"Corporate Finance in the Information Age"




                           Remarks by
                                
                                
                     Arthur Levitt, Chairman
             U.S. Securities And Exchange Commission
                                
                                
                                
                 Securities Regulation Institute
                      San Diego, California
                                
                        January 23, 1997


I want to talk to you today about the very heart of our system of
securities regulation -- the offering process, and how we might
improve it.

The Securities Act governs the way companies communicate with
investors when they want to raise money.  It was written in 1933.

The first transatlantic phone call had been placed just a few
years before.

The first talking motion picture had been produced.

The radio and the telephone were the front line of communications
technology.

The diesel locomotive had recently been introduced.

We live in a very different world today.

Jets can transport us virtually anywhere on the face of the earth
within the span of a single day.

The amount of information available to the average investor is
enormous -- television, radio, wire services, newspapers,
magazines, personal computers, FAX machines, on-line services,
and the Internet saturate our waking hours with information.

Our financial markets are now global -- capital and information
flow across borders almost instantaneously.

In addition to stocks and bonds, new and complicated financial
instruments have been developed, whose value can change many
times faster than the market itself.

Each of these late-20th century developments has come up against,
and clashed with, a communications framework that was conceived
in 1933.

The `33 Act erected barriers to conveying information beyond that
contained in the prospectus.  In 1933, that was difficult; in
1997, it is impossible.

And so we live in a world in which some executives believe that
corporate communications must come to a standstill during an
offering -- even to the point where they cannot say a word in
response to negative articles in the press.

A world in which offerings that are permitted offshore become
part of a global communications network that could bring news of
these offerings back onshore, where they are forbidden.

A world in which the rules are different for private offerings,
but vast communications networks leave few things truly
"private."

A world in which the primary source of offering information is
the prospectus, which in many cases reaches investors only after
they've parted with their money.

A world in which the SEC's EDGAR system puts prospectuses up on
the Internet faster than they reach investors through the US
mail.

As you know, these problems did not suddenly appear in the 1990s.
Many intelligent people have anticipated them, understood them,
and tried to solve them over the decades.

In 1939, SEC Chairman William O. Douglas wrote that it should be
possible someday to consolidate the reporting requirements
imposed by the various securities laws.  In trying to explain
why, almost a half-century later, that day had not quite arrived,
Harvard University Professor Louis Loss resorted to an elliptical
phrase by a German poet, that "the mills of God grind slowly."

While I am personally reluctant to lay the entire blame on God,
it's true that the process has moved slowly.  Professor Loss knew
this from personal experience -- he served as Reporter of The
American Law Institute during a decade-long effort to produce an
integrated Federal Securities Code.  Just two years earlier, in
1966, Milton Cohen had laid the groundwork for such a project in
a seminal article in the Harvard Law Review.

Two years after the new code was assembled and approved by the
ALI membership, the proposal received the SEC's endorsement  . .
. only to disappear in the corridors of Congress in early 1981.

Several of the ideals embodied in that legislative proposal lived
on, however, giving rise to such developments as the integrated
disclosure system of 1982, which also brought the advance of
"shelf" registration.

I've followed these attempts to modernize the `33 Act with
interest through much of my career, and I've discussed with many
of you how best to weigh the advantages of change with the
stability of tradition.  Some counsel caution, prudence -- an
almost monastic reverence for a law as sacred as the tablets
handed down from Mt. Sinai.  Others have urged a top-to-bottom re-
examination of legislation that is outmoded, and largely
irrelevant to a world of exotic investment instruments,
globalized markets, and a dazzling array of communications
technologies. I've approached the issue not as a scholar or a
lawyer, but as a businessman who has experienced SEC regulation
and prospered -- sometimes because of it, and sometimes in spite
of it.  I know from that experience that we can do better.

I recognize that this is a complex area of the law.  The key
questions demand answers, but defy easy answers.  Indeed, it is
only after 3 years of being an active participant in this
dialogue that I find myself in a position to begin to address
some of these issues.

In the course of those years, I have asked two panels to study
different aspects of US capital formation in some detail.  In
1995, I created a Task Force on Disclosure Simplification and
asked it to examine every single SEC rule related to corporation
finance, with a view toward simplifying the regulatory structure.
Its March 1996 report recommended that we eliminate or modify
fully a quarter of the rules and half the forms; we've already
done away with 44 rules and 4 forms, and more will disappear
shortly.

