REMARKS BY CHAIRMAN ARTHUR LEVITT JR. U.S. SECURITIES AND EXCHANGE COMMISSION "INVESTOR PROTECTION IN THE AGE OF TECHNOLOGY" SALT LAKE CITY, UTAH MARCH 6, 1998 Good afternoon. I'm delighted to be here today, to discuss a topic that is vital to our economy: The challenge of investor protection in an era of increasingly complex technologies. I'm especially pleased to join Senator Bennett, who represents Utah so ably on Capitol Hill. I've had the pleasure of working with Senator Bennett in Washington, and I value his guidance. Together, we are seeking better safeguards to strengthen our financial system. Through our efforts to build confidence in our markets, we will help fulfill the Commission's mandate -- to protect investors. Our nation faces no higher economic priority than to keep investors confident of the markets' integrity. It certainly is fitting that your Senator is hosting this conference on electronic commerce. Senator Bennett is one of the most far-sighted lawmakers in the United States Senate on this issue. His insights have been vital in helping policy-makers weigh technology's effect on the well- being of our people. Technology can be a double-edged sword. It can create vast new opportunities -- yet it can also pose unforeseeable risks. Ready or not, we have become ever more reliant on the flawless, instant operation of complex technologies. In an interdependent global financial system, a small-scale flaw in any computer anywhere can become an instant anxiety for economies everywhere. That is precisely the danger raised by an issue that you've been hearing a lot about here at this conference: the Year 2000 Problem. It's a policy area where Senator Bennett has shown true leadership. So let me begin my remarks today by adding the Commission's perspective, as we anticipate the final tick of the clock on December 31, 1999. We've all heard the breakdown scenarios about sudden computer failures and widespread corruption of computer programs. But I wonder whether most people truly grasp the enormity of the risks. Any company that neglects this looming problem is simply asking for trouble. If a firm is eventually hit by a Year 2000 breakdown, it will probably be put out of business -- not by the authority of any regulator, but by the power of the market itself. Preventing any significant Year 2000 disruptions must be a top priority. The Commission has been encouraging all the participants in our financial system to take swift and aggressive action. And it's not just the institutions that I'm concerned about. It's the investors who do business with them. A Year 2000 breakdown could do incalculable damage to investors' finances, and could undermine their confidence in our entire financial structure. To spur every part of our system into action, we have put America's securities industry on notice: Every financial organization that we regulate will be held accountable for preparing for the Year 2000. There will be zero tolerance for inaction. Just yesterday, the Commission approved a release proposing that large broker-dealers file two reports with the Commission, outlining their strategies for dealing with potential Year 2000 computer problems. The proposal would require the firms to engage independent public accountants to give an opinion on whether there is a reasonable basis for the broker-dealer's statements about its Year 2000 preparations. The goal of this proposal is not to second- guess broker-dealers, but to ensure that they are putting strategies in place to address the Year 2000 problem. We're also reminding corporations of their disclosure requirements, and we're working with industry groups to educate the public on the issue. I'm grateful to Senator Bennett for the time, attention, and perseverance that he has brought to this issue. With his continuing leadership, I'm hopeful that we can marshall the resources to forestall any widespread problem as we enter the new millennium. Americans have onfronted such technological challenges throughout our history -- and we have always risen to meet them. Our economy has thrived because we have been eager to embrace new tools that increase economic efficiency. The citizens of Utah had a first-hand view of one of the pivotal moments in America's technological progress. In 1869, not far from here -- at Promontory Point -- railroad men drove the Golden Spike that united the continent and opened it up for commerce. The railroad tracks, and the telegraph lines alongside them, allowed for the migration of people, ideas, goods, and capital. The securities markets were riding the wave of technology, too. As early as 1846, the first telegraph lines at the New York Stock Exchange started giving investors the latest price quotes. In 1866, the first trans-Atlantic telegraph began to help reconcile imbalances between prices on the New York and London markets. As the Industrial Age advanced toward the Information Age, new technologies were already improving market efficiency. So the trend toward advancing technologies has been under way for a long, long time. What's different today, is the pace of change. Change is occurring so quickly that it can sometimes be dizzying. Today -- amid far-reaching and fast-paced currents of innovation -- we've come to realize that we live in a truly global village of finance. Silicon chips and fiber-optic cables allow capital to move across borders at lightning speed. The expansion of our markets is driven by ever-increasing computer power and automated trading systems on our exchanges. That's true not just on Wall Street, but around the world. Globalization is making it just as easy to execute a trade in New Delhi as it is in New York. Investors have benefited from the rapid introduction of new technologies. Markets are now functioning with an efficiency that was