"Lawyers And Ethics: The Problem of Pay-to-Play"
                                
                Remarks by Chairman Arthur Levitt
        United States Securities and Exchange Commission
                                
                       Fixed Income Daily
                 Conference on Municipal Finance
                                
                   Philadelphia, Pennsylvania
                                
                          June 26, 1997


It's good to be here for this conference on municipal finance.  I
want to talk to you today about the vital role that lawyers play
in the municipal bond industry.  Although I'm not a lawyer
myself, I do work in Washington, where -- as Justice Sandra Day
O'Connor once said -- there may actually be more lawyers than
people.  So I've learned a few things about lawyers.

By federal standards, the SEC with just 2,750 staff is a small
agency.  But 40 percent of our people are attorneys.  This
extraordinary assembly of legal talent constitutes the backbone
of the Commission -- and they've taught me a lot about the honor,
dedication, and moral probity to which the entire legal
profession aspires.

The high ethical standard set by SEC attorneys stands in sharp
contrast to the reputation of the profession outside the walls of
our building.  Lawyers and lobbyists are among the most unpopular
professionals in our nation today.

It's safe to assume that lobbyists have long been targets of
scorn.  But the law used to stand apart.  Certainly, lawyers have
drawn a certain amount of derision because of their adversarial
role.  And yet, over the centuries, the practice of law has
remained near the pinnacle of the professions.

In recent years, however, opinion polls among Americans have
revealed a deep and growing cynicism toward lawyers.  According
to the ABA Journal, a recent survey found "a disturbing pattern
that the more a person knows about the legal system and the more
he or she is in direct contact with lawyers, the lower an
individual's opinion of them."

It's not as if we needed a survey to tell us that lawyers have
what we in Washington refer to euphemistically as a "character
issue."  Popular culture is studded with the signs of declining
esteem:  In the movies, lawyers are devoured by prehistoric
creatures, while on television, late-night monologues devour them
in other ways -- and the audience responds with cheers.

Lawyers have become the targets of an extremely aggressive brand
of humor during the 1990s.  There are actually sites on the World
Wide Web dedicated to lawyer jokes.  The profession's fall from
grace has been great.

What does this have to do with the municipal bond market?
Lawyers play a unique role there -- bond counsel does not exist
in any other market, and many people look to bond counsel as
their leading light.  Shady practices in the municipal market
today have placed lawyers at an ethical crossroads.  Let me
explain:

When I became SEC Chairman four years ago, the need for reform in
the municipal bond market was obvious.  This huge, $1.3 trillion
market, once primarily the domain of institutional investors, was
now dominated by individuals.  But practices had not evolved
accordingly.

The market was making headlines -- but they were far from good.
A Business Week cover story was captioned "The Trouble With
Munis."  The Economist referred to "America's notoriously corrupt
municipal bond market"; and Fortune ran a story, "The Big Sleaze
in Muni Bonds."

Corruption and conflicts of interest that would have stirred the
envy of Boss Tweed had tarnished the reputation of the municipal
market, overshadowing the many honest and diligent people who
work there as well.

At the beginning of the twenty-first century, this segment of the
securities industry appeared to be stuck in the nineteenth.  And
yet the importance of a healthy municipal market is well known to
everyone in this room.

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.

For all of these reasons, I placed improving our municipal bond
market among my highest priorities.

As most of you know, our regulatory touch on the municipal market
is light.  Congress designed it that way.  The responsibility for
maintaining investor confidence rests heavily on the shoulders of
market participants -- issuers, financial advisers, dealers, and
especially lawyers.

Ultimately -- more than any Commission rule, release, or
enforcement action -- it is the daily actions of each of these
individuals that demonstrate the integrity of this market, and
earn the public's trust.

But trust cannot coexist with the cynicism bred by such practices
as "pay-to-play."

What is "pay-to-play"?  Sy Lorne, who served as General Counsel
at the SEC, once described an odd experience he'd had in private
practice:

     "An investment banker called me up and told me that a state
     political figure had told them that they needed to make a five-
     figure contribution to his campaign, or be excluded from all
     state finance activities.  They asked me what they should do.
     I was shocked by the question.  After considerable research 
     and evaluation of the law and circumstances at the time I 
     was forced to tell them that the answer was probably to 
     write a check.  There was no clear illegality.  I did not like 
     giving that answer."

