_________________________________________ REMARKS BY ARTHUR LEVITT CHAIRMAN, U.S. SECURITIES & EXCHANGE COMMISSION "TAKING THE MYSTERY OUT OF THE MARKETPLACE: THE SEC'S CONSUMER EDUCATION CAMPAIGN" NATIONAL PRESS CLUB WASHINGTON, D.C.-- OCTOBER 13TH, 1994 _________________________________________ I've certainly come to the right place to discuss the English language. George Orwell blamed the demise of the English language on politics. It's quite possible he never read a prospectus. You each have before you a paragraph we've selected from a mutual fund prospectus. It was chosen pretty much at random -- you can find something written like it in many, if not most, prospectuses, so the actual fund doesn't matter. Now, the national press corps is among the most informed people in our nation. You're also familiar with the arcane language of boardroom and bar -- you know that a "frivolous suit," for example, is not something you buy at Brooks Brothers. And you're well-versed in writing and deciphering the English language. At the risk of C-Span's ratings, and the Press Club's reputation as a lively luncheon spot, I'm going to read the first few lines of that paragraph aloud: Maturity and Duration Management "Maturity and duration management decisions are made in the context of an intermediate maturity orientation. The maturity structure of the portfolio is adjusted in anticipation of cyclical interest rate changes. Such adjustments are not made in an effort to capture short-term, day-to-day movements in the market, but instead are implemented in anticipation of longer term, secular shifts in the levels of interest rates (i.e., shifts transcending and/or not inherent to the business cycle)..." That was only half the paragraph. Is it understandable? Why should we care about how fund prospectuses are written? Because there's a new economic fact of life in America, one whose significance has not yet sunk in. For the first time in history, investment company assets have surpassed commercial bank deposits. We've gone from a nation of savers to a nation of investors. The latest figures from the Federal Reserve confirm this trend: The number of American families with investments in mutual funds or the stock market has risen from one out of four - - already pretty impressive -- to one out of three. This mass movement into our securities markets has provided new opportunities for investors -- and new opportunities for America. But it's also increased risk, and it's led to a great deal of confusion. Investors are not as informed as they should be. It's a complex field, inhabited by creatures with names like "collateralized mortgage obligation," "bull-bear butterfly spread," and "inverse floater." And there are misconceptions even about such basic products as mutual funds. Last November, a Commission survey showed that two-thirds of those who bought mutual funds through banks mistakenly believed that bank-sold money market funds were federally insured. And the problem's not limited to banks -- almost 40 percent of those surveyed believed that mutual funds purchased from a stockbroker were federally insured. These people are just plain wrong. No mutual fund is federally insured -- even if you bought it at a desk 5 feet away from your bank teller; even if it's named "The Rock Solid Honestly Safe U.S. Government Guaranty Trust Savings Fund." Investor confusion is so widespread that we've begun a series of town hall meetings across the country -- to convey some basic facts about investing, and to encourage people to protect themselves by asking tough questions. After 30 years in and around the industry, that's the most important investment lesson I know. Unfortunately, it's a lesson few investors know. I'm here today as part of a campaign to change that, by educating investors. I've already met with people in New Jersey and Chicago. Tomorrow I'll speak at the Florida Crime Prevention Association meeting and at the Florida Atlantic University. I'm not just answering questions, however -- I'm also asking them. And in my own conversations at these forums so far, I've learned something about the needs and knowledge of individuals looking to the capital markets for financial security and success. I asked how many people could precisely measure the performance of their portfolios from this year to last -- about one-quarter could. I asked how many people trusted their brokers -- only a fifth did. Less than a fifth actually read their prospectuses. Some of the most intriguing responses were not about what investors knew, but about what they thought they knew, and about what they didn't know. Fewer than one percent said they'd heard about "up-front money," the bounty paid to induce a broker to change firms -- or about the higher commissions paid to such brokers at the start. Probably the strongest comments I heard were about cold- calling, a common industry practice which many investors feel borders on harrasment. Investors have come up with their own solutions: one person in Chicago told me that he thought the only effective way to deal with these calls is to "tell him your son is a broker." Another investor said he routinely gets calls from the same firm with which he already has an active account. "I just tell them I have an account already, and they should check their records better before calling. Then I hang up." But many people don't even know that they can hang up, or that they can put their name on a list that all firms maintain, designating themselves as people who should not be called. We're working with the FCC to deal with these concerns. But investors shouldn't need a rule to tell them not to buy securities from someone they've never met. What we have here is a failure to communicate. Our greatest