unimaginable just a few years ago. Transactions that were once time-consuming and tedious have become instantaneous and inexpensive -- initiated and executed at the touch of a button. We've come to see the Internet as a tool for providing financial information in real time. We've come to expect share volumes of hundreds of millions a day, handled without a hitch. As record numbers of investors have entered the marketplace, our exchanges have had to brace themselves for trading days with share volumes not in the millions, but in the billions. In the technological revolution, the big winners are investors. Information Age technology helps cut costs and enhance services. All of the improvements in the information flow -- personal computers, desktop workstations, networking connections, increasingly sophisticated software -- have helped propel market efficiency. Consumers can now evaluate investment opportunities more wisely than ever before. Modernization has altered the landscape of every aspect of the securities business. When I started out as a young broker, the securities industry still suffered from an enormous "back-office problem" with paperwork. Electronic trading screens were just becoming widespread. Investors still clung to physical, paper certificates. Advancing technologies have changed a lot of that. Without computer-driven information flows, today's complex market operations would be impossible. Just try to imagine, for example, pricing large mutual funds daily. Imagine tracking the constant inflow and outflow of investors' money from those funds. Imagine handling daily trading volumes of hundreds of millions -- sometimes billions -- of shares. Without the benefit of modern computers, it would simply be impossible. The structure of the securities industry is changing. And the relationship between individual investors and the marketplace is changing, too. One of the tools that is giving investors unprecedented opportunities is the Internet. Information and ideas are flowing constantly over an affordable, accessible system -- giving individuals the same access to market information as large institutions. The Internet is a supremely powerful force for the democratization of our marketplace: For anyone with a computer and a modem, the Internet ensures timely access to accurate data. At the Commission, we've been at the forefront of the drive to make financial data accessible to the public. Years ago, we established our EDGAR database to give investors the latest corporate financial information. But at one point, we confronted an important question, when the private group that had been disseminating EDGAR's data notified us that it intended to stop. We faced a decision: Should we let private companies sell that data? Knowing the enormous value of that information to investors, we said "No." Today EDGAR is available for free, to anyone, through the Commission's Web site. It gets hundreds of thousands of "hits" a day. Faster, better service -- in all parts of our nation's financial system -- means wiser investment decision-making. For example, an increasing number of issuers are making their annual reports, press releases, and other types of information available to investors on their web sites. Many mutual funds now allow investors to download prospectuses, sales material, and application forms from their web sites. Some funds allow their customers to access their account statements, and to transact business over the Internet. Full-service brokers are beginning to offer their clients research and other services on the Web. In addition, some discount brokerages have entered into relationships with underwriters and investment banks that give their customers access to IPOs and other offerings that they have never had before. So technology is a powerful tool in helping establish a "level playing field" for all investors, large and small. Investors have access to more tools than ever. But so do the swindlers who prey on those who are vulnerable. A lot of unsavory characters have been attracted to the Internet, seeing it as a clever new medium for the same old kinds of fraud. Investors need to keep up their guard, and remember: If it sounds too good to be true, it probably isn't true. Internet fraud presents new challenges for the Commission's enforcement efforts. We're responding with a growing program of investor education, market surveillance, and prosecution. We've moved aggressively to protect investors by establishing a significant presence on the Internet. We've posted "Investor Alerts" on our Web site, describing common scams. We've placed warnings in newsgroups and securities-related areas of commercial on- line services. Our Web page contains a complaint form that the public can use to submit information electronically about potential securities-law violations. And we maintain an active program of cyberspace surveillance. One of the cases we discovered through our Internet surveillance program was a $20 million Ponzi scheme -- operated from right here in Salt Lake City. Investors were solicited through a network of sales agents, one of whom posted the offering on the Internet. In that Salt Lake City Ponzi scheme, it was also the Internet that was critical in cracking the case: An alert investor sent us an inquiry about it, through the complaint form that's included on the S.E.C. Web site. Our Enforcement Division took it from there. The Salt Lake City case is hardly unique. Con artists are increasingly using the Internet to try to lure gullible investors to send money to fraudulent schemes. In the old days, swindlers used the U.S. Mail. Then they began using the telephone for cold calls. Now, predictably, they're using the Web. When it comes to fraud -- as the classic song says -- "it's still the same old story." Investors are promised astronomical rates of return on investments described as "risk-free." Scam artists are getting clever with technology, but they're just exploiting the same old human weakness: the impulse to get rich quick. We recently brought a case against some Internet scam artists who were peddling securities in a fictitious bank. The bank -- of course -- wasn't registered with any banking authority or securities regulator. But it promoted itself as the first global Web-based bank. That claim suckered in some gullible investors. I have here, with me, a few examples of the scams you see on the Internet. Some of their claims are so extravagant that you'd think everybody would know they're phony. Here's one -- "300 percent rate of return over three years! Tax-deferred!" It claims to invest in new software technologies. Here's another -- "Guaranteed! 