That is a real-life example of "pay-to-play," the practice of
making political contributions to elected officials or to
candidates for local office, to influence the award of contracts
relating to municipal bonds.  Such contracts are assigned on a
negotiated, rather than a competitive, basis.  They can be for
legal, underwriting, or advisory services.

There's little doubt that "pay-to-play" damages the integrity of
the municipal bond market.  It creates the impression that
contracts are awarded on the basis of political influence, not
professional competence.  The investing public can easily pay
more, and citizens of the municipality receive less, when bond
services are not bid competitively.

Pay-to-play also breeds contempt for the political process.  That
was brought home to me several weeks before I came to Washington,
when three young securities professionals came to talk to me
about their career plans.  They worked in the municipal bond
department of two major firms.

One of them commented that the only way he was able to survive in
the municipal bond business was by buying tables at political
fundraising dinners, or by making contributions to officeholders
in a position to award lucrative underwriting contracts.  The
others agreed this was still common behavior.

How discouraging, that even the newest entrants into this very
vital part of the securities business were being assimilated into
this culture of pay-to-play.  Little wonder that confidence in
government is so low today.  This experience helped convince me
to try to change the practice, before it could be ingrained in
the minds of a generation that will soon be the leaders of the
industry.

When I came to Washington, I had a long talk about pay-to-play
with Frank Zarb, who today leads the NASD.  Frank suggested a
voluntary ban on political donations by firms seeking
underwriting business, and he was able to persuade key people in
the industry to sign on.  This was the catalyst for a cultural
shift that took place almost overnight and has since been
reinforced with rule G-37 of the Municipal Securities Rulemaking
Board.

The MSRB followed with a rule that shed light on consulting
arrangements in the municipal market.  It required written
agreements between dealers and consultants who were hired to
obtain municipal securities business.  It also mandated the
disclosure of such arrangements to issuers and to the MSRB.

One dealer challenged the Board's rule forbidding pay-to-play on
first amendment grounds and was rejected by the courts. A little
more than a year ago, the Commission brought its first proceeding
for violation of this rule; our action against FAIC Securities,
Inc. of Florida resulted in penalties and disgorgement in excess
of $400,000.

Further progress has been made since then.  Some issuers have
taken steps to preclude "pay-to-play," most notably Connecticut
Treasurer Chris Burnham, who sponsored a two-year bar on business
with the Treasurer's office after making a campaign contribution.
That proposal is now state law.

As Treasurer Burnham's actions underscore, the integrity of the
municipal market rests not only on the shoulders of dealers, but
on other market participants as well.  The Public Securities
Association recognized this in a letter to ABA President Cooper
earlier this week, calling on the organized bar to follow the
lead of bankers in ending "pay-to-play."

The PSA letter raises a valid question:  Where are the lawyers?

I am sorry to have to report to you that, as of today, no
meaningful nationwide measure has been put in place by our
country's lawyers to stop, or even slow down, "pay-to-play."

While the National Association of Bond Lawyers acknowledges that
no lawyer should make any political contribution for the purpose
of getting or retaining municipal finance work, its solution has
no teeth.  The National Law Journal had stronger words for it --
they called it a "joke."

"Under it," the Journal said, "bond lawyers need to do nothing
but check state campaign finance laws, declare them adequate, and
call it a day."  Stronger steps are needed -- as well as lawyers
of strong character to take them.

Some have not been afraid to lead.  The Association of the Bar of
the City of New York has had the courage to step forward, out of
the shadows.  After issuing a report that demonstrated the need
for action, the City Bar proposed a measure to curb "pay-to-play"
statewide.

At the same time, they were realistic enough to see that ending
"pay-to-play" in one state is not enough.  The City Bar called
upon the American Bar Association to pass a resolution to
encourage bar associations, judicial rulemaking authorities, and
other bodies to adopt policies to end "pay-to-play," on the model
of the draft rule the City Bar submitted in New York State.

None of this is rocket science.  At the risk of oversimplifying,
the resolution would ask bond lawyers to cut the tie between
campaign contributions and selection as bond counsel.  This does
not seem a terribly difficult thing to agree with.  And yet,
several lawyers have voiced strong opposition to it.

Some have said, "No, we can't do this, it will restrict our first
amendment rights."  But the courts have upheld the
constitutionality of similar measures for dealers.  And the bar
is known for its creativity -- it should be able to devise clean
mechanisms for expressing political support.

