Welcoming Remarks by Chairman Arthur Levitt U.S. Securities and Exchange Commission to the SEC's Consumer Affairs Advisory Committee October 14, 1997 Washington, D.C. Welcome to the SEC and this important meeting of the Consumer Affairs Advisory Committee. It's good to see so many of you here again. Before we get started, I would like to acknowledge and welcome our newest member, Mort Wagner. Mort is an executive vice president with Smith Barney in New York. He also serves as the co-chair of the Alliance for Investor Education. At some point during virtually every day I've served as SEC Chairman, I have been reminded in some way why it is that protecting investors -- and helping investors protect themselves -- is and must always be our preeminent mission. This Committee plays a crucial role in determining how we fulfill that mandate. Let me say again what some of you have now heard several times. Your ideas, your creativity and insights, your shattering of status quo thinking and conventional wisdom -- the remarkable ferment that can and should take place when you gather together -- can lead to marvelous innovations and inspired new approaches to the many challenges faced by the Commission. Much has happened since last we met. For the first time in history, the Dow surpassed 8,000 -- more than doubling since I've been here. IPOs, secondary underwritings, mergers and acquisitions, mutual fund flows, and securities industry profits are all in the midst of extended record runs. In 1993, Business Week was so dazzled by the growth in the mutual fund industy that they prepared a rather breathless cover story on the subject, boldly -- and according to some in the industry, irresponsibly -- predicting that mutual fund assets would top $4 trillion by the year 2000. Well in one sense they were right. In June 1997, fund assets surpassed $4 trillion, and stand at a tidy $4.3 trillion now, with more than two years to go before we get to the millenium. Americans now have nearly $1 trillion more invested in mutual funds than they have on deposit in commercial banks. For the capital markets, last year was one of the best in history, and this year appears equally good. Some people look at this happy scenario of record highs and see proof that the markets are strong, that nothing is wrong with the industry, that the SEC ought to leave everything alone. But as President Kennedy once said, "The time to repair the roof is when the sun is shining." There is a universe of investors out there who have never been tested -- whose only experience has been a bull market. We have to take advantage of good times to make sure these investors understand how our markets perform over time and to ensure that our markets are as trusted, efficient, and professional as possible. Our growing securities markets and healthy economy have provided new opportunities for investors -- and new opportunities for America. But rapid growth has also increased complexity and risk -- which can in turn lead to confusion and a greater potential for abuse. Not all investors are as informed as they should be. And not all brokers are as ethical as they should be. While their number is few, problem brokers do great damage to confidence in our markets and great damage to people's lives. As you'll hear during our first panel this morning (and in a later panel about the Internet), the SEC is aggressively responding to alleged frauds -- particularly in the micro-cap sector of the market that sells almost exclusively to individual investors -- with a wide-ranging campaign focused on three strategies: prevention, enforcement, and regulatory initiatives. We have all long believed that it's better to prevent fraud before the life savings of investors are destroyed, than to simply punish the perpetrators after they've done their damage. * * * With respect to protecting an investor's life's savings, it is essential that we take note of the monumental change in the way Americans save for the future. Once upon a time, employees saved for retirement at their local banks or bought whole life insurance and were covered by a defined benefit plan. The responsibility for making and monitoring those investments was in someone else's hands. But as we all know that's ancient history. With the proliferation of defined contribution plans, employees today are being asked to make their own investment decisions. To succeed and to provide for their future, they need to become informed about the market -- about its risks and rewards. For this to happen, our efforts to educate must reach all those who participate in defined contribution plans. Our efforts must also reach the 40 percent of those eligible for a retirement plan, but who are not taking advantage of it. We must work together to inform and motivate those employees, who because of lower average incomes often turn out to be the people most in need of long-term planning for retirement. Our second panel this morning will explore some of the "best practices" we've seen to date on employer-sponsored investor education efforts. As you'll see, there's no lack of good ideas about ways to improve investor understanding. And if we succeed in improving investor understanding, not only do we win -- so do the 80 million Americans who invest in the market. Let me briefly recap what we've achieved in terms of educating investors and improving operation of the securities markets in the last year: In December 1996, the SEC