"FINANCIAL SELF-DEFENSE:
              PROTECTION IN THE MODERN MARKETS"
                         REMARKS BY
                   CHAIRMAN ARTHUR LEVITT
                              
            U.S. SECURITIES & EXCHANGE COMMISSION
                              
                       INVESTORS' TOWN MEETING
                     LOS ANGELES, CALIFORNIA
                         FEBRUARY 8, 1998
                              

     It's a pleasure to join you today in Los Angeles, and
it's great to see another big turnout for the Times' annual
investment conference.  You'd think that -- early on a
Sunday morning --you'd all be home reading the Sunday Times
right now.  I think that this turnout is a wonderful sign --
that, instead of being at home, you're all eager to be here
to learn more about investing.

     We've sure come a long way since last year at this
conference, when I joined you for a similar discussion.  Any
way you measure it, this has been a record-setting year.
The stock and bond markets have continued to climb.  The Dow
Jones Industrial Average is back up around its all-time
high, at about  8,000.  The broader Standard and Poors index
has hit the 1,000 level, for the first time ever.  The
markets have experienced record trading volume, including
the first billion-share days on both the new York and NASDAQ
exchanges.  And, along the way, the markets endured the
sharpest one-day downturn ever:  the 554-point plunge last
October.

     In some ways, today's marketplace reminds me of what
Charles Dickens said in A Tale Of Two Cities:  "It is the
best of times, and it is the worst of times."  It is the
best of times, because more Americans are enjoying the
rewards of investing in our nation's prosperity.  We have
the most productive,  most resilient economy in human
history -- and the financial industry is helping Americans
find ways to share in the nation's growth.

     But, in some ways, it also seems like the worst of
times.  It's a sad reality:  The best markets bring out the
worst elements.  There are more ways to invest than ever
before.  But there also seem to be more ways to be confused
-- or to be misled.  America's marketplace is generally
honest -- but there are some crooks out there, too.  With
the recent influx of so many first-time investors -- many of
them gullible -- fraudulent salesmen are eager to take
advantage of the ill-informed.

     The S.E.C. and your state securities regulators are
working hard as the cops on the beat.  The news media are
doing their part, too.  I've been impressed by much of the
work in the Los Angeles Times.   Reporters like Debra Vrana
and columnists like  Jim Flanigan help equip you with vital
information.  The fact is, in every area of the marketplace,
your best defense is knowledge.

     Today, I'm going to help you learn how to approach
investing, so that you can make decisions with  confidence.
     I'll focus on three things:

     *         First, how to take a realistic view of investing 
     -- and how to make decisions that are right for you;
     *         Second, how to spot some of the obvious danger
     signs of fraud;
     *         Third, how to ask the right questions -- and how
to find reliable answers.

     I know that some of you, in the audience today, may
have also attended last year's conference.  At the risk of
giving you a double dose of this advice, I think it's
worthwhile to go over the fundamentals of investing, again
and again.  Let's start with a  realistic view of today's
markets.  More and more Americans are focusing intensely on
saving and investing.  Today's financial challenges are
leading American families to see the virtue of a  well-
disciplined approach to the markets.

     It's the surest way to secure a more prosperous future.
In the 1990s, more than ever before, the people of America
are investing in America.  There's a startling new fact of
life in the American economy:  Mutual-fund assets -- at
about $4 trillion -- now total just about as much as the
deposits of commercial banks.  Through mutual funds and
other investments, you are the biggest holders -- directly
and indirectly -- of American stocks and bonds.  Not the
banks, not the insurance companies, not big businesses . . .
. but people like you.

     The massive movement into our stock markets has
provided new opportunities.  But it has also increased the
risks.  There sure is a lot of euphoria today about the
market.  Some of  that optimism is justified -- but some is
not.  A lot of folks apparently have forgotten that markets
move down as well as up.

     We all got an abrupt wake-up call when the Dow Jones
Industrial Average plunged, last October. That sudden
decline awoke a lot of people to the reality of risk. But
since then, many of them seem to have been lulled back into
complacency.  Yes, the stock market has done remarkably well
for the past three years -- with returns averaging 30
percent.

     But  the strong gains of the last few years are the
exception, not the rule.  I'm certainly not making
predictions.  I'm just reminding you that it's important to
have realistic expectations.  Investing is best done
patiently.  Don't fall for the illusion of easy money.
Don't be pressured by the aggressive salesman who promises
that you'll make a fortune with one quick gamble.

