Remarks of


                       Isaac C. Hunt, Jr.
                         Commissioner*
            U.S. Securities and Exchange Commission
                        Washington, D.C.

Litigation Reform, Safe Harbors, and Other Matters of Interest



            1998 Orange County Public Company Forum
                       Orange County, CA
                       February 12, 1998








______________

*    The views expressed herein are those of Commissioner Hunt
     and do not necessarily represent those of the Commission,
     other Commissioners or the staff.

            U.S. Securities and Exchange Commission
                     450 Fifth Street, N.W.
                     Washington, D.C. 20549


Introduction


     Thank you.  I am delighted to be here today.  Your program
examines public companies' communications challenges stemming
from litigation reform, disclosure requirements, and new
technologies.  I must admit, however, or should I say disclose,
that a large portion of my remarks will focus on federal
securities litigation reform.  There are several reasons why I
want to talk about litigation reform today:

          *    First, I wasn't at the SEC when the bills were
          considered that culminated in Congress's override of
          President Clinton's veto;

          *    Next, I expect Congress to move again in this area
          in the near future.  When that occurs, I'll feel more
          restrained about giving my views since I'll be working
          with my fellow Commissioners towards a consensus SEC
          position -- if a consensus is at all possible.

          *    Lastly, I want to offer my views because I'm here
          in California, and the ghost of the 1995 legislation
          past still seems to hover over this state.  I know how
          passionate Californians are about litigation reform --
          why, just last week, I came across several campaign
          buttons my staff received during the Proposition 211
          debate.  And, no, I did not save those buttons for
          posterity.

     After this discussion, I'll talk about the safe harbor
provided for in the 1995 legislation, and why it isn't working as
intended.  Finally, I'll address the impact of recent
technological advances on the markets.

     Before I begin, two disclaimers.  The first is that my views
are my own, and not necessarily those of my agency or my fellow
Commissioners.  The second is that time constraints will prevent
me from discussing several initiatives which would seem relevant
to your program, such as the SEC's recently adopted Plain English
rules (of which I am an ardent supporter).


Litigation Reform

     Background.  The Private Securities Litigation Reform Act of
1995 became law following Congressional overrides of the
President's veto.  The Act applies to private lawsuits only.  It
does not directly affect the SEC's enforcement program, although
it does include a "knowing" aiding and abetting provision for SEC-
use.  Among the Act's most significant measures are:

          *    a statutory safe harbor for forward-looking
          statements;

          *    heightened pleading standards, especially as to an
          alleged violator's "state of mind";

          *    a discovery stay during the pendency of a motion
          to dismiss;

          *    proportionate liability for defendants in private
          actions found not to have "knowingly" committed a
          violation; and

          *    a requirement that courts choose a lead plaintiff
          in class actions, with a presumption that the most able
          representative is the one with the largest financial
          interest in the case.

     Absent are two items urged by the SEC:  (1) extension of the
statute of limitations for private actions, and (2) restoration
of the private right of action for aiding and abetting.

     At President Clinton's request, SEC staff prepared a report
on the first year of practice under the Act.  That April 1997
report is on our web-site.  The staff report concluded that it
was too soon to draw definitive conclusions about the Act's
impact, especially since appellate courts had little or no
opportunity to interpret the Act's provisions.  But the staff
report did make some preliminary observations.  I'll share just a
few with you:

          *    despite the Act's safe-harbor provision, companies
          were not providing much more forward-looking disclosure
          than they provided before enactment;

          *    institutional investors were not actively seeking
          to become involved in securities class actions;

          *    the number of state court cases reportedly had
          increased.  Some of those cases were filed parallel to
          federal claims, perhaps in an effort to gain discovery
          where discovery in the federal action had been stayed
          pending a motion to dismiss.

     The Bills.  In response to the reported increase in class
actions filed in state courts, and perhaps also in response to
Proposition 211, three slightly differing bills were introduced
in Congress.  Representative Campbell's bill would preempt all
private civil actions in state court for fraud violations in a
"covered" security, and would define those securities in a manner
similar to what Congress used in the National Securities Markets
Improvement Act of 1996 ("NSMIA").  In NSMIA, Congress preempted
state blue sky laws for some securities (generally those
securities trading on the NYSE, the AMEX, and NASDAQ NMS).

