SPEECH TO THENATIONAL SECURITIES TRADERS ASSOCIATION

PALM SPRINGS, CALi9~RNIASEPTEMBER 2~.; :a."

"THE SEC AS A DEVELOPMENTAL AGENCY"

By: ROBERTA S. KARMElJ COMMISSIONER*SECURITIES ~HANGE COMMISSION

* THE SECURITIES AND EXCHANGE COMMISSION~ AS A MATTER OFPOLICY~ DISCLAIMS RESPONSIBILITY FOR SPEECHES BY ANYOF ITS COMMISSIONERS. IHE VIEWS EXPRESSED HEREIN ARETHOSE OF THE SPEAKER AND DO NOT NECESSARILY REFLECT THEVIEWS OF THE COMMISSION.

1.IN THE INTEREST OF FULL DISCLOSUREJ I FEEL I SHOULD

BEGIN THIS SPEECH WITH A DISCLAIMER. I AM NOT A VERY GOODAFTER DINNER SPEAKER. My SPEECHES TEND TO BE SERIOUS ANDHEAVY. THEY ARE EASIER TO DIGEST AFTER BREAKFAST THAN AFTERDINNER. FURTHERMOREJ I MADE THIS SAME DISCLAIMER TO MORTYWEISS BEFORE I AGREED TO THIS SPEAKING ENGAGEMENT.

MORTY ASSURED ME THAT YOU WOULD BE A VERY SOPHISTICATEDAND INTERESTED AUDIENCE AND THAT I COULD SPEAK TO YOU ON ANYSUBJECT. NEVERTHELESSJ IF YOU FIND AN AFTER DINNER SPEECHTOO BORING TO FOLLOWJ BUT YOU WANT SOMETHING OF BUSINESSINTERESTJ TO SHOW TO YOUR PARTNERS WHEN YOU RETURN TO THEOFFICEJ I WILL BE HAPPY TO SEND A COPY OF THESE REMARKS TOANYONE WHO WILL LEAVE ME A BUSINESS CARD.

THE REASON I AM SO SKEPTICAL ABOUT YOUR APPRECIATIONFOR MY SPEECH IS THAT I KNOW MORE ABOUT TRADERS THAN YOUMIGHT ASSUME. My FIRST CONTACT WITH THE SECURITIES INDUSTRYWAS A JOB IN THE TRADING ROOM OF AN OVER-THE-COUNTER MARKETMAKER. I WAS A BOOKISH SORT AND WHEN THERE WAS A SLOW DAY IN.THE OFFICE I USED TO TRY AND READ ABOUT THE STOCK MARKET.ONE AFTERNOON THE HEAD TRADER CAUGHT ME READING A TEXTBOOKON ECONOMICS.

"WHAT ARE YOU READING THAT FOR?" HE ASKED. "WELLSIRJ I REPLIEDJ "I WOULD LIKE TO LEARN SOMETHING ABOUTTHIS BUSINESS."

"WHAT A WASTE OF TIMEJ HE REACTED. "You WON'T LEARNABOUT THIS BUSINESS IN A BOOK. IT'S ALL JUST SUPPLY ANDDEMAND."

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THIS CONVERSATION MUST HAVE SEEMED MEANINGFUL TO MEBECAUSE IT STUCK IN MY MEMORY FOR TWENTY YEARS. ANDALTHOUGH I HAVE CONTINUED TO APPROACH THE SECURITIESINDUSTRY FROM A SOMEWHAT INTELLECTUAL VANTAGE POINT~ I AMNOT PERSUADED THAT THE HEAD TRADER WAS WRONG.

NEVERTHELESS~ I SPEAK'TO YOU TONIGHT ABOUT THEECONOMICS OF THE TRADING MARKETS AS A REGULATOR~ ANDREGULATION TODAY IS A FORMAL AND SERIOUS BUSINESS. THESECURITIES INDUSTRY AND THE SECURITIES AND EXCHANGECOMMISSION ("SEC") ARE BEING CALLED UPON TO SOLVE DIFFICULTPROBLEMS IN A MANNER WHICH WILL SATISFY A DISSATISFIED ANDDISTRUSTFUL PUBLIC. AT A TIME WHEN THE SEC HAS MANY NEWRESPONSIBILITIES WITH RESPECT TO THE SECURITIES MARKETS~ OURDECISION MAKING PROCESSES HAVE BECOME SUBJECT TO INCREAS-INGLY CRITICAL PUBLIC INTEREST AND SCRUTINY.

