     It is heartening that the vast majority of brokers are
ethical.  
     It is disheartening that the actions of a minority may have
undermined public trust in that majority.
     But the problem is not insurmountable.
     The project report made a number of recommendations, which
the Commission will review carefully and, where appropriate,
encourage the industry to implement.  We identified four broad
areas in need of improvement: 
1.   ENFORCEMENT:  We must be tougher on sales practice abuses. 
     That means more examinations and more expensive sanctions,
     which will raise the cost of bad practices;
2.   INFORMATION:  We recommend giving qualified immunity to firms
     for good faith disclosure on Form U-5, to encourage them to
     be more candid about the reasons a broker is terminated, by
     lessening the fear of defamation suits;
3.   ACCESS TO INFORMATION:  We have got to build a better central
     database, to give firms, regulators, and investors alike
     easier access to disciplinary records.  We need a user-
     friendly system that the public is aware of and has easy
     access to -- and the NASD is well along in developing such a
     system; and
4.   SUPERVISION:  Firms need to take a harder look at a broker's
     disciplinary record before hiring.  And we're putting firms
     on notice that if they do take the risk of hiring a broker
     with a bad record, they must be especially vigilant in their
     supervision.  The whole chain of command ought to be on red
     alert.
     Let me expand on this fourth point, because it's very
important:  It's our belief that many cases of investor fraud, if
not most, really constitute two failures -- that of the broker,
and that of his supervisor.
     Supervisory negligence permits wrongdoing -- it's as simple
as that.  As we move forward on our initiative, we'll continue to
examine compliance systems, and to hold supervisors responsible
for the crimes of their employees.  In every case where we find
bad practices, we'll ask:  Where was the supervisor?  Did he ask
the right questions?  How did he let this happen?
                             [pause]
     I am pleased that the industry also recognizes the problem.
A committee is now being formed to review how firms can best tackle
sales practice abuses.  This is something we encourage.
     Some have suggested we follow the lead of other areas of law
enforcement, and say "3 strikes and you're out."  I am sympathetic
to this get-tough attitude.  But a complaint is not a conviction;
and then again, in some cases, 3 strikes might be 2 too many.  
     Whatever standard the industry adopts, it must send an
unmistakable signal to brokers, to supervisors, and to investors
that unethical practices are not tolerated in this industry.  Let
me add that the perception would be strengthened further if, when
we permanently barred someone from the industry, then absent
extraordinary circumstances, that bar truly were permanent.
     We believe that, together with a new industry initiative, the
SEC recommendations for improving enforcement, information, access
to information, and supervision will go a long way toward removing
the tarnish on the profession.  But we also ought to think about
how to keep it shining, so that we won't need more "bad broker
initiatives" in the years ahead.
     We've identified two ways to do this: enhancing education and
re-examining compensation.  Let me conclude with a few words about
our plans in these two areas.
     When I was a broker, for the most part, we sold stocks and
bonds.  Today, brokers and supervisors may have to be well-versed
in a dazzling array of products, like limited partnerships, CMO's,
derivatives, or bull-bear butterfly spreads.  The pace of
innovation in our industry shows no sign of slowing -- we need to
educate and re-educate ourselves about new products, new
regulations, and new problems that may emerge.
     Unfortunately, the first thing firms cut in hard economic
times is the training budget.  That strikes me as shortsighted. 
Training budgets ought to be inching in the other direction.  We
should even consider extending the time period that trainees are
carried on salary, before they're subject to the pressures of
commissions.  A new broker with only 3 months of training is less
likely to do right by his customer than someone with a full year.
     Over the last few months, an industry group known as the
Continuing Education Task Force has taken the lead on the issue of
continuing education for brokers and making it a reality. 
Representatives of the SROs, NASAA, and a cross-section of firms
including Dean Witter, Merrill Lynch, Dain Bosworth, A.G. Edwards,
and many others have been deliberating and developing a curriculum
that promises to improve practices throughout the industry.  The
premise of the program, once it's in place, will be very simple: 
A broker must participate, or his registration will become
inactive.
     I wholeheartedly endorse the mission of this Task Force.  Its
members are developing a set of SRO rules that will be proposed for
public comment this Fall, and I am hopeful that the entire industry
will consider them carefully.  Indeed, you might even go a step
further and create a separate program for ongoing education of
supervisors as well. 