61 percent return on your investment! No risks! We make the money, and we give you your cut -- plain and simple!" It claims to invest in real estate. And another -- "Guaranteed by contract to give you in excess of 51 percent return per annum! This is a unique guarantee -- the best we have ever seen!" This one says the money will be deposited in a bank in Switzerland. Sure: That's your deposit -- but they'll be the ones making the withdrawal. In most cases like these, the businesses seldom exist as more than "shell" operations -- and the fraudsters simply pocket the cash. Unless investors are diligent in getting the facts about offerings on the Web, they're vulnerable to the same kind of swindlers we've always seen. The Commission can help police the marketplace. But a well-informed investor remains the "first line of defense" against fraud. Investor protection remains at the core of the Commission's mandate. Our mission has not changed -- but our methods must. Through an evolving approach to regulation, the Commission has actively encouraged our markets to take advantage of technology's benefits. For example, the Commission has published two interpretive releases on the electronic delivery of information. The benefits of electronic delivery are obvious -- reduced costs and faster delivery. The Commission's releases set forth guidelines that allow issuers, broker- dealers, investment companies, and others to use new technologies. Nonetheless, the interests of investor protection remain paramount in our thinking. Those same guidelines seek to ensure that information sent to investors in electronic form meets standards similar to those required for traditional paper delivery. And we recognize that not everyone is able, or willing, to use high-tech equipment. Companies must continue to offer information on paper to those who prefer it. We have to be sensitive to privacy concerns, too. In order to protect the confidentiality of certain financial information, the Commission also required brokers and advisers to obtain a customer's consent before delivering personal financial information electronically. At the Commission, we're also searching for technological solutions to regulatory problems. For example, American shareholders of foreign securities frequently don't receive proxies: Under American law, we cannot force foreign issuers to send them to our citizens. One intriguing way of dealing with this issue may be to get the information onto the Internet. It's a fast, cost- effective way to disseminate the proxy information. In cases like this, we may find opportunities to solve regulatory problems through technological means. As companies adapt their practices to new technologies, the Commission remains receptive to the continuing innovation in the marketplace. Yet we realize that there will be much more to do. In order to create a forward- looking structure, we need to enlist the best thinking of all the participants in the market. With that in mind, I intend to convene a roundtable on technology policy -- later this spring -- where regulators and representatives from the securities industry can gather to talk about critical issues. One area for discussion is the opportunity that technology offers for improving communication with investors. Advances in communications technology also raise supervisory and security questions for brokers and investment advisers. For example, automation makes it possible to collect, retain, and transmit information for supervisory purposes. I would like to listen to ideas about how this potential could be used to better protect investors and oversee markets without overburdening regulated firms. Finally, automation raises the possibility of faster settlement of trades and greater clarity in pricing securities. This is another area that merits serious discussion from all areas of industry, regulatory bodies, and the investing community. The roundtable on technology policy will help us adapt our approach to the evolving marketplace. Modern markets require agile regulation. At the S.E.C., our challenge is to create a flexible framework. It must allow us to accommodate the changes that are occurring today, and also to anticipate the changes that will occur tomorrow. Sometimes, adapting to change will mean adjusting our methods of regulation. Even more often, that will mean adjusting our way of thinking. We live in an era when, paradoxically, the only constant is change. The process of change can be disruptive. The pace of change can be disorienting. But the ability to change has always been the hallmark of our markets. We have succeeded by recognizing the need for change, and by responding to it. Yet, amid all the changes being wrought by technology, there's one thing at the Commission that certainly will not change: our dedication to investor protection. Keeping our markets responsive to the needs of investors is the surest way to keep our economy strong. Thank you very much.