"Values Add Value"
                                
                                
                Remarks by Chairman Arthur Levitt
        United States Securities And Exchange Commission
                   Trinity Church Tercentenary
                       New York, New York
                         March 18, 1997


To say I'm pleased to be here today is to make a huge
understatement.  I was raised across the East River, in Crown
Heights, and I'm always delighted to be in my home town.

For some New Yorkers, however, there will always be only ONE
Arthur Levitt.  No matter what I may achieve in my own life, no
matter what esteem I may earn, it will never approach the esteem
with which my late father is still remembered in this town --
long after his 24 years as New York State Comptroller.  For me,
that's been a healthy reality check.

Speaking of reality checks: I seem to be asking for one by giving
this speech about moral values in the markets.  As Samuel Johnson
advised, "Be not too hasty to trust or admire the teachers of
morality: they discourse like angels but they live like men."
For me to get up before my former colleagues on Wall Street and
pontificate about my personal ethical values in my professional
life would be a bit much -- I came here from Washington, not
Mount Olympus.

I grew up in the household of a mother who taught in the public
schools of Brooklyn for 38 years, and a father who as Comptroller
treated the funds of state retirees as protectively as his own.
They were people of deep faith, active in their religious
community.  They left me with an appreciation of values that has
served me well throughout my life.

What I want to do today, however, is talk not so much about my
own values, which are probably not very different from yours, but
about the role of values in the securities industry and in
securities regulation.  Wall Street is so focused on "value" that
there's not always time to talk about it in the plural.  I'm
therefore especially grateful to Trinity Church for creating this
forum, which is devoted to raising such questions.

There are two ways to approach this: the way choices are made in
Washington, and the way Washington tries to influence the choices
made on Wall Street.  I'll offer a few examples of each in turn,
not as a definitive statement on the subject, but as a basis for
questions from Jim Hartz and all of you after I speak.

First, Washington.  My present life makes me think about values,
ethics, and morality more intensely than ever before.  Wall
Street may be competitive, but Washington can be positively
adversarial.  Consider the constituencies involved: the White
House; Capitol Hill; the Republican party; the Democrats; the
public; the business community; my fellow Commissioners; and the
SEC staff.

To no one's surprise, these groups can and do have strongly
differing opinions on occasion.  At the same time, they are
honorable people, so in almost all cases, the choice is not
between good guys and bad guys -- usually, it is between good and
good.

I've found that you get very little done in the District of
Columbia unless you set priorities.  You cannot deal in
absolutes, and very few issues present a choice between absolute
right and absolute wrong -- usually it's a choice between two or
more ideas that are, to some degree, "right."

At the same time, moral relativism is a dead end; right and wrong
DO exist, in the financial markets as everywhere else.  But they
achieve their clearest definition in matters of law enforcement.
Most of the other issues the SEC faces after 64 years of
existence involve far more subtle distinctions.  We tend to look
for the BEST way to solve a problem, not the ONLY way.

Let me offer an example: The securities industry has
traditionally been regulated at both the state and federal
levels.  This has worked fairly well, because even though the SEC
can act against wrongdoing in any state, state regulators are
closer to the scene and can uncover problems that are hard for us
to see all the way from Washington.

This duplication of regulation was not without its costs to
business, however, and the last Congress proposed legislation to
pre-empt state securities laws.  A contest was created between
two worthy goals -- the extra comfort for investors in knowing
that state regulators were working with the SEC to protect them,
versus the benefits to legitimate businesses in eliminating
redundant regulation.  The process worked, and a compromise was
reached: federal pre-emption would be applied mainly to
securities of large, nationally-traded companies and to mutual
funds, which are also sold nationally and comprehensively
regulated by the SEC.  Investors lost a second layer of
protection in an area where they least needed it, and businesses
lost a second layer of regulation that they did not need.

Every day at the SEC is filled with similar choices between
contending interests.  Consider the question of shareholder
proposals, which we're now studying at the request of Congress
and will subsequently be asked to address.  On one side is
management, which feels it needs a free hand and should not be
second-guessed on ordinary business matters.  On the other side
are many shareholders who would like to impose their values on
such matters.  I'm sympathetic to both positions, and I honestly
can't tell you where we'll end up.  But in the end, this
decision, too, will have moral and ethical dimensions.