     In addition to continuing education, I believe that there's
a place for higher education.  Industry leaders have expressed
support for a voluntary higher education program, similar to the
"Certified Life Underwriter" degree for insurance brokers with
several years of experience.  They are developing this concept
further with our nation's top business schools, and I've offered
my support.  It seems to me that many brokers may wish to take
advantage of such a program, in order to distinguish themselves
and offer their clients even better service.  If this makes sense,
we may have an announcement down the road.
     Compensation is a far more difficult and complex issue.  I am
concerned that some compensation practices may exaggerate conflicts
of interest -- that is, encourage brokers in some cases to make
trades, rather than to do what's in the client's best long-term
interests. 
     Let's say interest rates are rising and a firm is long
inventory in the municipal area.  Is it appropriate for a firm to
provide incentives to its sales force in order to reduce inventory? 
This may be in the firm's interest and in the broker's interest,
but can the process be managed to ensure that it's in the client's
best interest?
     Is it appropriate for a firm to pay its sales force more for
principal transactions than for agency transactions?  Is it
appropriate to differentiate compensation by product?  Again, can
the process be managed to be consistent with the client's best
interest?
     Some firms are sensitive to these issues and are moving toward
making all payouts exactly the same.  This is a big step in the
right direction.
     The fact is, there are inherent conflicts in any sales
business.  The question is, how do we handle them?  There is a need
to think about compensation structures that harmonize the interests
of the broker with those of his client and his firm.
     Many worthy and creative ideas are already in place or under
consideration.  Some firms now offer a choice when you open an
account -- you can pay by transaction or pay an annual fee.  Such
alternatives are welcome, though still rare.
     Other firms have eliminated extra compensation for selling
proprietary products, because there's just no way to shed the
appearance of a conflict of interest in such transactions.  That's
a good move.
     We should also consider the compensation of supervisors, our
first line of defense in maintaining the integrity of the
profession.  Once upon a time, their bonuses were tied to top-line
revenues; now, they're more often based on bottom-line profits. 
This, too, is positive.  But should their pay be even less tied to
the production of the individuals they supervise?
     As you can see, I have many questions.  I don't pretend to
have the answers, but I strongly believe that the public's view of
our industry is inextricably linked to our compensation practices -
- and that public confidence cannot be attained until a broker is
seen to put the interests of the investor above his own, his firm's
and the industry's.  When a broker recommends a given security, the
investor should never have to second guess:  Is this in my
interest, or is he just trying to make a quick buck?  
     Customers have to feel that the broker and the customer are
in this together -- that their goals are the same.  Bad practices
drive a wedge between them.
     We are going to turn to the industry for its views on this
issue.  Dan Tully, the Chairman and CEO of Merrill Lynch, will lead
a task force that will examine compensation and incentive practices
throughout the industry.  Dan will be joined by respected investor
Warren Buffett, the Chairman and CEO of Berkshire Hathaway, and
former Chairman of Salomon Brothers; Jack Welch, Chairman and CEO
of General Electric; Raymond "Chip" Mason, Chairman and CEO of Legg
Mason; and Harvard Business School professor Sam Hayes, one of the
nation's leading experts on the securities business.  We'll be
looking forward to hearing what this distinguished panel has to
say.
                             [pause]
     I began this morning by calling to mind the pivotal role that
stockbrokers have played in our country's history.  My experience
in the industry gives me some insight into the complex pressures
you face.  I know how important it is to have a good professional
reputation, and I am proud of those brokers who do their job
honestly and well -- as the vast majority do.
     I'm also proud of our long record of successful self-
regulation.  I admire the creativity with which the industry solves
problems once identified.  
     My hopes and aspirations for an industry whose reputation is
fundamental to the public's acceptance of our markets and their
integrity calls for the nurturing of standards that will establish
your professionalsim.
     You have my full confidence in you to do the right thing. 
You have my commitment to work with you, not around you or against
you.
     Brokers have been given a valuable franchise -- it must be
protected.
     But with that right comes a responsibility -- it must be
fulfilled.
     I look forward to working with industry leaders to forge
creative solutions -- so that we may look back 10 years from now
and say that, together, we made it better.
                           #    #    #