Remarks of Richard Walker before the Investment Company
                          Institute
             Washington, D.C., December 7, 1998

     Good afternoon.

     I am pleased to be here this afternoon to talk with you
about some of the current issues facing the mutual fund
industry.  When I accepted the ICI's kind invitation to be
your luncheon speaker, I realized that today is the first
opportunity I've had since joining the Commission 7 years
ago to address representatives of the mutual fund industry.
I hope it won't be my last, though I recognize that my
position as Enforcement Director tends to limit the number
of invitations I receive.

     As all of you know, the Mutual fund industry has
witnessed meteoric growth.  Mutual fund assets now total
more than the deposits of commercial banks.  When I joined
the Commission in 1991, total mutual fund assets were in the
range of $1.2 trillion.  Seven years later, the total now
exceeds $5 trillion.  In 1991, approximately 3,200 mutual
funds were in existence.  Now, there are about 8000
different funds and about 30,000 different investment
companies.  In fact, there are so many funds now that they
come in every size, shape and flavor.  For example, if you
want funds with a patriotic name, our records indicate you
can choose from funds named Franklin, Hancock, Jefferson,
Pilgrim, Independence, and Flagship.  If you like trees
instead there are funds named Evergreen, Oak, Golden Oak,
White Oak, Sequoia, and Acorn.  And with the rise of hedge
funds, I wonder whether there will soon be, say, a privet
fund or a boxwood fund.

     Another indicator of the dramatic growth of this
industry is found in a 1966 Commission report to Congress
entitled, "Public Policy Implications of Investment Company
Growth."  The transmittal letter from then-SEC Chairman
Manny Cohen described the growth of the investment company
industry as "dramatic." Section 14(b) of the Investment
Company Act authorizes preparation of such a report when the
Commission believes growth in the industry is happening so
rapidly that it could hamper investor protection.  At the
time the report was prepared, the total level of investment
company assets _ which was what triggered preparation of the
report _ was $46 billion.  Given today's level of $5
trillion, we might have pulled a false alarm in 1966.

  Happily, the mutual fund industry has avoided scandal
over the years.  The fact that the industry has attracted a
greater number of individual investors  - including many who
are new to the market and relatively unsophisticated - has
led, however,  to closer scrutiny of the industry by
regulators, such as myself. Many of you probably don't know
very much about enforcement types like me.  So I thought it
would be useful to share with you some of my views and
philosophies about the role of enforcement generally and
about the areas that are of greatest interest to me.  Of
course, the views I express are my own and not necessarily
those of the Commission or its staff.
  
  I became Enforcement Director in May of this year, after
having served 2 1/2 years as General Counsel and 4 years
prior to that as Director of the Commission's Northeast
Regional Office.  During my time at the Commission, we have
brought a number of significant cases in a variety of areas.
We have done much to clean up the municipal bond market, to
continue our war against insider trading, and in recent
times, to tackle fraud in the micro-cap market and over the
Internet.

     While we have brought fewer cases involving `40 Act
registrants, the cases we have brought have been highly
significant. They include cases such as

    First Investors - in which we charged a large mutual
  fund complex and its senior management with sales practice
  violations;

    Mitchell Hutchins Asset Management and Piper -- two
  cases involving alleged inadequate procedures that led to
  disclosure and pricing violations;

    Account Management and Monetta -- cases involving
  allocations of hot issue IPO's; and

    Parnassus and Rockies Fund --which focused on the
  fiduciary duties of fund directors.

     More about some of these cases and the issues they
raise later.  It is sufficient to note at this juncture that
these cases go to the core of our enforcement program.  They
involve fundamental concerns that cut across industry lines.
For example, they underscore that mutual fund shares -- like
all other types of securities -- must be sold in a fair and
ethical manner with proper disclosure of their risks and
other characteristics.  The cases also demonstrate that
mutual fund directors, like directors of public companies,
must perform the duties required of them without conflicts
of interest and in strict observance of their fiduciary
duties.

     Before addressing our current priorities, let me spend
a few minutes talking about the enforcement process.
Although I've only been Enforcement Director for a few short
months, if you look at some of the things the Division of
Enforcement has done during this period, you will begin to
understand my approach to the enforcement process.

     At the outset, I believe that every enforcement action
we bring has 3 important components:

    First, enforcement actions must address specific
  violations of law and result in sanctions that will protect
  the public from future harm;

    Second, every enforcement action must also carry a
  broader message that will help to deter others from engaging
  in similar misconduct; and

    Third, enforcement actions should serve as a vehicle to
  alert and educate the public as to how to protect themselves
  from harm.