IN 1975 THE CONGRESS DETERMINED THAT OUR "SECURITIESMARKETS ARE AN IMPORTANT NATIONAL ASSET WHICH MUST BEPRESERVED AND STRENGTHENED." CONGRESS THEN DIRECTED THECOMMISSION TO USE ITS AUTHORITY TO FACILITATE THE ESTABLISH-MENT OF A NATIONAL MARKET SYSTEM FOR SECURITIES. SIMILARLY~CONGRESS DIRECTED US TO FACILITATE THE ESTABLISHMENT OF ANATIONAL SYSTEM FOR THE PROMPT AND ACCURATE CLEARANCE ANDSETTLEMENT OF TRANSACTIONS IN SECURITIES. IN SO DOING~CONGRESS GAVE OUR AGENCY A DEVELOPMENTAL ROLE WITH REGARD TOTHE SECURITIES MARKETS WHICH WAS IN SOME WAYS NEW.

3.FURTHERMORE~ THE COMMISSION WAS GIVEN THESE NEW

RESPONSIBILITIES AT A TIME OF GROWING PUBLIC DISTRUST OFREGULATION AND REGULATORS~ WHICH HAS LED TO THE IMPOSITIONOF VARIOUS CONTROLS~ SUCH AS THE GOVERNMENT IN THE SUNSHINEACT~ ON THE DECISION MAKING PROCESSES OF GOVERNMENT. I SEEDANGERS~ AS WELL AS OPPORTUNITIES~ IN THESE DEVELOPMENTS~FOR BOTH THE SEC AND THE INDUSTRY. IF YOU WILL INDULGE ONEOF YOUR REGULATORS~ WHO IS WONT TO DEAL WITH THE CHALLENGESOF THE SECURITIES MARKETS THROUGH WORDS AND IDEAS INSTEADOF THROUGH THE POSSIBLY MORE COMPREHENSIBLE MEANSOF SUPPLY AND DEMAND} I WOULD LIKE TO SHARE WITH YOU MYCONCERNS AND SUGGESTIONS REGARDING BETTER REGULATION BY AMATURE AGENCY WITH NEW WORK TO DO.

SEVERAL MONTHS AGO I SPOKE TO ANOTHER INDUSTRY GROUPABOUT THE GROWING PAINS THE COMMISSION WAS HAVING IN CHANGINGFROM A PRIMARILY LAW ENFORCEMENT TO A PARTLY PROMOTIONALAGENCY. OF ALL THE SPEECHES I HAVE GIVEN AS A COMMISSIONER}THAT SPEECH SPARKED THE MOST INTEREST AND CONTROVERSY AND WASTHE MOST MISUNDERSTOOD. SO IN TRYING TO SPEAK ON THISGENERAL SUBJECT AGAIN} I DECIDED TO START BY DEFINING WHATI MEAN BY "PROMOTIONAL~" "REGULATORY" AND "PROSECUTORIAL"GOVERNMENT ACTIVITIES.

I DEFINE A PROMOTIONAL FUNCTION AS A GOVERNMENT ACTIVITYDESIGNED TO BENEFIT OR FOSTER PRIVATE BUSINESS GROWTH ORDEVELOPMENT WHICH CONGRESS HAS DETERMINED IS IN THE PUBLICWELFARE. THIS FUNCTION COULD ALSO BE LABELED A DEVELOPMENTALFUNCTION} AND I WILL SOMETIMES USE THAT TERM TONIGHT.

4.A PROSECUTORIAL FUNCTION IS LAW ENFORCEMENT; GOVERNMENTACTION WHICH VINDICATES A STATUTORY NORM. REGULATORYFUNCTIONS ARE OF MANY TYPES} BUT THEY ARE BASICALLY STANDARDSETTING ACTIVITIES.