     Representatives White's and Eshoo's bill -- now with more
than 160 co-sponsors -- would preempt just private class actions,
rather than all private civil actions.  The term "class action"
would be defined broadly to include, among other things, those
seeking damages on behalf of more than 25 persons.  Further, the
definition of covered security is different from that in the
Campbell bill.  Finally, Senator Gramm introduced a bill similar
to White-Eshoo, although the Gramm bill defines a covered
security using a NSMIA approach similar to, but broader than, the
Campbell bill.

     How the Current Debate Should be Framed.  Whether we should
have a uniform standard for national securities litigation is a
complex issue, as the success of our markets is based in large
part on investor confidence in our current system of dual federal-
state regulation.  With NSMIA, however, Congress showed a
willingness to re-examine that system, and divided responsibility
for securities registration between the SEC and the states.

     Now, the responsibility for policing fraud stands on
different footing than the responsibility for registering
securities.  Private actions support SEC efforts to combat fraud,
and they are the primary way investors are reimbursed for losses
caused by fraud.  Accordingly, any efforts to craft a uniform
standard should not foreclose investors with grievances from
obtaining prompt and full redress through the courts.

     There are two ways to view the preemption debate.  The first
sees preemption as a reactive solution to problems associated
with the 1995 Act.  I don't see the debate this way, and I'll
explain why later.  The second sees the debate as whether,
ideally, national markets should be governed by a national
standard.  I am of this second school of thought, and I believe
that we should move towards national standards for some
securities litigation for its own sake.

     At this time, I support preemption of certain securities
class action suits against larger issuers.  This is generally the
approach taken in the White-Eshoo and Gramm bills.  But while I
support the goals and objectives of these two bills, I'll discuss
later why I have some trouble with them as currently drafted.

     I do not support preemption for individual actions at the
state level and, consequently, I can't support the Campbell bill.
Preservation of individual actions allows states to regulate
fraudulent conduct occurring wholly within their borders, and
allows investors to bring individual actions against their
brokers and advisers alleging state law claims.  The states have
strong interests in providing a remedy for their citizens in
these classes of cases.  In addition, preempting individual
actions could significantly exacerbate the problem of over-
crowded dockets in federal courts.

     Now, let's go back to the first school of thought:  that
greater preemption is needed to cure problems associated with the
1995 Act, and that the pending bills do just that.

     As I noted earlier, SEC staff identified three areas where
the Act wasn't working as intended:  the lead plaintiff provision
has not encouraged institutions to seek lead plaintiff status,
the stay of discovery while a motion to dismiss is pending could
be avoided by filing a companion case in state court, and the
safe harbor has not produced much additional disclosure.  Yet,
notably, none of the bills now before Congress directly address
these concerns, although it's possible that they all might result
in greater use of the safe harbor.

     Moreover, I don't agree with those who say that there has
been a migration of cases to state courts since the Act's
adoption.  The evidence at best is inconclusive.  For example, a
recent Price Waterhouse study notes that the number of state
securities class-action lawsuits actually has declined since the
Act's passage -- Price Waterhouse found 44 state court filings
alleging securities fraud in 1997, the lowest number since 1992.

     Our staff's analysis also suggests that this migration has
not occurred in any dramatic fashion.  But my staff did call to
my attention the fact that over 60% of the state securities cases
filed since the Act's adoption have been filed in the State of
California!  California seems to be attractive to plaintiffs in
part because of a relatively liberal reliance standard in
securities fraud cases.  That 60% figure suggests to me, at
least, that California could, if it chose, resolve by itself a
large part of the perceived problems associated with the Act.  In
fact, I understand that a bill has been introduced in the state
legislature that generally would import the Act's provisions into
state law.

     I believe that many supporters of the pending Congressional
bills know that (perhaps apart from California) there hasn't been
a migration to state courts.  Many know that the bills don't
correct better-documented problems associated with the Act; for
example, individual plaintiffs would still be able to file in
state court to defeat a discovery stay in a related federal
action.  I must assume, therefore, that some of these supporters
share my view -- that securities, trading over national markets,
generally should be governed by a national standard.  From my
perspective, it would be a better and fairer discussion were we
all to agree to frame the current debate in this manner.

     What Kind of Uniformity?  But framing the debate as I have
done has some drawbacks.  Those of us in the "second school" must
decide whether it is worth having a uniform standard at any cost
-- whether it is worth having a uniform standard if it is not a
good one, or not as good as we would like it to be.  We must
decide whether we support the pending bills as they are.  Those
are hard questions and, frankly, I'm still resolving them in my
own mind.