Some have said, "No, the problem should be addressed through
comprehensive campaign finance reform."  I cannot be more clear
about this: The SEC is not in the business of campaign finance
reform; from our perspective, ending pay-to-play is a matter of
market reform.

Some have said, "It's not my problem -- tell the issuers to stop
asking for money."  But true character lies in accepting
responsibility, not shunning it.

Some have said, "No, we must first marshal the evidence to be
sure that `pay-to-play' exists."  The evidence has been strong
enough to move editorial writers in the regional and national
press -- as well as the lawyers' journals -- to call for action.
Moreover, no one knows this market better than the dealers, who
have themselves acted to end the practice and now call upon
lawyers to join them -- can the lawyers really be blind to what
the dealers see?  It may be that for those who resist reform, the
evidence will never be strong enough.

There is a pattern here:  Each of these excuses presents a
problem, not a solution.  To my mind, this is precisely the kind
of behavior that has given lawyers a bad name.

That's especially true when it comes to a practice like pay-to-
play, which bears directly on questions of ethics.  In the ABA
survey I mentioned earlier, only 22 percent of respondents felt
that the phrase "honest and ethical" applied to lawyers.  Forty
percent said that description did not apply.

Moreover, about half the respondents -- 48 percent -- said that a
significant number of lawyers lacked the ethical standards needed
to serve the public.  Compare this 48 percent "dishonesty rating"
with 22 percent for accountants and 30 percent for bankers.

And among recommendations for improving the legal system,
"tougher ethical standards" were cited by the public as the
highest priority.

The issue of "pay-to-play" presents just about as clear an
ethical choice as the legal community is ever going to get.  They
just don't come any better.

Here is an opportunity, with one hugely significant gesture, to
seriously address the public's growing cynicism, to shatter the
negative stereotype before it hardens any further, and to begin
to turn public opinion in favor of the legal profession once
again.

The reputation of lawyers will not be restored through public
relations, but through public actions -- not with surveys and
slogans, but with character and courage -- not by avoiding
responsibility, but by demonstrating decency.

And let the record show that many lawyers have already begun to
seize this opportunity for moral leadership.  The Association of
the Bar of the City of New York, as I've noted, has risen to the
occasion.  The deans of the great majority of New York's law
schools have likewise stepped forward and called upon New York
State and the ABA to end "pay-to-play."

A few weeks ago, several of the leading lawyers in our nation
gathered in my office.  They came together because they found pay-
to-play an odious, obnoxious practice and wished to say so
publicly.  They felt that more should be done to end the practice
-- and that, if given the chance, many of their colleagues would
agree with them.

These legal luminaries have organized "The Lawyers' Committee to
End Pay-to-Play" under the honorary chairmanship of one of our
country's outstanding lawyers, jurists, and public servants --
Judge William H. Webster.  He has been joined by former Attorney
General Elliot Richardson, former SEC Commissioner Steve
Friedman, and by the noted securities lawyers James Doty, Michael
Halloran, John Lifton, Jack Levin, and John Olson.  And upon the
end of his term of office later this week, the Honorable William
T. Allen will add his name to the growing list, too.  Together,
they are asking lawyers across the country to subscribe to the
statement they and many of our nation's leading lawyers have
already signed.

As a result of this debate, a simple question is crystallizing
for the August meeting of the American Bar Association:  Will
lawyers act to end "pay-to-play," or will they rationalize,
temporize, and try to dodge the issue?

Once last century, an American lawyer known for his honesty was
faced with an ethical dilemma.  Asked to pursue a six-hundred-
dollar claim he knew he could win but which would bankrupt a
widow and her children, Abraham Lincoln declined the opportunity,
saying, "Some things that are right legally are not right
morally."

That's precisely where professional standards matter the most.
Within the imperfect structure of the law, for lawyers to pay to
play MAY be right legally -- but it is absolutely not right
morally.

I don't want to personalize the issue, or demonize the
opposition.  I acknowledge that there are good lawyers on both
sides of this question.  But even good lawyers can sometimes
become so mired in the details of a proposal that they lose sight
of the goal.

Our nation's lawyers now face the task of ending "pay-to-play."
This is not a time for good lawyers.  This is a time for great
lawyers.  I trust and hope they will heed our call.

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