"THE STATE OF THE BROKERAGE PROFESSION"
                           REMARKS BY
                     ARTHUR LEVITT, CHAIRMAN
                          UNITED STATES
               SECURITIES AND EXCHANGE COMMISSION
                           BEFORE THE
                SECURITIES INDUSTRY ASSOCIATION'S
                  LEGAL AND COMPLIANCE SEMINAR
                       SCOTTSDALE, ARIZONA
                         APRIL 20, 1998
        UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                     450 Fifth Street, N.W.
                     Washington, D.C. 20549
                                           Check against delivery
                               ..
                Remarks by Chairman Arthur Levitt
        United States Securities and Exchange Commission
                      Scottsdale, Arizona
                         April 20, 1998
     Not taking ourselves too seriously is one of life's more
important lessons -- for brokers, lawyers, and government
officials.  But taking our professional responsibilities
seriously is one of society's most crucial obligations.  Two
years ago I asked you to join with the SEC in a partnership to
improve sales practices within the brokerage profession.
     Today I am here to report on our progress, and to continue
this vital undertaking. Indeed, the issue is so important that I
intend to deliver a `State of the Profession' speech like this
one annually during the remainder of my term at the Commission.
     If there's one thing everyone in this room agrees on -- and
by the way, if you disagree with this proposition, I'd be
interested to hear about it -- the one idea I think we all hold
in common is that the best interests of investors are the best
interests of the firm -- they are identical. In a sense,
everything you and I do is aimed at making sure those two
interests are more exactly aligned.
     I want to discuss with you a framework that will help us
achieve that goal, not just for the next few quarters or years,
but for generations to come.  At its heart, our mission must be
to continue to elevate standards of professionalism in the
brokerage industry.The basic elements of the framework are
familiar. I think they derive from three fundamental priorities.
     First, efforts to reduce and eliminate conflicts of interest
between brokers and clients must not only continue -- they must
be taken to new and higher levels.  Second, better investor
education is essential. Informed investors increase professional
accountability by encouraging brokers and firms to work smarter.
And third, the SEC and the SROs must step in to set certain
standards. We must reinforce your genuine compliance efforts by
bringing actions in those cases where compliance is viewed either
as a nuisance or an afterthought.
                               I.
     Every single person in this room knows why enhancing p
rofessional standards is important.  But today, it's a more
urgent priority than ever before.  Discussions about the growing
role of investing usually cite three common goals shared by most
Americans: owning a home; providing for our children's education;
and securing a dignified retirement.  The goals are cited so
often they sometimes sound more like a mantra than a mission.
     But we must not forget how much more difficult it is to
achieve these goals than it was just a few generations ago.
Millions of families are worried about their basic financial
security. Largely by necessity, many have concluded that
investing may help provide for their future. The long bull market
has not only proven attractive -- it's created a stampede. In
1980, one in eighteen households invested in securities; today
it's more than one in three.
     This cascade of dollars has done wonders for the industry's
bottom line -- I have no argument with that. But those dollars
represent something that no bar chart or profit & loss statement
can ever convey: they represent the toil, sweat, and tears of
millions of decent, hard-working people.
     By soliciting and accepting their money and their trust,
Wall Street has solicited and accepted an awesome responsibility
for the future of our people. As that responsibility grows, it's
our job -- yours and mine -- to make sure the industry works
harder and more effectively to be worthy of it.  In that spirit,
I offer these thoughts to you today.
                               II.
     The first element of the framework to enhance professional
standards is familiar to all of you -- it has to do with the way
brokers get paid.  We simply must accelerate efforts to reduce or
eliminate conflicts of interest between brokers and their
clients.  There is no question that our focus on broker
compensation practices has resulted in important improvements.
The 1995 industry report on compensation practices played a
critical role in changing the climate surrounding these issues.