     My preliminary view is that there are four things in
particular that I would like to see changed in the current
White/Eshoo and Gramm bills.  Two are fairly technical, and I
hope that a consensus builds for correcting them.  The other two
are larger, "big ticket" items that would better protect
investors if they were included.

          "Technical" Fixes.  The two bills as drafted could
eliminate important areas of state corporate governance law,
since they'd preempt state class actions for damages based on
fraud in proxy and tender offer materials in extraordinary
corporate transactions.  Class actions challenging such
transactions often allege breaches of fiduciary duty by
target-company management and directors under state law, since
state law imposes duties of care and loyalty, as well as certain
additional disclosure obligations.

     Delaware's courts in particular have developed expertise and
a body of case law which lends predictability, and its courts are
known for resolving disputes expeditiously.  Broad preemption
would diminish the value of this body of precedent and
specialized courts for resolving disputes and, as a result,
corporate transactions could be delayed or thwarted altogether.

     In addition, I am concerned as to how "class action" is
defined in both bills.  The bills use a low 25-person threshold,
and that quite subjective definition applies to "any single
lawsuit, or any group of lawsuits filed in or pending in the same
court involving common questions of law or fact."  This could
have the effect of preempting individual actions in some
instances, such as where 25 plaintiffs file separate individual
lawsuits arising from the same set of facts in the same state
court.  Further, broadly grouping such lawsuits might unfairly
group an individual fraud action with a non-fraud action (such as
one for breach of contract).

          Pro-Investor Fixes.  Turning to the two "big ticket"
fixes I alluded to earlier, several cases have raised the issue
of whether the Act's heightened pleading standards eliminate
recklessness as a theory of liability for fraud-based violations.
Some district courts have so held, and the issue is before two
Circuit Courts of Appeals, including the 9th Circuit here in
California.  But most courts seem to agree with the SEC that
recklessness continues to suffice for pleading and proving
scienter.  I strongly believe that liability for recklessness
must be preserved as it is essential to investor protection.  I
testified before Congress that a uniform federal standard that
did not include recklessness as a basis for liability would
jeopardize the integrity of the markets, and would deal a
crippling blow to defrauded investors who have meritorious
claims.  So, if the courts ultimately eliminate liability for
recklessness at the federal level, state law would be the only
hope for many defrauded investors.

     Of course, many states provide other benefits to defrauded
investors not available at the federal level, such as causes of
action for aiding and abetting, and longer statutes of
limitations.  While both are important to investor protection, I
focus on the limitations period, for it even more directly
impacts upon investors with meritorious claims.

     In 1991, the U.S. Supreme Court in its Lampf decision
imposed a uniform limitations period on private securities-fraud
cases:  one year from the date of discovery of a fraud and three
years from its occurrence.  The Court chose a period shorter than
that applied in most federal circuits, which based their rules on
analogous state-law periods.  Seven years after Lampf, more than
30 states including California still have longer limitations
periods for securities fraud actions than what is provided for in
the federal courts.

     The majority of the states have it right in my view:  a 1
year/3 year limitations period is too short.  As a former
Commissioner once wrote, Lampf "perversely ... reward[s] the most
blameworthy connivers:  those clever enough to mask the fraud for
only three years."  Notably, it is not unusual for the Commission
to consider cases for enforcement action where the fraudulent
conduct was concealed from investors, auditors, or other market
participants for three years or more.  The SEC could not abide
Lampf, and I don't know why investors should either.

     Several years back, accounting groups and the defense bar
lobbied Congress not to fix Lampf on a stand-alone basis but,
instead, to consider it as part of a broader package of reforms.
But a broader package was adopted in 1995 without any fix.
Congress should enact an express statute of limitation that would
allow cases to be filed up to two years after discovery and five
years after a violation occurs.


Safe Harbor

     Let me now spend a moment on the Act's safe harbor
provision.  The provision was designed to provide shelter from
liability for projections and other forward-looking statements.
It generally holds that the maker of such a statement isn't
liable if either prong of a two-prong test is met:

          *    the statement is identified as forward-looking and
          is accompanied by "meaningful cautionary statements"
          identifying important factors that could cause actual
          results to differ materially from the projected ones;
          or

          *    the plaintiff fails to prove that the statement,
          if made by a natural person, was made with actual
          knowledge that the statement was false or misleading.

     As I said earlier, the provision hasn't led to much more
disclosure.  Companies seem concerned about the lack of judicial
guidance as to what "meaningful cautionary language" is required,
and about potential liability under state law.

