"PUBLIC TRUST AND PUBLIC OBLIGATIONS IN THE 
                      MUNICIPAL BOND MARKET"






                            REMARKS BY


                     ARTHUR LEVITT, CHAIRMAN
             U.S. SECURITIES AND EXCHANGE COMMISSION



            NATIONAL FEDERATION OF MUNICIPAL ANALYSTS
                       BALTIMORE, MARYLAND


                           May 8, 1996


             U.S. 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 
            NATIONAL FEDERATION OF MUNICIPAL ANALYSTS
           WEDNESDAY, MAY 8, 1996 - BALTIMORE, MARYLAND


     It is a pleasure to be with you today.  We have a common
goal in promoting professionalism in the municipal finance
industry.  I'm particularly impressed with your Disclosure
Handbook for Municipal Securities, which contains the kind of
information analysts need to make informed investment decisions
for their funds and customers. 

     As many of you know, my father served for 24 years as New
York State Comptroller.  I trace to him my abiding interest in
the integrity of the municipal debt markets, and my concern over
recent examples of public money management gone awry.  

     Of course, I have professional concerns as well.  The
municipal bond market is now valued at some $1.2 trillion.  It is
of critical importance to our nation's future.  And it has
undergone a fundamental change in the last decade, from a market
dominated by commercial banks, to one in which individual
investors hold almost 70 percent of outstanding securities,
directly or indirectly.

     That is why, from my first days as Chairman of the
Commission, I've held the reform of the municipal securities
markets among my highest priorities.  In some cases, such as
improving price transparency, this has been our choice; in
others, such as Orange County, events have compelled us to act.  
     
     Only a few weeks after I was sworn into office, I told the
Congress that "to some observers, the most significant flaw in
the municipal securities market is the lack of trading
information available to investors and market professionals."

     Today, improvements in market price transparency are well
underway.  Working with a broad spectrum of industry groups that
included the NFMA, the SEC crafted a framework for secondary
market disclosure through the amendments to rule 15c2-12.  These
measures went fully into effect this past January first.  I thank
you for your role in these initiatives.  Many of you led the way
on such issues as disclosure of developer information in land-based 
transactions.  These are not simple matters to resolve, but
your efforts are leading to improvements in disclosure for the
marketplace. 

     In addition to our new rules, a private initiative was
undertaken by the Public Securities Association to make selected
trade and price information available to the public on a regular
basis.  We now need to bring to a completion the plan of the
Municipal Securities Rulemaking Board to make same-day price
reporting of retail trades a reality.  

     Poor disclosure was not the only problem in the muni market
when I arrived at the Commission.  In my years in the securities
industry, I had found myself attending too many fundraisers for
candidates I didn't know, seeking office in places I didn't live. 
At the time I was sworn in, young people entering the municipal
securities business were still learning the pernicious practice
of "pay-to-play," in which political campaign contributions open
the door to underwriting business. 

     Not only does this subvert a freely competitive business --
it also teaches contempt for the political process.  Right from
the start, the industry demonstrated its sincere commitment to
reform.  In October of 1993, more than 15 of the nation's largest
firms agreed in principle to cease making political contributions
that attempt, or even appear to attempt to influence the
selection of the firm as an underwriter.

     Today, the industry has imposed rules that codify the
voluntary ban on political contributions, and these rules are
bringing to an end the days of pay-to-play.  We're now at the
next stage of that initiative:  how to address the concern that
lawyers and lobbyists may act as surrogates for firms and making
contributions on their behalf.  We raised the issue with the
industry, and the Association of the Bar of the City of New York,
under the leadership of Cyrus Vance, stepped forward with its own
plan to discourage the practice among its members.  We are now
asking issuers, firms, and potential surrogates alike to address
this issue with voluntary action.

     These are positive achievements.  To see how much more
remains to be done, one need look no further than the problems in
Orange County.  I want to use this opportunity today to discuss
three issues raised by the county's brush with disaster -- the
sound management of public funds; preserving public trust in the
municipal market; and the Commission's recent enforcement actions
in this vital market.  

PRUDENT MANAGEMENT OF PUBLIC FUNDS
     The municipal bond market is of critical importance to our
nation's future.  It represents the schools that teach our
children, the water we drink, the power that enhances our lives
and drives our economy, the roads that take us where we need to
go.  American investors trust municipal bonds as they do few
other instruments, and this has helped make them a popular
investment. 