     The Report described a series of specific best practices
with respect to compensating brokers. These were not pie-in-the-
sky schemes that only work on classroom chalkboards. They were
field-tested practices that had been embraced by respected
brokerages around the country.  Many firms endorsed the Report
and the best practices it set forth. The SIA endorsed them too,
and includes them in a publication identifying best practices in
several areas.
     In fact, the Report's most enduring achievement may be the
one most easily overlooked. In it, the brokerage profession
acknowledged the existence of these conflicts of interest.  More
important, the profession committed itself to a specific agenda
to reduce or eliminate them.  I wrote to a small group of firms
last year to obtain a candid and confidential assessment of their
progress in implementing these best practices. My questions were
not encyclopedic. But from the responses I received and other
reports, I think we have a reasonably complete picture of where
things stand.
     The good news is there are accomplishments about which
compliance professionals and brokers can be proud. Here are four
highlights:
      First, recruits entering the profession are receiving a
     fixed salary for an extended training and mentoring period, often
     lasting two years. This reduces pressure on inexperienced brokers
     to generate commissions.
      Second, firms have enacted policies prohibiting single
     product and short duration sales contests. If followed, these
     policies remove incentives that can harm investors.
      Third, firms have moved to level compensation rates for
     proprietary and non-proprietary products, and principal and
     agency trades. This also removes incentives that can compromise a
     broker's advice.
      And fourth, more firms are basing compensation on success in
     managing client assets, rather than focusing exclusively on
     ringing up new sales.
     I applaud you for helping implement these important
policies. Your commitment to best practices was instrumental in
this process. It is especially significant that meaningful
changes were enacted without resorting to the regulatory process.
It is also apparent that more needs to be done. Much more.
     There are clearly areas where pressure can lead a firm to
follow common practices that serve short term interests, rather
than best practices that serve long term goals.  This is
certainly the case when up-front money is used to snatch high
producing brokers from competing firms.
     I'm aware of only one firm that, as a result of the Report,
adopted and adhered to a ban on up-front bonuses. Several firms
had this policy before the Report, and to their great credit have
stuck with it. One other firm adopted a ban, but attached an
exception that has regrettably overwhelmed its rule.  Better
progress was made in dampening the use of accelerated payouts for
experienced recruits, though pressure is mounting to move
backwards.
     Four out of the nine firms prohibit accelerated payouts. One
doesn't have a formal ban, but rarely uses them. Another adopted
a ban, but one year later -- because of what it called intense
competitive pressure -- reversed itself. Finally, one firm uses
them, but is the only firm whose policy seems genuinely designed
to provide brokers with a reasonable transition rather than a
windfall.
     It won't surprise anybody to hear me say that I do not like
either of these practices.  When used to excess, they discredit a
great profession.  But I'm not the person who really matters.
The person who matters most is the broker's client.  But clients
don't get to express their views on the use of up-front bonuses
and accelerated payouts.
     They don't get to express a view because -- to the best of
my knowledge -- not a single firm that uses them, discloses them
to their clients.  The 1995 Report described meaningful
disclosure as a "time tested approach to protecting the interests
of investors." Disclosure of up-front money, it said, could "lead
to better decision making by clients."
     But disclosure of up-front money was not a recommended best
practice.  Why not?
Because by definition, a best practice required at least one firm
to make such disclosures. Not even one firm was doing that in
1995. And not one is doing it today.
     What are clients told when their broker leaves one firm to
join another?  Usually it's something like: "The only reason I'm
moving is because my new firm will provide me with much more
research, and that will help me serve you much better."  We can't
tolerate pitches that tell such a small part of a larger story.
     The NASD is to be congratulated for taking the initiative to
address several of these matters.  Last week, I asked the NASD to
examine whether up-front bonuses, accelerated payouts, or certain
other forms of broker compensation create inherent conflicts. If
so, I suggested they consider requiring disclosure to clients --
or, if there is no other choice, banning them altogether.