THESE ACTIVITIES CAN BEST BE VIEWED ON A CONTINUUM FROMPURE PROMOTIONAL OR BENEFIT GRANTING ON THE ONE END} TO PURELAW ENFORCEMENT ON THE OTHER END} WITH VARIOUS TYPES OFREGULATORY ACTIVITIES IN THE MIDDLE. PURE PROMOTIONALACTIVITIES WOULD INCLUDE DIRECT CASH GRANTS} LOANS ATINTEREST RATES BELOW MARKET OR GUARANTEES OF INDEBTEDNESS.THE SEC NEVER HAS HAD AND DOES NOT NOW HAVE ANY PUREPROMOTIONAL FUNCTIONS. THE SEC IS NOT A PROMOTER AND I DONOT BELIEVE IT WOULD BE IN THE BEST INTERESTS OF EITHER THEINDUSTRY OR THE AGENCY FOR THE SEC TO BECOME A PROMOTER}PARTICULARLY IF PROMOTION IS EQUATED WITH PROTECTION OFTHE SECURITIES INDUSTRY.

PURE LAW ENFORCEMENT IS THE PROSECUTION OF VIOLATIONSOF THE LAW. WHEN THE SEC GOES TO COURT TO ENJOIN A MARKETMANIPULATOR} IT IS ENGAGED IN PURE LAW ENFORCEMENT.

IN BETWEEN THESE EXTREMES ON THE CONTINUUM OF GOVERNMENTACTIVITY IS REGULATION} WHICH MAY HAVE MULTIPLE OBJECTIVESAND MAY TAKE MULTIPLE FORMS. LICENSING} IS A COMMONREGULATORY ACTIVITY} IN WHICH STANDARDS ARE ESTABLISHED BYIMPOSING REQUIREMENTS UPON PERSONS DESIRING TO OBTAIN ALICENSE. NEVERTHELESS LICENSING MAY BE PURSUED IN APROSECUTORIAL MANNER} IF IT IS PURSUED PRIMARILY FOR THEPURPOSE OF ENFORCING EXISTING STANDARDS.

5.THIS HAS BEEN THE CASE AT THE SEC IN THE AREA OF BROKER-DEALER DISCIPLINARY PROCEEDINGS~ WHICH FOR THE MOST PARTINVOLVE LICENSE SUSPENSIONS OR REVOCATIONS. ALTERNATIVELY~WHERE LICENSING GRANTS A BUSINESS ENTITY AN EXCLUSIVEFRANCHISE~ FOR EXAMPLE~ THE REGISTRATION OF A SINGLEDESIGNEE TO RECEIVE AND PROCESS LOST AND STOLEN SECURITIESREPORTS~ IT CAN BE A PROMOTIONAL AS WELL AS A REGULATORYACTIVITY.

SIMILARLY~ RATE MAKING IS A COMMON REGULATORY ACTIVITYUTILIZED TO PROTECT CONSUMERS. BUT RATE MAKING CAN BECONDUCTED AS A PROSECUTIONAL FUNCTION TO IMPOSE PENALTIES ONUNDESIRABLE BUSINESS ACTIVITY OR IN A PROMOTIONAL WAY TOASSIST IN THE DEVELOPMENT OF BUSINESS ENTERPRISE.

Now THE SEC HAS ALWAYS HAD A GENERAL MANDATE TO PROMOTEFAIR AND HONEST MARKETS IN SECURITIES. BUT CONGRESS DIDNOT PREVIOUSLY GIVE OUR AGENCY THE MORE SPECIFIC POLICYDIRECTIVES OR LEGAL AUTHORITY AND MECHANISMS TO COMPEL THEINDUSTRY TO ADOPT PARTICULAR TECHNOLOGICAL DEVELOPMENTS ORTO INTERFERE WITH ECONOMIC FORCES CHANGING THE INDUSTRY.SINCE 1934 THE COMMISSION HAS BEEN PROMULGATING REGULATIONSWHICH ARTICUATE BEHAVIORAL STANDARDS FOR THE INDUSTRY.HOWEVER~ THE COMMISSION ENDEAVORED TO KEEP THE SECURITIESMARKETS FAIR AND HONEST PRIMARILY BY LAW ENFORCEMENTTECHNIQUES. IF A MARKET PARTICIPANT DID NOT MEASURE UPTO EXPECTED STANDARDS OF CONDUCT~ HE WAS ENJOINED~ BARREDFROM THE BUSINESS OR CRIMINALLY PROSECUTED.