     And yet, this has been a tumultuous time for the muni
market.  The Orange County bankruptcy and default followed the
loss of an estimated 1.7 billion dollars in public funds through
a risky investment strategy.  There have been reports of other
losses, fortunately less severe than Orange County. 

     I know the concern you have over these issues.  It is of
great interest to all of us that local governments have prudent
investment policies -- and that they follow them -- so that funds
are available when needed to build their projects, pay their
debts and to meet other civic needs for which taxes are paid. 
Such funds can generate additional revenue in the interim, and
that is good.

     Care must be taken, however, that the return received does
not become a narcotic, inducing dependency by being built into
annual budgets as a significant revenue source in and of itself. 
Such an addiction loses sight of the original purpose for raising
the funds, and it courts disaster in the event of sudden market
changes.  Using the treasury function as a profit center has
backfired on some sophisticated corporate managers in recent
years; as we saw in Orange County, it is no less risky for public
officials.

     The harsh lessons of the markets have been visited over the
past 18 months upon large corporations and dealers, as well as
municipal governments.  A factor common in many cases has been an
absence or breakdown of internal controls.

     These developments offer an unprecedented opportunity for
all concerned to be sure that proper controls are in place.
Surprising investment gains should set off alarms every bit as
loudly as surprising losses.  At the same time, let us not be
seduced by easy cures, such as narrowing lists of permitted
investments to only the safest.  Instead of eliminating
investment tools, we should be ensuring that they are well
understood and wisely employed.  

     Some have called on the federal government to intervene.  I
told Congress last year that I believe the regulation of state
and local investment practices is the responsibility of the
states.  If there's a role for the federal government in all
this, it is to offer our support and to share any knowledge and
experience we have that may be of use to local governments.

     Treasury Secretary Rubin and I have been actively pursuing
such a dialogue for the past ten months.  We've met with state
and local government officials throughout the country in an
intensive outreach effort.  

     The Commission is especially concerned because what is at
stake here is not just the fate of one or two municipalities --
it is the entire mechanism of public finance, which is based on
the public's trust.  That trust has been eroded by the events of
the last year and a half, and that's the second item I'd like to
talk to you about.

PUBLIC TRUST AND THE GENERAL OBLIGATION BOND
     Americans trust municipal bonds as they do few other
instruments.  This has worked to keep costs low for issuers.  The
Orange County bankruptcy filing and default may therefore impose
costs on public finance that will be felt for years to come, by
issuers miles from Southern California.  

     There may be another cost imposed as well -- one associated
with the phrase "willingness to pay."  Recent headlines speak of
actual or looming default because citizens or legislatures in
various parts of the country are no longer willing to support
debt service.  And, in Orange County, a large issuer publicly put
in question the validity of its own debts.  Whether sincere or a
negotiating ploy, these expressions of uncertainty may have added
a new premium for legal risk.  

     Corporate debt and equity markets have had to cope with
broken contracts time and again.  But municipal bonds are
different.  Local government bonds typically carry the "full
faith and credit" of the issuer -- a pledge that investors will
be repaid before anyone else.  So strong is this obligation that
even during the Depression, virtually all the debt that defaulted
was repaid with interest, and with interest on the interest.  

     Since the Depression, no general obligation bond of a major
issuer has ever defaulted, until now.  The consequences have been
heavy for Orange County, but a default also severely unsettles a
group just as important to local government as taxpayers -- the
bondholders who lend it money, whether as individuals or through
mutual funds -- hardworking women and men throughout America
looking for a decent, secure investment for their savings,
whether for their children's schooling; or to start a business
someday; or perhaps for retirement. 

     This time of difficulty in municipal finance will doubtless
produce lessons for all of us.  One lesson we should not draw,
however, is the wrongheaded notion that Chapter 9 may be an
alternative to responsible but unpopular decisions to fulfill the
obligations incurred by local governments.  Chapter 9 should be a
last resort -- not an easy way to avoid debts, or a safe haven
for fainthearted officials.  

    It's been said that trust is won with difficulty and easily
lost.  Municipal bonds -- and the municipal bond market -- have
enjoyed a solid reputation because of the valiant efforts of many
in the past.  We must all work to maintain and enhance public
faith in the market.

THE DISCLOSURE OBLIGATIONS OF PUBLIC OFFICIALS
     The third and final subject I'd like to discuss with you
today has to do with the Commission's enforcement activities in
the municipal market.  I've mentioned the Orange County
bankruptcy several times.  Local government officials who
authorize the issuance of municipal securities have serious
responsibilities under the federal securities laws.  