approved the "cold-calling" rules proposed by the NASD and the MSRB. This past spring, we approved similar rules proposed by the AMEX and the NYSE. The "cold- calling" rules require that securities professionals call investors only between 8:00 a.m. and 9:00 p.m.; say who's calling and why; put investors on a "do-not-call" list if they ask; and get written approval before taking money directly from investors' bank accounts. To inform investors about these rules, our Office of Investor Education and Assistance prepared an educational brochure, "Cold Calling Alert," which should be in your briefing books. I announced the release of "Cold Calling Alert" during a U.S. Senate hearing on fraud in the micro-cap market. We are working closely with the North American Securities Administrators Association to distribute the brochure as widely as possible. Investors can get a copy by calling (800) SEC-0030 or visiting our website at www.sec.gov. Earlier this year, the SEC approved new order handling rules that reinforce our settlement with the NASD and help protect investors in all markets. We are studying the impact of the rules on the markets and early signs are very positive. Since the rules were implemented, the markets have witnessed a historic decline in spreads. Some reports have put the decline at better than 30 percent. And all this, with no significant decrease in liquidity or increase in volatility. This is great news. It means that investors are getting much better prices -- and that's better for all of us. In the area of disclosure, the SEC is now undertaking the most sweeping revision of our rules and regulations in many years. We have put forth proposals that will change the face of both corporate and mutual fund prospectuses. These new rules may not represent the Holy Grail -- but they will make prospectuses simpler, clearer, more useful, and, we hope, more widely read and understood. Most of our efforts focus on that most important disclosure document: the prospectus. It is possible that no document on Earth has committed as many sins against clear language as the prospectus. The prose trips off the tongue like peanut butter. Poetry seems to be reserved for claims about performance, and conciseness for discussions about fees. In fairness, much of the arcane language is aimed at legitimate legal concerns. But the fact remains that disclosure fails in its essential purpose if it doesn't communicate. The time has come to pierce the shroud of jargon and boilerplate surrounding the prospectus. It's my aim to have prospectuses begin to speak a new language -- the English language. Our efforts began with the profile for mutual funds. Eight major fund families stepped forward to volunteer for a pilot project to develop a standardized summary prospectus that highlights key information about a fund. At the beginning of the year, the Commission proposed a new rule that would all companies to use the profile. At the same time, the SEC proposed a complete overhaul of the mutual fund prospectus to make sure it focuses on information that helps people decide whether to invest. I am hopeful that both of these key projects will be presented to the Commission for final approval before the end of the year. In 1996, we extended our reform efforts to include corporate disclosure. The Division of Corporation Finance, with help from our Office of Investor Education and Assistance, began a pilot program to promote the use of plain English. We worked closely with companies to create new documents, pledging to review these documents in an expedited manner. This program has gone very well. Our volunteers' ranks are swelling, and in the months ahead we will have many more examples of plain English filings. Through these pilot programs, we've gained considerable knowledge about how to create clearer disclosure documents. To assure a smooth transition, we have also conducted workshops and our Office of Investor Education and Assistance has drafted A Handbook on Plain English: How to Create Clear SEC Disclosure Documents. This handbook -- which we've included in your briefing materials -- features proven advice from our pilot participants and others who have created plain English documents, as well as a foreword by Warren Buffett. We have issued a draft of the handbook to the public and posted it on our web site. Investors support the use of plain English -- and so do many lawyers and corporate officials. They agree that the time has come to jettison the legalese and speak plainly to investors. They understand that plain English does not mean "dumbing down," or leaving anything important out of a disclosure document. It just means presenting complex information clearly. We've achieved a great deal. But there's a limit to what we can do alone. Regulation is a blunt instrument, with many unintended consequences. Wall Street is the free market, and we prefer to use market forces. We'll regulate where warranted -- but many of the areas I want to address are gray, not black and white, and don't lend themselves easily to rulemaking. That's why the input of this Committee is so important. * * * I would now like to introduce our first speaker: Bill McLucas. Bill, as many of you know, has been the Director of the SEC's Enforcement Division for a decade now. He will start our consideration of how to combat abuse in the micro-cap market by taking us behind the scenes and telling us in detail how one fraud operated. # # #