     I am also concerned about several other compensation-related
issues, one of which was not specifically addressed in the
Compensation Practices Report.  It has probably not occurred to
many of you that buying securities from some firms in the month
of December may be riskier than at other times of the year. But
at least in theory it could be, because of the structure of
certain broker compensation plans.
     Remember the book that was called: "Don't Buy A Car That Was
Made On Mondays?"  The concern was that absenteeism on Mondays
was so high it affected the quality of cars built on those days.
Well, many brokerage firms base their compensation plans on
grids. Brokers receive a percentage of the commissions they
generate. As their commissions increase, they can jump up to a
higher payout level on the grid. The increased rate serves as an
incentive to generate more transactions.  I don't quarrel with
prudent incentives.
     But some grids are structured in a way that seems destined
to lead to conflicts. Some grids don't just provide a higher
payout for sales beyond a certain level. Instead, they apply the
higher rate retroactively, to all sales that have taken place
since the beginning of the year.
     Imagine it's December 27th. You've generated $270,000 in
commissions so far this year. Your payout rate is 35%. But if you
get to $300,000 by December 31, your payout rate will go to 38%,
applied retroactively. When you do the math, here's the bottom
line: if the broker can generate $30,000 in additional
commissions in four days, he or she will receive a $9000 windfall
in addition to the standard commission.
     That kind of incentive can create strong pressures not only
to sell, but to sell anything. Unless a firm's culture is strong
and impeccable, that temptation may be difficult for the broker
to avoid. We should be moving brokers away from such temptations.
I have asked the NASD to examine this issue as part of its effort
to respond to the Report on Compensation Practices. By this time
next year, I hope to report that substantial progress has been
made in removing such incentives.
                              III.
     The second element of the framework to enhance professional
standards may surprise you.  It's promoting better informed
investors.  This may not be the first topic that comes to mind
when you think about raising professional standards.  But it's
among the most venerable methods of improving sales practices in
any industry.
     When expectations about performance, risk, and fees are
informed by knowledge of the product and the market, the chance
of a misunderstanding is greatly reduced.  In other words --
helping investors help themselves is just plain good business. It
is the surest and most certain way of avoiding problems.
     Two weeks ago, the SEC launched a campaign to motivate
Americans to get the facts about saving and investing. The SIA,
its Investor Education Committee, and many of its members made a
tremendous contribution to our campaign's kick-off. I hope Irv
Weiser, Marc Lackritz, and their colleagues know how grateful the
Commission is for their efforts.
     Urging investors to invest their time before they invest
their money is enormously important. Making sure that disclosure
materials are in plain English is also essential. These were
central goals of my first term at the SEC.  But I think we all
would agree that more needs to be done.
     Investors need tools to help them plan their financial
future. To be useful, the tools have to be practical and
meaningful.  The Public Disclosure portion of the CRD is a tool
for investors. But because it was not initially designed to serve
the public, it was not investor-friendly. Obscure printouts full
of mysterious regulatory codes baffled investors.
     That is about to change in a dramatic way.  Part of the
redesigned CRD is now accessible over the Internet. When fully
implemented, it will present in a point and click format the
disciplinary background for every registered broker and firm in
the United States. It's my hope that after its first full year in
operation, we'll be able to say that it was used by more than one
million investors. Frank Zarb and Mary Schapiro deserve great
credit for turning around this once star-crossed system.
     The new CRD and plain English disclosure documents represent
important advances.  But it's within our power to offer other
important educational tools to help prepare the public for a
lifetime of investing.  We can do more to help investors
understand that they should reassess their goals and risk
tolerances from time to time. They should also periodically
evaluate the success of their investments in meeting their
objectives.
     To do so intelligently, investors need personalized
information on the performance and total cost of their
investments. The logical place to include this is in their
account statements.  I've read many account statements from
brokerage and mutual fund firms. Very, very few have provided
this information.
     That strikes me as short-sighted. If you believe you are
providing high-quality services at a competitive price, why
wouldn't you want your investors to know?  I was delighted to
learn recently that a prominent fund company is hoping to roll-
out a new, state-of-the art account statement before year-end.