challenge at the SEC today is how to deal with the confusion and lack of information among investors. We need to do better. We've got to take the mystery out of our marketplace. To do that, we've chosen to make the SEC more consumer-friendly. To understand what a change this is, you need to know something about how the Commission works. Most of the actions we take every day affect the industry directly, and investors indirectly. When we make a phone call, or write a letter, it's often to one of the exchanges, or a mutual fund, or a brokerage firm -- not to an investor. There's an irony in this. We've been protecting investors . . . but not really talking to them. The new realities of our marketplace call for a new approach. Instead of working exclusively through the industry, we're now also working at the grass roots, by listening to the needs of consumers, and doing our best to better educate them. I know from personal experience that this will work: When I headed a large brokerage firm, I paid a different kind of attention to my customers than to my regulators. Each approach has its virtue: Regulators affect the industry's rulebook; but investors affect its pocketbook. If enough people start asking tough questions, we can influence behavior in the industry just as powerfully as we can by making new rules. That's one of the reasons I've come to this forum today. I want to tell you how the SEC has begun to work directly with American consumers. I'll then close by announcing two new initiatives aimed at the heart of prospectus-speak. Last March, I appointed the first Consumer Affairs Advisory Committee in SEC history, to focus on the issues facing the people who invest in our markets. Our decisionmaking process now includes consumer advocates, investment group members, and senior citizens' representatives. To reflect the Commission's new priorities, we've just reorganized our Consumer Affairs Office. In the past, it was 100 percent complaint-driven; from hereon in, it will be an activist office, using its expanded resources on investor education as well as on complaints. We've removed layers of bureaucracy, so that now our Consumer Affairs office reports directly to the Chairman. Yesterday, in a speech before state securities regulators, I announced that the new director of the SEC's Consumer Office will be a seasoned veteran right out of their ranks -- Nancy Smith, Director of the New Mexico Securities Division. I also announced three new consumer services we're providing: We have a new toll-free Consumer Information Line. Callers will be able to get answers to the most commonly asked questions from a series of easy-to-use menus. The service will be available as of October 24th, and we hope you'll help us publicize it. The number is 1 (800) SEC-0330. For those who want information right away, we've already gone online with a system accessible through the Internet or by direct dial, able to provide investment alerts, consumer brochures, policy announcements, and rule proposals. Yesterday, the SEC was open from 9 to 5; but today, for those with a computer and modem, the SEC is never closed. This week we also unveiled something new for investors who feel more comfortable with hard copy in their hands -- an SEC brochure about mutual funds. This is but the second in a series of publications alerting investors to the risks as well as the rewards in our markets. Each of you should have a copy of our new brochure. It can be a powerful tool to help investors -- but only if we can get it into their hands. We're talking to private sector groups committed to disclosure and investor protection to assist us with printing and distribution. The press has a huge role to play in educating investors. Columnists like Jane Bryant Quinn, Kathy Kristoff, Jim Glassman, and others have been doing an outstanding job, and we're deeply grateful. But with one in three households now involved in the markets, both the media and the SEC will have to do even better. I noticed the recent Times Mirror survey showing that 71 percent of Americans feel the press "gets in the way of society solving its problems." That's hard to believe. Only 25 percent said that you "help society solve its problems." You don't have to endorse those survey results to see that there's an extraordinary opportunity here: With so many Americans involved in our markets, and with so much confusion among them, it's clear that our society has a problem -- one that all of us -- the SEC, the media, and the industry -- will have to work to solve. Let me now tell you about two more initiatives to reduce confusion in the marketplace, both being announced for the first time today. If you didn't before, you know now that prospectuses can be tough to read. The prose trips off the tongue like peanut butter. Poetry seems to be reserved for claims about performance. In fairness, much of the reason for the arcane language has to do with well-founded legal concerns. I wish I could say that the SEC had nothing to do with the status quo, but I can't. We've contributed to the situation, albeit with the best intentions -- and so have our fellow regulators and the courts. We ask funds to simplify and clarify their discussions of derivatives, for example. Within days, battalions of fund managers and lawyers descend on paneled conference rooms, thousands of legal pads slap down on shiny tables, and a new contest begins between the forces of Clarity and the forces of Confusion. It's no wonder many investors wouldn't know a derivative if they saw one. The law of unintended results has come into play: Our passion for full disclosure has created fact-bloated reports, and prospectuses that are more redundant than revealing. The answer can't be simply to make a rule