     We've worked to fulfill these goals in a number of
ways.  We've brought cases that involve, not only misconduct
by specific individuals and entities, but also are
illustrative of problems prevalent in the industry.  And
we've coupled our enforcement efforts with investor alerts
and other educational efforts such as investor Town
Meetings, postings on our Web site and printed pamphlets
offering advice to investors.

     One technique that I have found to be particularly
effective in drawing attention to a problem is to bring
several cases involving similar violations at the same time.
We employed this approach earlier this Fall when we brought
13 cases against micro-cap issuers and promoters on the same
day, and again when we named 37 broker-dealers who had
failed to make required Year 2000 filings.  More recently,
we conducted a successful Internet sweep in which we
initiated actions against 44 individuals and entities who
engaged in illegal touting of securities without disclosing
they were receiving compensation for their efforts.  I have
found that by grouping cases thematically, our message is
delivered more forcefully and effectively than sometimes
occurs when we bring cases separately.

     In addition to making sure that our enforcement program
provides strong deterrent and educational messages, it is
important for us to send these messages in a timely fashion.
With staff turnover at a high level, industry growth at a
record pace and broad markets over which to maintain our
watch, this is a formidable challenge.  And yet, it is a
challenge that we have demonstrated we can meet by
selectively focusing on issues of the greatest concern, and
prioritizing and expediting our investigations of those
matters.  Again, our Y2K broker-dealer sweep and our
Internet sweep are good examples of how we will be
approaching enforcement issues of high priority.  Both of
those sweeps were originated and executed in just a few
short months.  Effective law enforcement requires us to
shorten the time period between our discovery of illegal
conduct and imposition of deterrent sanctions.

     Of course, expediting investigations takes its toll.
We simply do not have the resources to prioritize every
investigation.  We must be selective.  And just as we put
pressure on our own staff to meet tight schedules, we must
also be firm about deadlines for Wells Submissions and for
compliance with our subpoenas.  This means we need your
cooperation more than ever.

     I'd be remiss if I didn't take a minute to talk about
the May 1998 letter the ICI sent to Commissioner Laura Unger
in connection with her review of the Enforcement Division.
I commend the ICI for offering its views on how to make the
process work better.  Let me tell you about some of the
matters the ICI raised and what has been done to address
them.

     
     
     
     First, the ICI stressed that it is important that
enforcement actions not be used as a substitute for
rulemaking or the issuance of interpretative guidelines.  I
completely agree.  I believe that the cases we have brought
in the '40 Act area are all based on violations of clearly
established principles of law.  I'd be curious to hear from
you which cases you feel are not.

     The ICI also suggested that we consult with the
Division of Investment Management before recommending any
'40 Act case.  In fact, we do.  IM  reviews and comments on
every recommendation.  We give great deference to their
comments and often re-shape recommendations based on what
they have to say.

     The ICI further suggested that our staff receive
extensive '40 Act training.  Our staff already receives
training in all areas of the law, not just the '40 Act. We
recently worked with the SIA to provide greater training for
our staff by the broker-dealer community.  We would welcome
the ICI's participation in such training as well.

     Another suggestion raised by the ICI is that IM
designate more enforcement liaisons to review our cases. . .
.   Are you beginning to see a theme to the ICI's comments
or is it just me?  If I were a suspicious guy, I'd say the
ICI must think we in enforcement don't know very much about
what we've doing in the `40 Act area.  If it gives you all
any comfort, you should know that every enforcement
recommendation is reviewed by half the civilized world --
not only IM, but every other division, the Commissioners and
the Commissioners' legal counsel.  As you can see, there are
alot of checks and balances built in to the process.

     As to the question of more enforcement liaisons from
IM, IM has a staff of four, headed by Liz Osterman, who are
both exceptional and adequate in number.  IM provides more
liaisons than any other division, even though fewer cases
fall into their domain.

     Finally, the ICI asks that we create a specific unit in
Enforcement solely to focus on '40 Act cases.  We tried this
in our New York Office when I was its director and it did
not work well.   We frankly do not have enough of a need to
justify such a unit.  In 1997, we initiated 489 enforcement
actions - 7 involved Investment Company Act violations and
45 involved Investment Advisers Act violations.