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6.THE 1975 AMENDMENTS TO THE FEDERAL SECURITIES LAWS GAVE

THE SEC SOME RESPONSIBILITIES WHICH I BELIEVE HAVE AMIXED REGULATORY AND PROMOTIONAL QUALITY BECAUSE THEY GIVETHE COMMISSION THE ABILITY TO IMPACT THE ECONOMICS OF THETRADING MARKETS FOR THE PURPOSE OF FACILITATING THEIRDEVELOPMENT. THESE RESPONSIBILITIES INCLUDE THE LINKING OFMARKETS THROUGH COMMUNICATION AND DATA PROCESSING FACILITIES;THE CONSOLIDATION OF MARKETS IN SECURITIES SUITABLE FOR.AUCTION TRADING; THE CREATION OF A PROGRAM FOR LOST ANDSTOLEN SECURITIES; AND THE ESTABLISHMENT OF A NATIONALSYSTEM FOR CLEARANCE AND SETTLEMENT OF SECURITIES TRANSACTIONS.

THE COMMISSION ALSO WAS GIVEN A VARIETY OF NEWREGULATORY TOOLS. THE COMMISSION NOW LICENSES AND APPROVESTHE REGISTRATION OF MARKET PARTICIPANTS OVER WHICH WE DID NOTPREVIOUSLY HAVE JURISDICTION -- DEPOSITORIES~< CLEARINGAGENCIES~ TRANSFER AGENTS AND INFORMATION PROCESSORS.FURTHER~ THE COMMISSION MUST AFFIRMATIVELY ACT TO APPROVEALL RULE CHANGES OF THE EXCHANGES~ NASD AND OTHER SELF-REGULATORY ORGANIZATIONS. BROKERAGE COMMISSION RATES WEREUNFIXED IN 1975 so THAT THE SEC WOULD NOT BE TRANSFORMEDINTO A PUBLIC UTILITY RATE MAKING COMMISSION. NEVERTHELESS~THE SEC WAS GIVEN SOME RATE MAKING AUTHORITY.

DECISION MAKING IN THESE AREAS IMPACTS PRIVATE ECONOMICINTERESTS IN WAYS WHICH LAW ENFORCEMENT OR PURE REGULATIONDO NOT~ AND CAN LEAD TO A CONFUSION ABOUT THE PURPOSE OFREGULATION.

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7.A RECENT STUDY ON FEDERAL REGULATION BY THE SENATE

COMMITTEE ON GOVERNMENTAL AFFAIRS CONCLUDED THAT PROMOTIONALAND REGULATORY PROGRAMS CANNOT COMFORTABLY CO-EXIST IN ASINGLE AGENCY. THE STUDY FOUND THAT WHEN BOTH FUNCTIONS AREASSIGNED TO A SINGLE AGENCY~ THERE IS A GENERAL TENDENCY FORTHE AGENCY'S PROMOTIONAL MISSION TO PREDOMINATE. THE SEC'sPROSECUTORIAL FUNCTION IS WELL KNOWN AND WELL DEVELOPED.BECAUSE THE COMMISSION IS DIRECTLY RESPONSIBLE FOR ENFORCEMENTOF THE FEDERAL SECURITIES LAWS~ IT IS IMPORTANT THAT OURPROSECUTORIAL CAPABILITY IN NO WAY BE COMPROMISED BY OURNEW DEVELOPMENTAL FUNCTIONS. IT IS EQUALLY IMPORTANT THATOUR DEVELOPMENTAL ROLE BE CARRIED OUT WITH A CONCERN FOR THEGENERAL ECONOMIC HEALTH OF THE INDUSTRY~ LEST WE HARM THEMARKETS WE ARE DIRECTED TO HELP.

THE EXISTENCE OF PROSECUTORIAL~ REGULATORY ANDPROMOTIONAL FUNCTIONS WITHIN A SINGLE AGENCY NECESSARILYGIVES RISE TO CERTAIN TENSIONS AND PROBLEMS.