In my experience, attempts to apply simplistic measurements like,
"This choice is ethical, this choice is not," only defy reality,
which typically requires mid-course adjustments.  Especially in
Washington, it makes little sense to defend every proposal as if
it came from Mt. Sinai.  Sometimes compromise on a lesser point
means that a larger proposal will survive.

This is not orthodoxy -- it's DEMOCRACY, which Winston Churchill
described as "the worst form of government except all those other
forms that have been tried from time to time."

Here's another example: litigation reform.  The SEC has
traditionally supported the right of shareholders to sue a
company in which they've invested, on the theory that the SEC
can't be everywhere, and plaintiffs' lawyers help keep companies
on their toes.  But it got to the point where the system was out
of balance -- where, in some instances, plaintiffs were suing
because they knew a company would pay, regardless of the merits,
just to make them go away and save the costs of litigation.

Three years ago, I mentioned in a speech that there were limits
to how far the SEC would fight to protect private rights of
action.  The White House was flooded with calls, some demanding
my resignation, others demanding my canonization.  Again, two
"goods" were put into play -- the right of investors to protect
themselves by filing lawsuits, and the right of companies to be
protected from frivolous lawsuits.

Legislation was introduced that took a drastic approach to the
problem.  The constituencies divided into two camps -- on one
side were many on Capitol Hill and in corporate America,
especially Silicon Valley; on the other side were investor
advocacy groups and the plaintiffs' bar.  The deep divisions
carried right into SEC headquarters on Fifth Street in
Washington.  The Commission felt the original bill was too
severe, and suggested changes; in the course of that contentious
year, enough of those changes were made that, while we could not
support the bill in its entirety, neither could we oppose it.
The modified bill passed, only to be vetoed by the President,
whose veto was then overriden.

Did we do the right thing?  I hope and believe we did, but the
only thing I can say with certainty is that we did not accept
either extreme position, we stayed at the center of the debate,
and tried to work constructively to improve the bill.  That
process involved compromising, and weighing competing values.
Again, this is not orthodoxy, but it IS democracy.

Enough of Washington -- a story you probably know much about.
Let me now turn to a lesser-known subject: the ways the SEC tries
to influence the morality and values of Wall Street.

It's been said that the genius of our Constitution is that it
recognizes that the nation will be made up of competing self-
interests.  Rather than try to quash that powerful instinct, it
sets up a system of traffic lights so that competition takes
place in a fair and orderly way, without too many head-on
collisions.

The primacy of wealth in American culture makes the stakes
extraordinarily high in the securities industry, for regulator
and regulated.  The urge to make money is so powerful that our
markets require strong ethical standards, and strong sanctions
for those who violate those standards.

Regulation must strike a balance between nurturing the mechanisms
that facilitate the flow of capital in our nation, and protecting
the interests of the investors who provide that capital.  That's
my philosophy.  Full disclosure and a marketplace where
competition is both fierce and fair are the best way to provide
that balance.

My predecessors left the Commission an honorable heritage, and it
is our mandate to uphold the standards and the independence that
will enable our successors to continue that tradition.  My fellow
Commissioners share the conviction that there is a dollars-and-
cents value to a market that is accepted as being fair and open
and, conversely, a fearsome cost to markets judged to be rigged
or favoring the interests of a special few.  The tragedy in
Albania is the most extreme example of a market gone mad by
accepting the laws of the jungle instead of the ethics of fair
and free commerce.

Securities regulation BEGINS with the black-and-white view of
traditional law enforcement -- you can't lie, cheat, or steal in
our markets, and if you do, you'll be punished.  But it takes
things one step further:  It recognizes that, between the black
and white there lies a grey area of conduct that is "beyond the
periphery of the law," as William O. Douglas once put it, and "in
the realm of ethics and morality."

What kinds of things lie in this grey area?  Important values and
principles -- moral and ethical imperatives such as the idea that
a broker should always hold his client's interests above his own.
The principle that an organization that operates in the public
interest, such as an exchange or standard-setting body, should
have significant public representation on its board.  The notion
that underwriting and brokerage business should go to the firm
that provides the best deal for investors, not the best payback
for issuers or fund managers.