The Advisory Committee on Capital Formation and Regulatory
Processes, ably chaired by Commissioner Steve Wallman, had a
broader mandate: I charged it to study different models for the
offering process.  In the area of corporate finance, few
Commissioners in recent history have been as creative and focused
as Steve Wallman, who I believe will be long remembered for the
scope of his intellect and his dedication to change.  In July
1996, the Wallman Committee proposed a system that would register
not transactions, but companies, and rely on periodic disclosure
more than a prospectus.  This scheme would apply to larger
companies, to begin with.  The Commission immediately asked for
comments not only on that model, but also on other ways to
modernize regulation of the offering process.

Several months later, however, the earth shifted under our feet:
last October, President Clinton signed the National Securities
Markets Improvement Act, far-reaching legislation designed to
update the law in several important ways.  Among other changes,
Congress granted us broad exemptive authority under the
Securities Act of 1933.

Taken together, these events offer an almost unique opportunity
for change.

This is the first Commission in history to hold exemptive
authority from the `33 Act in its hands.  A new vista of
possibilities has opened up.

Among the new models proposed is one from a committee of the
American Bar Association.  As I understand it, this system would
eliminate all restrictions on offering communications -- whatever
restrictions remained would apply only to sales, and would not
mandate use of a prospectus for most offerings.  The proposal
would also eliminate much of the distinction between public and
private offerings.  And it would apply to large and small
companies.

Other commenters think we're focused on the wrong thing
completely -- they believe that most of the problems with the
existing system can be solved by revisiting the liability
provisions under the federal securities laws.

Still others have come to us with laundry lists of things they
would revise or eliminate, as if the candy store has now been
opened after 64 years of waiting.  Although we're in no mind to
give away the store, I am open to change -- so long as it does
not compromise investor protection.

Our challenge is huge: it is to rethink the way we permit
companies to communicate with investors.

I haven't pre-judged any of the proposals, and I'm not prepared
to pass judgement on them today.  But I will share with you my
vision of the result we desire -- my notion of the end we wish to
achieve, whatever the means we decide to use to get there.

American investors deserve a market in which the theory of the
regulator matches the reality of the regulated; in which the
media anticipated by the law are the same media used in real
life; in which there is no gap between the way the SEC allows
investors to receive information, and the way in which investors
actually do receive information.

The offering model we end up with should be flexible enough that
it does not need to be rewired with each new advance in
communications -- such as Internet TV, for example, which is
right around the corner.

This is really just common sense -- and, as I noted, we have no
monopoly on wisdom -- people have been talking about these
questions for many decades now.  Technology changes, but the
underlying issues remain the same.  Commissioner Wallman is the
latest in a series of thoughtful and insightful students of the
offering process.  While we may not all agree on every detail of
what a new process would look like, I believe we do agree that
there's never been a greater need, or a better opportunity, to
make significant changes.

Whatever the eventual decision -- whether we keep the current
system, switch to a form of company registration, tune up the `33
Act, or some other solution as yet unseen -- we should not wait
until we've found the Holy Grail to begin taking action.  There
are many steps we can take right now to better match the theory
of investor communications with the reality of investor
communications.  It's never too early to apply common sense.

I see three main areas of improvement in the offering process
that are within our grasp today: more timely and useful
disclosure for investors; more rational regulation for companies;
and greater use of developing technologies.  Let me sketch out a
few thoughts in each area:

More timely and useful disclosure for investors

The Wallman Committee advised that we should not blindly enact a
series of deregulatory changes without closely considering what
investor disclosure enhancements may be needed.  I agree.

Much of the disclosure debate centers on the prospectus.
Unfortunately, the statutory prospectus is typically delivered
after investors part with their money, and is often written in a
manner that makes it inaccessible to many.

In many cases, the problem is not a lack of information; quite
the opposite.  Too much information can be as much a problem as
too little.  More disclosure does not always mean better
disclosure.

I believe investors would be better served by essential
information that arrives before they are asked to commit to a
purchase.  Whether this would be a preliminary prospectus, a
summary, or perhaps, for certain securities, merely a "term
sheet" -- it would be easy to read and easy to deliver instantly
and electronically, perhaps along with the company's latest
periodic reports.  Were we to make substantial progress in
providing investors with essential information in advance of
their purchase decisions, we might then be able to revisit the
question of whether and when companies have to put a final
prospectus into the hands of investors.