GOVERNMENT REGULATION OF BUSINESS IN THIS COUNTRY HASLONG INVOLVED AN EFFORT TO BALANCE THE NEED FOR FOSTERING THENATIONAL ECONOMY BY AIDING BUSINESS DEVELOPMENT AGAINST THEOBJECTIVE OF GUARDING AGAINST INIMICAL OR UNFAIR BUSINESSPRACTICES. HOWEVER~ INDEPENDENT REGULATORY AGENCIES DONOT ALL HAVE PROSECUTORIAL~ REGULATORY AND PROMOTIONALFUNCTIONS.

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8.ONE REASON THE SEC HAS BEEN ABLE HISTORICALLY TO AVOID

SUCCUMBING TO THESE CONFLICTS BETWEEN PROMOTIONAL~ REGULATORYAND PROSECUTORIAL PROGRAMS IS THAT THE SCHEME OF FEDERALSECURITIES REGULATION INCLUDES SELF-REGULATION. THESECURITIES EXCHANGE ACT OF 1934 RECOGNIZED THE REGULATORYROLE OF THE STOCK EXCHANGES~ AND IN 1938 CONGRESS EXTENDEDTHE CONCEPT OF SELF-REGULATION TO OVER-THE-COUNTER BROKERS ANDDEALERS~ BY ENACTING THE MALONEY ACT WHICH LED TO THEFORMATION OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS("NASD").

THE SELF-REGULATORY ORGANIZATIONS OPERATE IN THE PUBLICINTEREST TO KEEP OUR MARKETS FAIR AND HONEST BY SETTINGSTANDARDS REGARDING JUST AND EQUITABLE PRINCIPLES OF TRADEAND BY POLICING UNETHICAL AND ILLEGAL PRACTICES. AND THESELF-REGULATORS ARE ALSO BUSINESS ENTITIES WHICH PROMOTETHEIR ECONOMIC SELF-INTEREST AND THE BUSINESS INTERESTS OFTHEIR MEMBERS. IN BOTH RESPECTS THEY COMPLEMENT ANDSUPPLEMENT THE COMMISSION'S PROGRAMS~ ENABLING THE SEC TODEAL WITH THE MORE SENSITIVE AND LESS DETAILED ISSUES.

BUT~ THE SELF-REGULATORY ORGANIZATIONS HAVE BEEN CRITICIZED~FROM TIME TO TIME~ BOTH BY CONGRESS AND THE SEC~ FOR THEIREXCLUSIONARY AND ANTI-COMPETITIVE BEHAVIOR. IN OTHER WORDS~THEY HAVE PROSECUTORIAL~ REGULATORY AND PROMOTIONALRESPONSIBILITIES~ AND THEY HAVE AT TIMES LET THEIR PROMOTIONALFUNCTIONS PREDOMINATE OVER THEIR REGULATORY AND PROSECUTORIALFUNCTIONS.

9.IN THE LATE 1960s THE SELF REGULATORY ORGANIZATIONS

FAILED ADEQUATELY TO RESPOND TO THE LONG TERM PROMOTIONALNEEDS OF THE INDUSTRY OR TO TAKE THE REQUISITE PROSECUTORIALOR REGULATORY INITIATIVES TO SOLVE THE UNSAFE AND UNSOUNDCONDITIONS IN THE SECURITIES MARKETS. THE SEC's OVERSIGHTOF THE SELF-REGULATORS ALSO PROVED INSUFFICIENT. THEUNFORTUNATE RESULT WAS AN EROSION OF PUBLIC CONFIDENCE INTHE SECURITIES MARKETS MEMORALIZED IN SOME VERY CRITICALCONGRESSIONAL REPORTS. ULTIMATELY~ THE CONGRESS PASSED THESECURITIES ACTS AMENDMENTS OF 1975.