     So much for our processes - let's talk about our
priorities.  In preparing my remarks for today, I gave a lot
of thought to how I would rank my enforcement priorities in
the mutual fund area.  While I concluded that a precise
ranking was not really possible, there are several areas
that top the list.

Sales practice violations

     The first is sales practice abuses.  The Commission has
long regarded such abuses -- in all areas of the securities
industry -- as among the most serious violations that we
deal with.  This is particularly true under Chairman Levitt
who has devoted every resource available to insure investor
protection.  I too have had a serious distaste for sales
practice violations dating back to the time I viewed and old
episode of the TV sitcom, Taxi.  Danny DeVito's unsavory
character was laid off as taxi dispatcher.  He landed a job
as a broker and while cold calling quickly found himself
talking to a boy about 10 years old.  He said to the boy,
"Is your mommy home?"  After the boy responded "no," Danny
DeVito asked, "Do you know where her checkbook is?"

     In recent years, the Commission has meted out tough
sanctions in the sales practice area.  These include stiff
monetary penalties and industry bars for securities
professionals.

     The kinds of cases we will be on the lookout for
include those involving misrepresentations about the risks
of investing in, or the characteristics of, a particular
fund.  In addition, I am concerned about situations in which
brokers and advisers place their interests ahead of the
interests of their customers when they recommend the
purchase of specific funds.  For example, you can expect to
hear from us soon on the subject of fraudulent mutual fund
switching.  We will also be looking closely at failures to
disclose up front fees, contingent deferred sales loads and
breakpoints in sales materials used to sell funds,
particularly at the point of distribution.  And we are also
studying, together with our Office of Compliance Inspections
and Examinations, arrangements for the distribution of fund
shares where compensation is paid for distribution services,
including in "step out" transactions.

Duties of Directors

     A second area of enforcement priority is ensuring that
fund directors properly fulfill their duties.

     Like any corporation, the board of a mutual fund is
generally responsible for overseeing the management of the
company.  But the board is responsible for much more.  As
amply stated by the noted academic Thomas Lee Hazen,
"[D]irectors serve primarily as `watchdogs' over an
investment company to protect the interests of shareholders
against abuses by investment advisers and others in a
position to profit illegally from the company."

     Well-trained watchdogs can help to keep "attack dogs" -
- as I've heard my staff referred to on occasion -- at bay.
Investors must be able to depend on vigilant and well-
informed directors to "keep their fund's house in order."

     Recent experience makes plain that we will hold
directors' feet to the fire.  Three cases in particular
stand out:  Parnassus, Monetta, and the Rockies Fund.  The
Commission's Orders in each of these cases are "must"
reading for everyone in this room.

Parnassus

     Parnassus is an administrative proceeding in which we
sued two outside directors of the Parnassus Fund.  We
alleged that they aided and abetted and caused the Fund to
overstate its net asset value by failing to value in good
faith the Fund's holding in a thinly traded stock.  For two
years, the Fund valued the stock at 34 cents per share.
This price was based on the last available Nasdaq market
quote - a quote issued before the company was de-listed
after its equity turned negative and before the company
filed for bankruptcy.  Thereafter, the company's shares
traded in the pink sheets at prices as low as one cent per
share.  Nonetheless, the Fund continued to value the stock
at 34 cents per share.  The Fund also carried a $100,000
promissory note of the same company at an inflated price.
     
     The bloated valuations caused the fund to overstate its
NAV, which in turn provided redeeming shareholders a
windfall and shortchanged those buying new shares.  In
addition, the adviser received more than it was entitled to.

      On September 3 of this year, ALJ Robert Mahony
  handed down his decision.  We   won.

     Now, Parnassus is a case that led to a hue and a cry
from the industry and the bar.  "The SEC is seeking to
impose new duties on directors," our critics complained.
Not so.  The responsibility of directors to assure that the
assets of their Fund are fairly valued goes to the core of a
director's duties under the '40 Act and Rule 2(a)(41)(b).

     You should not draw comfort from the fact that the ALJ
declined to impose money penalties in this case.  His
decision on penalties was guided largely by the fact that
the directors received no unjust enrichment and otherwise
had a clean record.

The Rockies Fund

  Our case against the Rockies Fund reinforces the lesson of
Parnassus.  In this litigated administrative proceeding, we
sued two independent directors of the Fund.  We charged
these directors with anti-fraud violations for misstatements
and omissions appearing in the
Fund's annual and quarterly reports concerning, among other
things, the value of certain restricted and unrestricted
securities held by the Fund.