requiring fund prospectuses to be clear and concise. We already have a rule that requires fund prospectuses to be clear and concise. The problem is that clarity and conciseness often collide with legal requirements. We can do better. But it's obvious that rulemaking only goes so far. I've decided to try a different tack. I'm asking funds to compete with one another to make prospectuses more consumer-friendly, in two distinct ways: first, through clear language; and second, through the inclusion of a single page that covers the essentials. First, clear language: It's my hope to have prospectuses begin to speak a new language -- the English language. I've recruited someone you all know to help me. Warren Buffett is the Chairman and CEO of Berkshire Hathaway. He's deservedly famous as a successful manager and investor. But there's one other thing he's famous for, and that is the clarity of his company's annual reports. That's why, when I began to think about ways to make prospectuses clearer, I immediately called him and asked him to translate the first paragraph I read to you today into plain English. Here's the result, which is also on the sheet you have: Maturity and Duration Management "We will try to profit by correctly predicting future interest rates. When we have no strong opinion, we will generally hold intermediate-term bonds. But when we expect a major and sustained increase in rates, we will concentrate on short-term issues. And, conversely, if we expect a major shift to lower rates, we will buy long bonds. We will focus on the big picture and won't make moves based on short-term considerations." That's the whole paragraph, and I think it's a real improvement. Warren's success with that paragraph in particular, and with clear communication in general, proves it can be done. The ball is now in the industry's court. Mutual funds compete for business all the time. Let's see if they can't also compete for clarity of communication. For our part, I've asked the staff to re-evaluate the process by which it comments on prospectuses. I've emphasized the need to limit the number and nature of the comments we give. We simply cannot give comments that can be answered only by technical, incomprehensible prose. I'm announcing today that we've created some incentives for funds to write clearer prospectuses. To recognize those who are trying to do the right thing, we're instituting an expedited review process for funds that come in with a prospectus they want to make more readable. At the same time, I'm putting the industry on notice that, in commenting on fund registration statements sent to us for review, we're going to feel free to talk about the clarity of language used, in addition to legal technicalities. We want a higher standard of clarity. To me, it makes good business sense to have a readable prospectus -- a clear and concise product description is a salesman's best friend. I've asked my staff to do better; now I'm asking the industry to do the same. Our second goal is to make the information in prospectuses less encyclopedic. As writers, you all know that it's easy to write a long story; what's hard is to get the same story into a few inches of column space, or 60 seconds of T.V. time. You wrestle with this problem every day. So does the mutual fund industry -- and they do so in good faith. One way to compress information in prospectuses is to provide investors with a one-page stand-alone summary of a fund's main features. There's a pending proposal before the Commission known as the "off-the-page prospectus," which attempts to meet this goal. When I first came to the SEC, I thought this proposal might be a good solution. The SEC has begun using focus groups to learn more from investors themselves about their needs, and in those groups, people have told us that a single page would not provide them with enough information to make an investment decision. What our focus groups did like, however, was having the traditional prospectus include a single page summary, with standard information in a standard format. We've been tracking this question for more than a year now, and our latest study is being conducted as I speak. But preliminary results seem to confirm that while people want a single-page summary, most of them want it along with the traditional prospectus. Industry leaders know that investors don't want to work their way through several pounds' worth of dense prose in order to find the nuggets of information they need. They know that a clear prospectus can help sales. So we knew the response would be positive if we asked funds to create a Profile Prospectus -- that is, a prospectus with a single-page summary. Today, I'm pleased to announce that seven major mutual fund groups have already stepped forward to pilot the Profile Prospectus: Capital Group, Fidelity, Vanguard, T. Rowe Price, Scudder, Dreyfus, and IDS. We hope more funds will join them. Because if funds compete for clarity, the winner will not be any single fund -- it will be the 38 million Americans who invest in mutual funds -- that's 38 million and growing every day. We have within our grasp a chance to help them -- a chance to change the way they buy funds -- a chance to make it easier for them to make comparisons, and easier to get right to the key issues they need to know before investing. When all is said and done, that's what these initiatives are about -- people reaching for a better life -- a new home, children through college, or a decent retirement. People looking to our capital markets as never before, for future financial security and success. We've already become a nation of investors. It's time we became a nation of educated investors. Thank you very much. You've been very kind to listen. # # #