The fund's current plans are to include a personalized
performance report for an investor's total portfolio, as well as
the specific performance for each separate investment.
     I am, of course, aware of the unusual number of
technological challenges confronting the industry. So I'm not
proposing new rules to require the preparation of personalized
reports at this time.  I am, however, going to monitor
developments in this area. This is the next frontier in investor
education, and I expect firms to respond quickly to the
challenge.
                               IV.
     The SEC has asked you to work with us to reduce conflicts,
and to better educate investors. I know that the overwhelming
majority of you will strive to do so, because you have done so in
the past.  But regulators have learned that voluntary cooperation
and self-regulation do not make a bit of difference with a tiny
but incorrigible sector of the industry.  So the third and final
part of the framework to enhance professional standards is
enforcement.
          Both the Commission and the SRO's have as their
overriding mission the protection of investors. Hundreds of
thousands of brokers work diligently every day to earn investors'
trust. We will not permit the honorable work of so many to be
sullied by the outrageous conduct of so few.  I can scarcely
express publicly the contempt I feel for the very small number of
brokerage firms whose record mocks the idea of best practices.
     These rogue firms are professional only in the sense they
have mastered the art of hucksterism; of preying on investors'
lack of sophistication. When one of their brokers picks up a
phone, it's almost as dangerous as when a drunk gets behind a
wheel.  The time has come for zero tolerance of these firms,
which demonstrate an utter disregard for professional standards.
What is particularly galling is that, right from the outset,
these firms target vulnerable investors: widows with insurance
proceeds; retirees with a nest egg; parents with a college fund.
     Boiler rooms belong in power plants, not in professional
brokerage houses. Whether they are hawking micro-cap securities,
chop stocks, or penny stocks, we want to make sure that the only
future cold calls these brokers make are to lawyers listed in the
yellow pages.  Our Microcap Fraud Task Force has made inspecting
these firms a top priority. We've given examiners special
training. We've developed procedures to help ensure that critical
materials are not concealed or destroyed during an inspection.
And we're leveraging our resources by working with federal
prosecutors more than ever before. We are detailing staff to U.S.
Attorneys in trouble spots around the country. We don't have
unlimited resources, but we're marshaling what we have to try to
find and shut down the most dangerous operations.
                           Conclusion
     The three priorities we've talked about -- conflicts of
interest, educational tools for investors, and targeted
enforcement -- are not new. They are time-tested ways to bring
the interests of investors and the interests of brokers and firms
closer together -- a goal all of us share.  But as the number of
Americans in the markets increases, so does our responsibility,
compelling us to find new ways to achieve old goals.
     Professionalism never goes out of style. The truth is, in an
industry that's simultaneously consolidating and globalizing,
professionalism is a competitive advantage.  What qualities set
truly professional, world-class firms apart, and help it
establish standards for the next century?  A world class firm
views its brokers as reflections of itself. It provides
continuous training and support, rewards clean records, and looks
at more than just numbers in evaluating success.
     A world class firm is proud of its record. It doesn't fear
disclosing the total costs of managing an account -- it welcomes
it.  A world class firm makes its proprietary products portable,
confident that its offerings and advice will prevail in the
marketplace.  A world class firm doesn't hire brokers with
disciplinary problems that might even remotely jeopardize
investors, no matter how big the book, no matter how intense the
pressure.
     At the end of the day, when all is said and done, a world
class firm has put investors' interests above everything else --
above the broker, above the firm, above the industry. A world
class firm is confident that this is the one thing it can do to
ensure its own long term prosperity.
     Join with me in the weeks and months ahead to meet these
challenges. Let us continue to prove to more than 100 million
American investors that their confidence in the profession is
justified -- and that their trust will be cherished and
protected.  If there is a strong partnership between the
profession that seeks to serve investors and the agency that
seeks to protect them, no challenge is insurmountable -- no goal
is unattainable.
     Thank you very much.