Monetta

     While Parnassus and the Rockies Fund focused on the
fair valuation of Fund securities, fund directors of course
have other duties, many of which arise outside the `40 Act.
Front and center among these is the common law duty of
loyalty.  The importance we attach to this duty is well
illustrated by our February 1998 case against three
directors of mutual funds advised by Monetta Financial
Services.

     We allege in this case that during an eight month span
in 1993, Monetta received profitable short term trading
opportunities in "hot" IPOs from certain broker-dealers.
The allocations were made based on business Monetta had
directed to the broker-dealers, principally on behalf of the
funds.  We allege that Monetta, the adviser, allocated
portions of the IPOs to certain fund directors even though
the funds were legally and financially able to invest in the
IPOs.  As you know, directors owe a fiduciary duty of
loyalty to their companies and shareholders.  We allege that
the Monetta directors who received preferential IPO
allocations without making disclosure and obtaining the
consent of disinterested representatives of the funds
breached their fiduciary duty of loyalty.  Acceptance of
this benefit from the fund's adviser placed the fund
directors in a position where their judgments - including
reviewing the performance of the fund's adviser and deciding
whether to retain or replace the adviser -- could be
influenced by considerations of personal gain dispensed by
the adviser.

Compliance Procedures

     A final area of priority relates to the effectiveness
of compliance and internal procedures.  We addressed the
adequacy of such procedures in the Mitchell Hutchins case
and the Gabelli case.   I think it's fair to say that if a
fund has an effective compliance program and internal
procedures that are closely observed, the Enforcement
Division's response to any violations of law will be very
different than if no procedures are in place or the
procedures are ignored.

     This brings me to preparations for the Year 2000.  We
have been discussing the Y2K problem with the ICI and the
industry for several years.  In addition, SEC examiners
visited more than half of all SEC registered advisers this
summer, reviewing their Y2K readiness.  Our former Director
of Investment Management Barry Barbash discussed the topic
at this very conference one year ago.  It is now time to
revisit the issue and assess where we are a year later.
Though I've heard some dismiss the threat of Year 2000
failures in this industry, I join Matt Fink in urging you
to, continue to treat Year 2000 readiness as an issue of
high priority.

     Today's luncheon comes at a fortuitous time and will
help to serve as a reminder of the importance of this issue.
It just so happens that today marks the deadline for filing
with the Commission Form ADV-Y2K.  This form must be filed
by advisers registered with the Commission as well as
advisers to registered investment companies.  Completed
forms will be publicly disclosed and will contain vital
information concerning, among other things, compliance
plans, resources and personnel to address the Year 200
issue, progress to date, and contingency plans.

     Now while I hope I do not trigger a stampede to the
door, let me offer some friendly advice _ file the form.  We
will recommend that every adviser that does not file timely
be sued. I tell you this today because our goal is not to
sue you, but rather to ensure compliance.  If you or your
clients have not made this filing, make sure you do so by
day's end.

Conclusion

     I've spent most of my time this afternoon talking about
the past and the present enforcement program.  What about
the future?  What can you expect in the months and years
ahead?

     One thing you can expect is greater scrutiny of hedge
funds.  The Commission believes that it is time to reexamine
the risks posed to our markets by the activities of hedge
funds.  Indeed, the President's working group is currently
looking at hedge funds and the circumstances surrounding the
acquisition of Long Term Capital Management. While few have
advocated strict new regulatory controls over hedge funds, a
number of observers have suggested that enhanced disclosure
of some hedge fund activities would be beneficial and would
promote greater transparency.  For the most part, hedge
funds operate outside  the Commission's regulatory
framework.  Like regulated entities, however, they are
subject to our antifraud jurisdiction.  This is where the
Enforcement Division comes in.  You can expect that we will
pay close attention to the possibility of fraudulent conduct
in connection with hedge fund activities, particularly in
view of the impact which we've seen hedge funds can have in
a global economy.

     And what does the future hold for those of you in this
room?  I hope that it will bring a continued, perhaps even
more vigorous, commitment to maintaining the trust of the
investing public.   This can only be achieved if investors
have confidence that those who create, sell, manage, advise
and regulate mutual funds bring the highest standards of
honesty and integrity and a commitment to the protection of
investors to their jobs.  You cannot afford to rest on your
laurels and become complacent about what you do simply
because the mutual fund industry has avoided the taint of
scandal.  The reputation of this industry has been earned
through the good faith and diligent efforts of a great
number of people.  It is up to you to make sure that that
reputation is maintained.