     Let me be clear:  Most people in the securities
industry are honest.  But some are not -- and they can do
enormous damage to people's lives.  At the S.E.C., we're
always pursuing cases of brokers who have enriched
themselves at the expense of their clients.  Lately,
southern California has had all too many cases like that.

     Let me tell you about . . . . Robert White.  He's a Los
Angeles broker who -- after being fired from a reputable
securities firm -- promised his new customers that he'd play
it safe.  He told them that he'd invest their money in high-
quality stocks, bonds, and mutual funds.  Instead, he used
their money to pay his own expenses, and to speculate in
investments for himself.

     In order to fool his clients, he set up a classic Ponzi
scheme.  To show a profit, he relied on a steady stream of
new customers:  He'd simply take the new customers' money,
and he would pay off his earlier clients.  Over almost eight
years, he raised about $1.9 million from more than 30
investors -- and he misused $1.2 million of it.  His victims
should have been suspicious:  He'd hand-deliver their
account statements instead of mailing them.  He'd meet with
them in coffee shops, not in an office.

     Sometimes, when  I'm  in Washington, and I'm asked to
review a case like this,  I think to myself:  If only those
investors had known that they could make a couple of phone
calls, to check out his operation with regulators.  His firm
was not registered -- although he had claimed it was -- with
either the S.E.C. or the National Association of Securities
Dealers.  The clients' accounts were not insured -- although
he had claimed they were -- by the Securities Investors
Protection Corporation.

     If investors had known those facts, they might have
protected themselves from fraud.  Let me tell you about
another case, close to home:  the case of . . . . William
Madon.  He's a California man who took more than $5 million
from about 250 investors, who thought they were investing in
his mutual fund.  There was no such fund.  It was just
another Ponzi scheme.  We caught up with him, and we shut
his operation down.

     You might be interested to know how we found out about
Madon's fraud.  Right here, at last year's  Los Angeles
Times conference, a worried investor spoke to one of my
colleagues from the S.E.C. -- and followed up that
conversation with a letter giving us some more details of
the case.  We have a booth here at the conference  here
today, too.  If anyone has any concern about an investment
operation that seems suspicious, we encourage you to talk to
us about it.

     Ask federal regulators;  ask your state regulators;
call the telephone "hot lines" of the securities industry
itself.  We're all here to keep the system honest, and to
try to protect you from fraud.  But regulators can only do
so much.  You, too, need to be alert to the dangers in the
marketplace.  There are some real problems out there, and it
pays to know how to avoid them.  That leads to the second of
my themes today:  how to be alert to some of the dangerous
practices in the marketplace.

     I've spent a lifetime in the securities industry.  I've
been a broker, a manager, and I've run a large firm.  I've
seen the best and the worst that the industry has to offer.
The worst instincts of the market are all too evident today.
They're especially clear in the increase in fraudulent
practices involving small companies -- what we call the
"microcap" sector of the economy.

     We used to call these securities "penny stocks"  --
typically those with low prices, issued by very small
companies.  In most cases, stock sales by small businesses
are entirely legitimate:  Like larger firms, they're raising
money for expansion by selling stock  "over the counter" to
the public.  So, it's not that all microcap stock sales are
dangerous.  But you've got to do your homework.

     You don't want to invest in a company that's riskier
than you were led to believe -- and you certainly don't want
to fall victim to a scam.  We're trying to put a stop to
microcap fraud with a combination of tougher law enforcement
and tighter regulation, and with the cooperation of leaders
in the securities industry.  Next week, the  S.E.C. will
launch a new initiative to close regulatory loopholes and
strengthen the crackdown on that kind of fraud.  But all our
efforts rely on greater investor awareness.

     The classic warning sign of fraud is a high-pressure
sales pitch, where the salesman may pretend that he has
inside information about a small company that, he says,
"just can't miss."  In a microcap case, the hard sell
usually involves a company that you've never heard of.  Or
maybe it's a company that has a slightly familiar name --
sounding a little like the name of a large, reputable firm.
The scam involves sending money right away, before you've
had much time to think.

     And it almost always promises quick, easy, astronomical
profits.  Usually, microcap fraud is conducted over the
telephone -- but it's increasingly popping up on the
Internet, too.  There's a reason that criminals hawk their
wares by phone, or on the Internet.  They don't give you
anything in writing, so that you don't have the chance to
study the details closely.