I am also intrigued by the notion, put forward by the Wallman
Committee, of broadening the field of material events companies
are required to report under Form 8-K.  It's a safe bet that
investors want to know about such events as the resignation or
termination of top executives, or default by the company on its
corporate debt.

Perhaps it is also time for the Commission to take a page from
foreign regulators and think about replacing the 8-K list of
events with a simple requirement that companies report
significant changes when they occur.

In addition to communicating vital information more clearly and
more quickly, we should also re-examine the content of disclosure
documents.  One area that is ripe for improvement is the forward-
looking disclosure provided by companies.  Analysts typically get
this information in conference calls with senior management;
other investors rarely have such an opportunity.  When asked to
explain this uneven disclosure, companies cite a fear of
liability for so-called "soft" information.

Congress responded by enacting the Private Securities Litigation
Reform Act of 1995.  The SEC staff has since been reviewing the
quality of forward-looking disclosures, to see if practices have
improved.  I am sorry to report that they have not.  In fact,
rather than taking advantage of the new safe harbor to
communicate forecasts more clearly, companies are using even more
boilerplate, in the form of cautionary language.

It appears that the legal requirements of the safe harbor are
being "over-lawyered."  There's been a call for greater guidance
from the SEC.  One of the most common questions has to do with
the requirement for meaningful cautionary statements that
identify important factors that might cause the actual results to
vary.  For the moment, let me just say that it is not
"meaningful" to provide only a generic laundry list of possible
risks.  Good cautionary language should provide the reader with
disclosure through the eyes of management, not litigation
counsel.  If you would tell the board of directors that you
expect a new product to be available as of a certain date, what
would you tell them at the same time to protect yourself if the
target is not met?  In meeting the target, what are you most
worried about at the time?  Your board wouldn't want a
boilerplate list of risks; investors don't want it, either.

There's one other way to improve disclosure fairly quickly, and
that is in its presentation.  Impenetrable prospectuses undermine
the purposes of the federal securities laws.  Disclosure is not
disclosure if it does not communicate.

The time has come to pierce the shroud of jargon and boilerplate
surrounding the prospectus.  We recently established a pilot
program in the Division of Corporation Finance offering expedited
review to companies that wrote their prospectuses in plain
English.  Already we have had dozens of volunteers, including
household names like Bell Atlantic, NYNEX, ITT, and GE Capital.
And less than two weeks ago, the Commission proposed new plain
English requirements for prospectuses that derived from the Task
Force report.

More rational regulation of companies

It turns out that investors are not the only ones who are
confused today -- certain concepts of the federal securities laws
have come to be known among practitioners as "Metaphysics,"
because of the complexities and fine distinctions that they
involve.  That doesn't strike me as a healthy state of affairs.

One way to improve this is for the SEC to provide more guidance.
I commit to you today that the Commission will endeavor to write
clearer and simpler rules, and provide better insight into our
analysis of issues.

Two areas in particular cry out for common sense.  The first
involves distinctions between public and private offerings.  For
valid reasons the SEC has prevented companies from transferring
from a private offering to a registered public offering, and vice
versa.  But our positions have sometimes impeded valid attempts
to raise capital.

The time has come to consider removing some of these barriers.  I
believe we should be encouraging the public disclosure and
investor protections that accompany a registered offering.
Likewise, if market conditions should change and threaten a
public offering, I think it would be unfortunate to send a
company away empty-handed when there are sophisticated investors
available who would purchase securities in a private transaction.
We are developing proposals to allow this.

I alluded earlier to the "quiet period" as another area of
uncertainty for companies.  It should be made clear that the
quiet period does not chill company communication in the ordinary
course of business.

If I were to make changes, I would shorten the quiet period to a
specified brief time before filing a registration statement.  If
something is said well in advance of a public offering, it's hard
to argue that someone is conditioning the market.  If it is said
after a registration statement is filed, the investor has the
prospectus, and perhaps a wealth of other public information
available to put things in adequate context.

During the newly defined quiet period, a company would still be
able to discuss a proposed offering, but in a limited way.
Communications that do not mention an offering would be free of
restrictions, other than the applicable state or federal anti-
fraud rules.

In the course of the recent debate over ways to modernize the
Securities Act, one thing has really surprised me: the few voices
speaking up on behalf of small business.  And yet, their cost of
capital is high and they would reap the biggest benefits from
regulatory relief.