THESE AMENDMENTS GAVE THE SEC A MUCH GREATER ROLE ASOVERSEER OF THE SELF-REGULATORY ORGANIZATIONS. WE MUST NOWACT TO AFFIRMATIVELY APPROVE NEW RULES OR AMENDMENTS TOEXISTING RULES OF THE SELF-REGULATORY ORGANIZATIONS. IN SODOING~ OUR AGENCY MUST FIND THAT SUCH RULE CHANGES ARE CONSISTENTWITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF1934. SINCE IT WOULD USUALLY BE IMPOSSIBLE OR AT LEASTIMPRACTICAL FOR A SELF-REGULATORY ORGANIZATION TO EMBARKUPON A NEW VENTURE~ OR DELIVER A NEW TYPE OF SYSTEM ORSERVICE TO ITS MEMBERS WITHOUT A RULE CHANGE~ THIS STATUTORYAMENDMENT DIRECTLY INVOLVES THE SEC IN THE PROMOTIONALACTIVITIES OF THE STOCK EXCHANGES AND THE NASD.

IN ADDITION~ THE 1975 AMENDMENTS GAVE THE SEC THEAUTHORITY TO ABROGATE OR CHANGE RULES OF MOST OF THE SELF-REGULATORY ORGANIZATIONS IN FURTHERANCE OF THE PURPOSES OFTHE EXCHANGE ACT. THE SEC ALSO NOW HAS THE POWER TO

10.AUTHORIZE OR REQUIRE THE SELF-REGULATORY ORGANIZATIONS TOACT JOINTLY WITH RESPECT TO MATTERS AS TO WHICH THEY SHAREAUTHORITY IN PLANNING) DEVELOPING) OPERATING OR REGULATING ANATIONAL MARKET SYSTEM OR FACILITIES THEREOF. THE 1975AMENDMENTS ALSO INVOLVED THE SEC MORE DIRECTLY AND MOREACTIVELY IN OVERSIGHT OF THE SURVEILLANCE AND DISCIPLINARYACTIVITIES OF THE SELF-REGULATORY ORGANIZATIONS.

THESE NEW POWERS) COUPLED WITH THE GENERAL CONGRESSIONALMANDATE TO FACILITATE THE ESTABLISHMENT OF NATIONAL MARKETAND CLEARANCE SYSTEMS HAVE GIVEN THE COMMISSION RESPONSIBILITIESFOR DIRECT AS WELL AS INDIRECT DEVELOPMENTAL) REGULATORYAND LAW ENFORCEMENT ACTIVITIES.

THUS) ALTHOUGH THE SELF-REGULATORY ORGANIZATIONS ARENOW ASSISTED IN RESOLVING THE CONFLICTS WHICH THEY HAVEBETWEEN THEIR PROMOTIONAL) REGULATORY AND PROSECUTORIALROLES BY! ACTIVE SEC OVERSIGHT) THE SEC MUST NOW DEAL WITHTHF~F CONFLICTS INTERNALLY.

As A COMMISSIONER OF THE SEC I AM DEEPLY CONCERNEDABOUT HOW THE SEC WILL RESPOND TO ITS NEW DEVELOPMENTALROLE AND HOW PROMOTIONAL RESPONSIBILITIES MAY CHANGE OURAGENCY. THE SEC HAS ALWAYS ENJOYED AN EXCELLENT REPUTATION.I HOPE AND EXPECT THAT WE WILL CONTINUE TO DO SO. BUTGOVERNMENT AGENCIES WITH A PRIMARILY PROSECUTORIAL FUNCTIONSEEM BETTER ABLE TO MAINTAIN THE PUBLIC'S CONFIDENCE THANAGENCIES WHICH ARE PROMOTIONAL. PROMOTIONAL ACTIVITIES AREPERHAPS MORE SUSCEPTIBLE TO CORRUPTION AND THE APPEARANCE OFIMPROPER RELATIONSHIPS WITH A REGULATED INDUSTRY.

11.TONIGHT I HAVE CALLED YOUR ATTENTION TO THE PROBLEMS I

PERCEIVE IN THE COMBINATION OF DEVELOPMENTA~ REGULATORY ANDPROSECUTORIAL ROLES IN A SINGLE AGENCY. I WOULD ALSO LIKETO DISCUSS SOME POSSIBLE SOLUTIONS TO THESE PROBLEMS.