     They don't meet you face-to-face in an office, so that
you never have the chance to see what may be a  "boiler
room" operation.  And they don't put anything in the mail,
allowing them to avoid potential federal charges of mail
fraud.  Microcap fraud is all the more vicious because it
preys on the most vulnerable members of our society  --
especially senior citizens.  Con-men who engage in microcap
fraud don't care whom they hurt:  They're just out for the
quick buck.

     And -- sad to say -- the fraudulent brokers take
advantage of the greed of some over-eager investors.  Every
once in awhile, we get news of some outlandish sales pitch
that  -- incredibly -- some people fall for.  Not long ago,
I heard of a case where people were responding to a "get
rich quick" scheme they saw on the Internet.

     They sent in their hard-earned money -- sight-unseen --
to invest in an eel farm.  I mean, if you fall for something
like that,  you really need to go back and re-study the
basics of investing.  I've seen some astonishing recent
examples of the more outrageous sales pitches -- discovered
by the S.E.C.'s  Enforcement Division.

     Sometimes the scams come in unsolicited phone calls.
Sometimes they come over the internet.  But they're always
dangerous.  Hundreds of fraudulent sales pitches come in to
the S.E.C. every month, for investigation.  When you get any
kind of sales solicitation, the best advice I can give  is:
Use your common sense.  Keep your guard up.  Remember the
cardinal rule of investing:  If it sounds too good to be
true, it probably isn't  true.

     I cannot assure you that you'll make money in the
market -- no one can guarantee that.  But we regulators are
working hard to see that the marketplace is run honestly.
And that brings me to the third of my themes for the day.
The most important investment lesson I can convey to you
comes down to this:  Ask questions.

     Think of it this way:  Many of you would never entrust
your children to a baby-sitter without diligently checking
references.  Or choose a day-care center without checking
for appropriate training and licenses.  In this day and age,
we all know it makes good sense to think carefully before
opening up our homes to people we don't know.

     Those same instincts should be triggered when you
consider opening up your finances to strangers.  Many of you
are making real sacrifices -- so that you will be able to
educate your children, to help your aging parents, or to
ensure that you will be able to retire someday.  Why
jeopardize such goals by neglecting to think carefully about
your investment decisions?

     Take some time to think seriously about why a broker or
investment adviser is trying to sell you something.  Take a
little time to investigate, and to ask questions.  I imagine
that some of you might think that's an unrealistic idea   --
that it's beyond your ability to investigate a broker or a
brokerage firm.  I'm pleased to tell you about some truly
positive news.  When it comes to checking out a broker or a
firm, investors will soon be able to use an investigative
device that Sherlock Holmes would envy.

     Starting in about a month, the first phase of a
remarkable service will become available over the world wide
web.  When fully implemented, by mid-1999, this service will
present -- in a user-friendly way -- the disciplinary and
employment background for every registered broker and every
registered firm in the United States.  I saw a preview of
this service last week.

     There isn't anything comparable to it for any other
profession or industry in the country:  not for doctors,
lawyers, carpenters, or plumbers.  It requires no special
expertise to use.  This service will give every one of you
the power to be the first line of defense against fraud and
abuse.  Whether you access the service by a computer or by
toll-free phone call, you will be able to have the kind of
information that the market treasures -- information that
can prevent you from making a costly mistake.

     At the moment, this service is called the central
registration depository, or CRD.  The CRD is operated by the
National Association of Securities Dealers -- the group that
shares responsibility for regulating the securities
industry.  The president of NASD Regulation, Mary Schapiro,
will speak here later today, and I am certain she will want
to talk about the new CRD, too.

     The CRD helps you determine who you should not do
business with.  But it doesn't give you the final answer on
who  you should  do business with.  Even after you've
checked out a broker's background and experience, you've got
to make sure that you are comfortable with the style and
approach used by the broker and his or her firm. That's why
you still need to ask questions.

     And you should know that, when you ask a question to
your broker -- or to your financial planner -- you have the
support not only of the SEC, but also of the securities
industry.  No one supports the idea of educating investors
more than the industry itself.

     What kinds of questions should you ask?  Some are about
products,  and some are about the people who sell them.
Let's start with money market funds.  When you look at some
of their names, you see reassuring words like "trust" --
"liquid" -- "government" --  "cash" --  "U.S." -- "ready
assets."  Well, I don't care if a fund is named  "The Rock-
Solid  Honestly Safe  U.S. Government Guaranty Trust Savings
Fund."  In any investment, you stand a chance of losing your
money.