     Enforcement actions are a necessary, if unpleasant, part of
any capital market -- including the municipal market.  As the
Government Finance Officers Association told the Commission in
the summer of 1994: "Enhanced enforcement activity can do more to
focus previously non-compliant issuers and underwriters on their
responsibilities that any other."  GFOA then went on to call
specifically for "enforcement actions that put market
participants on notice that they will be penalized for their
actions."  We received the same encouragement from bond lawyers. 

     While Orange County has garnered the lion's share of
attention, it has not been our only municipal case.  Over the
past three years, our Division of Enforcement has brought 20
cases involving the municipal securities markets -- and in fact,
only the Orange County matter names the issuer.  Many of the
enforcement actions we've brought actually concern fraud against
an issuer.  These actions have involved virtually every market
participant:  national and regional underwriting firms, national
and local financial advisory firms, employees of those firms,
bond counsel, underwriters counsel, and consultants as well as
elected officials.  

     These cases are all based on failures to disclose, whether
issuer financial problems, facts and associated risks relating to
the tax-exempt status of the obligations, or conflicts of
interest, including pay-to-play.  Virtually all involve
violations of the basic antifraud sections -- Section 17(a) of
the Securities Act and Section 10 and rule 10b-5 of the Exchange
Act.  In more than a few instances, there have also been parallel
criminal proceedings, which should be a pretty good signal that
the conduct involved was not "borderline."  

     This weeding-out process doesn't mean that the entire garden
has gone bad.  To the contrary, the vast majority of market
participants have been playing by the rules.  Weeding can only
make the garden healthier, and these cases make it clear to any
observer that discipline is being maintained. 

     The SEC's actions have led to a renewed interest in the
securities law obligations of state and local governments.  This
is a message we've been stressing for 20 years, and we welcome
the chance to repeat it: 

     Public entities that issue securities are primarily
     liable for the content of their disclosure documents
     and are subject to proscriptions under the federal
     securities laws against false and misleading
     information in their disclosure documents.

     Issuers of municipal securities are not subject to the same
registration and reporting provisions of securities laws as those
on the corporate side.  The complex set of rules known as line
item disclosure do not apply.  However, the antifraud provisions
most certainly do apply.

     They are really quite simple at their core.  They call for
full disclosure of information material to investors making an
investment decision.  

     And materiality, the Supreme Court tells us, is determined
by what a hypothetical reasonable investor would want to know in
order to decide whether to sell, buy, or hold.

     What does that mean for a local government official?  The
Commission's report on the conduct of members of the Orange
County Board of Supervisors points out that:

     In authorizing the issuance of securities and related
     disclosure documents, a public official may not authorize
     disclosure that the official knows to be false; nor may a
     public official authorize disclosure while recklessly
     disregarding facts that indicate that there is a risk that
     the disclosure may be misleading.

     Does this mean that local government officials can't rely on
experts, lawyers and financial advisors?

     Of course they can -- just as officials of public companies
do.  That reliance, however, must be reasonable.  You should also
keep in mind the Commission's admonition in 1989 that:

     Because they are ultimately liable for the content of
     their disclosure, issuers should insist that any
     persons retained to assist in the preparation of their
     disclosure documents have a professional understanding
     of the disclosure requirements under federal securities
     laws.

     Public officials who authorize the issuance of securities by
a municipal government are not guarantors of such investments. 
Their responsibilities, however, do include some reasonable
attention to providing accurate disclosure to the investors who
buy their bonds and notes.

     This is not overly complex; it requires neither an MBA nor a
Ph.D.  When, as in Orange County, a public official has knowledge
of facts bringing into question the issuer's ability to repay the
securities, it is reckless for that official to approve
disclosure to investors without taking steps, appropriate under
the circumstances, to prevent the dissemination of materially
false or misleading information.  

     I hope my talk today has conveyed a sense of how
passionately we care about the municipal market.  We will do
everything we can to foster its liquidity, fairness, and the
perception of its fairness.  I know you share that passion and
that commitment.  There's hardly ever been a greater need for it.

     As recently as a few years ago, for most Americans,
municipal finance was a kind of sleepy backwater, misunderstood
and underappreciated.  Today, it's been catapulted into the
headlines.  Citizens have worked hard to pay their taxes, only to
see them swept away like a losing bet on a roulette wheel. 
Investors have loaned their savings to municipalities in need of
cash, only to see the very obligation to repay brought into
question.  

     You and I can change these things -- but we can't do it
alone. 

     For the sake of our cities, our states, and our nation,
let's continue to work together to create a municipal market
that's worthy of the 21st century.  

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