     Last October, the U.S. District Court for the Middle
District of North Carolina was first to apply the safe harbor
provision, in Rasheedi v. Cree Research.  In that case, the judge
dismissed a complaint where plaintiffs alleged, among other
things, that the company made misleading statements about its
prospects in two press releases and the company's MD&A section of
a 10-Q.  In its materials, the company asserted that its ability
to meet its projected goals depended on it decreasing variability
in its manufacturing processes.  Plaintiffs claimed, however,
that this was misleading because it ignored another factor:
design defects known to the company which caused customers to
return its products.

     The judge found that these company statements were protected
by the safe harbor because they contained adequate meaningful
cautionary language.  Although this decision could embolden
issuers to provide more forward-looking disclosure, it's
precedential value is uncertain.  After all, it is the first
decision.  Moreover, it's analysis is somewhat brief, with no
real effort made to define what is meant by meaningful cautionary
language.

     But despite a lack of judicial guidance, many companies are
using the safe harbor -- some successfully, some less so.  Here
are two examples of the latter that our General Counsel's office
came across:

          *    How's this for overly broad?:  "Although the
          Company believes that the assumptions underlying the
          forward-looking statements are reasonable, any of the
          assumptions could be inaccurate and, therefore, there
          can be no assurance that the forward-looking statements
          included ... will prove to be accurate."

          *    On the flip side, laundry lists of all things that
          can go wrong also are not "meaningful."  How about the
          disclosure I saw explaining that "there may be
          difficulties in obtaining raw materials, supplies,
          power, and natural resources and any other items needed
          for the production" of a company's products?

     The Commission has seen too much of this "not-too-
meaningful" disclosure since the Act's passage.  So, while the
Act's safe harbor may not be a model of clarity, please do what
you can to ensure that your company's cautionary statements are
substantive and tailored to the specific projections.


Impact of Recent Technological Advances on the Securities Markets

     I'll conclude with a brief discussion of the impact of
recent technological advances on the securities markets.  Because
of the central role of technology in the securities markets, the
Commission always has had to take into account the state of
technology in the industry.  But, frankly, we may have been a bit
slow in reacting to some recent technological advances.

     I'll accept a share of criticism for being cautious at times
when it comes to pushing the regulatory envelope on technological
issues.  For all I know, the staff may attribute that caution to
my grey hair.  But I, of course, see it differently.  I'm
cautious at times because I believe that no matter how committed
the Commission is to supporting innovation and new technology, we
must balance that commitment with the need to protect investors
and the integrity of the markets.  Moreover, no matter how
committed we are to supporting innovation and new technology, we
always must act pursuant to sound legal authority and principles.
While I'm delighted to interpret statutes' flexibly to aid
technological change, I don't like to read language out of
statutes to reach any particular regulatory ends.

     In part because of Chairman Levitt's and my former colleague
Steve Wallman's efforts, the Commission now is addressing
technological issues head on, even if we don't always act with
the speed and daring that Steve and others might like.  In fact,
Chairman Levitt just announced an early spring "Roundtable" to
discuss technological issues on both a micro- and a macro- level,
and I am very much looking forward to that event.

     As you may know, the Commission has issued several releases
with technology themes in the last few years:  releases regarding
electronic delivery, electronic trading systems, etc.  And the
staff has issued numerous interpretive and no-action letters on
topics as diverse as issuer bulletin boards to promote secondary
trading in the issuer's stock, and electronic road shows to aid
issuers in primary offerings.  The staff also has tried wherever
possible to clarify the application of existing legal
requirements to securities products or services made possible by
new technology.  And, of course, the staff now is considering
major initiatives to review fundamental elements of the
regulatory structure governing public offerings under the
Securities Act, and of the regulatory structure governing
securities markets under the Exchange Act.  Both of these
initiatives are, at least in part, technology-driven.

     Notably, in NSMIA, Congress directed the SEC to study and to
report to Congress on the impact of recent technological advances
on the securities markets.  That October 1997 staff report is on
our web-site.

     The staff noted in its report that in this day and age of
exponential technological advances, it could only really offer
Congress a "snapshot" photograph in time of its views on this
important subject.  I agree.  Let me close with another sound
conclusion from that staff report.  As the Commission moves
forward to implement the goals of the federal securities laws, it
will become increasingly important to keep abreast of changing
technologies and developments in related areas of the law.  To do
so, the Commission must work closely with other governmental
regulators, industry participants, and technical specialists.
Please help us in this effort.

     Thank you.