Certainly we should adopt some of the small business suggestions
of the Task Force on Disclosure Simplification, as well as a
shorter holding period under Rule 144 -- which I expect to
accomplish in the next few weeks.  We should consider making it
easier for small companies to advertise for qualified investors
without triggering a registration requirement; we should permit
some form of "testing the waters" in more offerings; and we
should allow small businesses to have some of the timing
advantages of shelf registration.

I don't want to make any of this sound too easy; as always, the
devil is in the details.  But I believe that we can and should
make progress in these and other areas soon.

Greater use of technology

I'll close with a subject that has been much discussed in the
past year: the opportunities raised by the advances in
technology.  I've already mentioned electronic delivery of
information to investors either directly or indirectly, and the
SEC has issued guidance about how such delivery complies with the
federal securities laws.  I have to say I'm surprised that Wall
Street has not responded more quickly to electronic delivery
opportunities.

Few sectors of our economy use technology in more sophisticated
ways than the securities industry.  But somehow, that technology
hasn't yet been harnessed to delivering prospectuses to
customers.  I recognize the problems in drafting such documents
on time, especially in a world of three-day settlement.  But it
seems to me that electronic delivery can only help.  I call upon
the industry to take better advantage of this opportunity.

At the same time, the SEC is getting its own virtual house in
better order.  Our EDGAR system is one of the more successful
government computer projects.  But in today's world where eight-
month-old technology can become obsolete, it is no surprise that
eight-year-old EDGAR needs to be modernized.  The technology is
now at hand to make EDGAR more user-friendly.

I envision a new EDGAR with enhanced graphics capabilities to
accept charts and photos; an EDGAR that accommodates different
word processors; an EDGAR that can accomplish tasks at the click
of a mouse.  The first round of bids on the new EDGAR contract is
due soon, so it should not be long before we start work on a new
system.

One of our key technology issues today, as you know, is the
offering of securities on the Internet.  A number of small US
businesses have begun to do so.  But some foreign companies are
concerned about describing their securities on their Web page,
because US investors might view the foreign home pages, possibly
triggering the registration requirements of our securities laws.

If foreign companies are selling securities to US investors
publicly via the Internet, they need to register with the SEC.
I've worked hard to encourage foreign companies to list here -- a
record 870 companies now do so.  But that's not enough.  There is
an urgent need to develop a set of high-quality international
accounting standards, so that US investors know they are
protected even when they invest overseas.  We are working closely
with the appropriate international bodies to attain this goal --
but, like our predecessors on the Commission, we will not
compromise rigorous standards and an effective, independent
standard-setter to protect US investors.

One other current area of confusion for foreign companies arises
when they are selling offshore, but want to sell privately to a
limited number of US institutional buyers.  In those cases, we
would look for a clear indication that the foreign company is not
interested in attracting U.S. public investors -- such as a
warning that the securities are not registered in the US and are
not being offered to the general public here.

It's not my intention to answer every problem related to cross-
border capital in this speech, but merely to signal an openness
to new ideas about solutions.  I have asked the staff to provide
more definitive guidance or create a safe harbor, as needed, to
help foreign issuers who are trying to do the right thing.

Conclusion

The events of the past year have given us a rare opportunity to
improve the offering process for both investors and companies.

At times like these, the initial reaction is sometimes to scrap
the old system.  Yet even the most zealous revolutionary would
have to agree that the capital formation system in the US is
working fairly well -- we have the deepest, most liquid and
transparent financial markets in the world.

In 1934, businesses raised $641 million in our capital markets;
in 1984, $126.8 billion; and last year, that figure was well over
a trillion dollars.  The total turnover on our stock market in
1995 was $5.1 trillion; the next largest market, Japan, had $1.2
trillion.

It would be foolish to throw the system that produced those
results out the window, in the name of modernization.

But it would be equally foolish to deny that there is room for
improvement, or to resist change in the name of our current
success.

We have the most productive system of capital formation in
history, and the market has reached record heights.  Change can
be disruptive under those circumstances.  But we became pre-
eminent as a nation not by resisting change, but by embracing it.

Change has always been the hallmark of our markets, and the SEC
has succeeded by recognizing that fact and responding to it.
That's why we will keep this debate moving forward in the weeks
and months ahead -- until the theory of disclosure matches the
realities of the marketplace in the age of information.

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