Together, these values are a cultural touchstone for the
industry.  They are largely self-imposed, with the SEC keeping an
eye from a distance.   They ADD value, bringing customers in the
door again and again by winning their trust.  They are admirable,
noble, worthy principles for an admirable, noble, and worthy
business.  But they don't always lend themselves to analysis in
black and white.

Should a broker sell a client an in-house product that earns him
a higher commission, or another firm's product that may pay less?
Are the public members of a board truly independent of management
and, if so, what percentage of seats constitutes "significant
public representation"?  When a fund manager receives a credit
for sending orders to a broker to be executed, where does it
cease being a rebate and turn into a kickback?

I would go so far as to say that most of the pressing issues in
the industry today are not criminal, but cultural.  I can say
this because I come out of that culture, and I think I have a
pretty good idea of its strengths and weaknesses.

It is almost impossible to regulate culture, values, ethics, or
morality.  It IS possible, however, to influence those things in
other ways -- and that is something the SEC has tried very hard
to do over the years, above and beyond enforcing the laws.  I'll
close with two examples of how we've tried to do so.

The first is an area that is somewhat beyond our usual beat, and
in which we've met with only limited success.  People familiar
with Wall Street are often struck by how little it resembles Main
Street.  There's widespread agreement that there are too few
women and minorities among the securities industry AND its
regulators -- but there is little agreement on how to change
that.

The SEC neither possesses nor desires regulatory power over such
matters.  But fostering diversity is an important value to many
of us, who feel it's the right thing to do.  So we're trying to
raise the subject whenever we can and to encourage people to do
what they can to have a securities industry that looks like
America.

The response has been one of good will, good ideas, and good
faith efforts to make things better.  In fact, I just heard of an
ambitious plan at Smith Barney to tie 10 percent of every
manager's bonus to their efforts to promote diversity.  It's a
bold experiment, one we'll all be watching.  The truth is, we
work in diverse markets, domestically and internationally.  It
makes sense for the securities industry to reflect the population
it interacts with every day.

One other factor will surely help this along: the mass migration
of investors away from bank accounts, CDs, and other insured
products, and into our stock markets during the 1990s.  One out
of three American families now invests in mutual funds.

This is an extraordinary change.  A nation of savers is becoming
a nation of investors.  And among the many new investors in the
securities markets are growing numbers of women and minorities.
I have little doubt that this will foster their increasing
involvement in the industry as well.  We'll continue to do
everything we can to encourage that.

My final example of an attempt to influence the culture of Wall
Street comes from the municipal bond market.  Several weeks
before I came to Washington, three young securities professionals
came to talk to me about their career plans -- I always try to
accommodate young people in that position.  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 common behavior.  This practice is known
as "pay to play."

How terrible, 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 at such a low ebb today.  This experience convinced
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.

The issue is not as black-and-white as it may seem, however.  It
was impossible for any single firm to end the practice -- to
cease making contributions would have been suicide for the firm's
municipal desk.  The SEC could have ordered firms to stop making
contributions, but that would have interefered with their First
Amendment right to make donations that had nothing to do with
underwriting work.  There was no perfect answer.

When I came to Washington in 1993, I had a long talk about pay-to-
play with Frank Zarb, one of the wise men of Wall Street. Frank
suggested a voluntary ban on political donations by firms seeking
underwriting business, and 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 a formal rule.  And now the Association of the Bar of the
City of New York has proposed its own rule forbidding pay-to-play
among its members.  What a positive statement it would be if the
lawyers were to raise themselves to the same standard of ethical
conduct as the bond dealers!

                          *     *     *

I've talked about some of the ways values and ethics intersect
with our markets, on Wall Street and in Washington.

I hope I haven't shattered any illusions.  But my goal was not to
CREATE any.

The pure and simple truth, as Oscar Wilde liked to say, is rarely
pure, and never simple.

But it is certainly worth defining, deliberating, discussing, and
debating.  I hope you'll agree, and I hope I've contributed to
that debate today.  Thank you.

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