     Let me underscore that last point.  It's a fundamental
fact of investing.  You should remember it whenever you
invest:  In any investment, you stand a chance of losing
your money.  An informed investor looks beyond the
packaging.  Read the prospectus, or the annual report.  Make
sure that the mutual fund invests in the kind of things
you're comfortable with.

     If it invests in something that seems too risky --
something that would make you lose sleep at night -- then
steer clear of it.  Too many investors simply look at last
year's results, and then throw money blindly into
investments that did well yesterday -- scarcely thinking
about how they'll do tomorrow.  The truth is, past
performance is not a reliable indicator of future
performance.

     A fund that is number one in its category this quarter,
or this year -- or over the past five years -- may be just
average next year.  Next, you should know what kind of sales
charge, or "load," you'll pay -- front-end load, back-end
load, or no-load.  You should look at a "load" like a
handicap in sports.  A fund with a 3 percent load is
effectively starting out at  minus-3-percent, by comparison
with a  fund that has no load.

     On top of that, you should consider the annual fees
that a fund may charge.  Once you do own a mutual fund, keep
track of how it's performing, relative to other funds that
are similar to it.  Watch it, not just quarter by quarter,
but also over the long term -- and evaluate it against the
market averages.  Looking at the numbers in the record is
probably a better indicator than listening to the self-
styled pundits of investing.

     A journalist once poked fun at wall street forecasters
by saying that they've  "predicted nine of the last five
recessions."  Instead of the forecasters, try looking at the
numbers.  They're not infallible -- but they're the best
benchmarks we have.  Use them.  So far, I've talked about
investments.  But some of the most important questions have
to do with the judgment of the people who recommend the
investments.

     Now, here's a question for you:  Have you ever asked
your broker precisely how he gets paid?  Commissions reward
a broker for the quantity of his transactions, not
necessarily the quality.  In other words, the broker has an
incentive to persuade you to make a lot of trades -- whether
or not trading is in your best interest  -- because that's
how he makes his money.

     You can ask a broker:  How do you get paid?  Do I have
choices about how to pay you?  Does it make sense for me to
pay by the transaction?  Or should I be paying a flat fee
regardless of the number of transactions?  Another question
for you:  How many of you have ever sat down to dinner with
your family, only to be interrupted by a phone call -- from
a salesman who doesn't seem to understand the meaning of the
word, "no"?

     This practice is known as "cold calling."  There are
actually a lot of other names for it, but I can't repeat
them in polite company.  Cold calling can be a legitimate
sales technique if a broker is trying to get to know a
client's situation and needs.  But cold calling, as a high-
pressure sales tactic, can also be the first sign of
something suspicious -- like a microcap scam.

     New rules have been written to compel a firm to stop
calling you, if you ask to be put on a "do not call" list,
and to prohibit cold calls before 8 a.m. and after 9 p.m.
But you don't need a rule to tell you that you shouldn't buy
securities from someone you've never met -- who calls you
with a "hot stock" or with an "inside tip."  We've developed
a new brochure, called "Cold Calling Alert," that offers
advice to investors about such aggressive sales practices.

     We have some copies here today -- and, if you want one,
call our toll-free number:      1-800-SEC-0330.  Because
investors are better informed, many firms have already put
an end to some of the more troublesome sales practices.
Things are changing for the better -- and if you ask
questions, they'll change  even faster.

     The bottom line of all of these questions is this:  A
broker has a responsibility to his client.  A broker should
be expected to hold the client's interests above all others
-- above his own, above his firm's, and above the
industry's.  Most brokers do so.  That's my definition of
professionalism.  We've covered a lot of ground today.  We
discussed how to protect yourself in the marketplace.  We
discussed how to be on guard against fraud.  And we
discussed how to ask well-informed questions.  But there's
something more.  I'm here today, not just to offer help, but
to ask for it.

     I want to hear from you about the state of our
securities markets, and I  want your help in making them
better.  For, when all is said and done, the work of the
S.E.C. is not about this rule or that regulation.  It's
about hard-working people seeking a better life -- buying
that new home, sending the children to college, enjoying a
decent retirement.

     It's about meeting your goals, and about giving you the
chance to gain the resources to fulfill your dreams.  It's
about people like you.  When you come right down to it, it's
about the promise of America.  Help America fulfill its
promise:  Become an educated investor.

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