FIRST~ THE SELF-REGULATORY ORGANIZATIONS MUST REMAINVIABLE AND MUST CONTINUE TO EXERCISE BOTH PROMOTIONAL ANDREGULATORY RESPONSIBILITIES. IN MANY AREAS THE MARKETPLACECAN PROVE BOTH A BETTER PROMOTER AND A BETTER REGULATORTHAN THE GOVERNMENT. 'PERSONALLY~ I HAVE ALWAYS FOUND THEKINETIC ENERGY OF THE TRADING MARKETS INTELLECTUALLYSTIMULATING. I AM CONFIDENT THAT THE MENTAL ACUITY WHICH ISREQUIRED TO COMPETE IN THOSE MARKETS CAN BE HARNESSED FORTHE PUBLIC GOOD AS WELL AS PRIVATE GAIN.

SECOND~ NEITHER THE COMMISSION NOR THE INDUSTRY SHOULDBECOME OVERLY ENTHUSIASTIC ABOUT THE SUGGESTION THAT THESEC NOW HAS CERTAIN PROMOTIONAL FUNCTIONS. IN MY OPINION~THE SEC SHOULD NOT INTERPRET ITS MANDATE UNDER THE 1975AMENDMENTS TO AUTHORIZE THE SUBSTITUTION OF ITS JUDGMENT FORTHE BUSINESS JUDGMENT OF THE INDUSTRY CONCERNING NEWPRODUCTS~ SERVICES OR SYSTEMS. FURTHER~ TO THE EXTENTTHAT THE PRIVATE SECTOR CAN INITIATE AND PROMOTE EXPERIMENTSIN THE DEVELOPMENT OF NATIONAL MARKET AND CLEARANCE SYSTEMS~THE SEC SHOULD REFRAIN FROM COMPELLING THE INDUSTRY TO USENEW AND POSSIBLY UNPALATABLE OR UNWORKABLE SYSTEMS.

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12.THIRDJ THE SEC CAN RESOLVE CERTAIN CONFLICTS BETWEEN

OUR PROMOTIONAL AND REGULATORY FUNCTIONS BY A FUNCTIONALDIVISION OF PERSONNEL. As YOU KNOWJ OUR DIVISION OFENFORCEMENT IS SEPARATE FROM OUR OPERATING DIVISIONSINCLUDING THE DIVISION OF MARKET REGULATION. ALTHOUGH ASTRICT SEPARATION OF FUNCTIONS IS NOT ALWAYS CONSISTENTWITH THE MOST EFFICIENT USE OF STAFF RESOURCESJ AS AGENERAL PRINCIPAL THERE IS VALUE IN INSULATING THEPROSECUTORIAL FUNCTION.

BUT LAST AND OF GREATEST IMPORTANCEJ IN WHAT MUST BEOUR MUTUAL EFFORTS TO MAINTAIN THE PUBLIC'S CONFIDENCEJ

IS THE CONDUCT OF OUR AFFAIRS HONESTLY AND IN PUBLIC.LAST YEAR THE GOVERNMENT IN THE SUNSHINE ACT BECAME LAW. ITREQUIRES MOST OF THE FEDERAL REGULATORY AGENCIES TO OPENTHEIR RULEMAKING AND MOST OTHER MEETINGS TO THE PUBLIC. THESTATUTE ALSO PROHIBITS EX PARTE COMMUNICATIONS BETWEENAGENCY DECISION MAKERS AND INTERESTED OUTSIDE PERSONS WITHRESPECT TO THE MERITS OF PENDING FORMAL PROCEEDINGS. THEBASIC PREMISE OF THE SUNSHINE ACT IS THAT GOVERNMENT IS ANDSHOULD BE THE SERVANT OF THE PEOPLEJ AND THEREFORE IS ANDSHOULD BE FULLY ACCOUNTABLE TO THEM.

BEFORE THE SEC CAN ADOPT ANY RULE OR ISSUE ANY ORDERJ

THE AGENCY MUST FOLLOW CERTAIN PROCEDURES REQUIRED BY THEFEDERAL ADMINISTRATIVE PROCEDURE ACT AND THE SECURITIESSTATUTES. IN GENERALJ IN MAKING THE KIND OF DECISIONSNECESSARY TO IMPLEMENT THE 1975 AMENDMENTS RESPECTING THENATIONAL MARKET AND CLEARANCE SYSTEMSJ

13.THE SEC ENGAGES IN WHAT IS CATEGORIZED AS INFORMAL RULEMAKINGOR SO-CALLED INFORMAL ADJUDICATION. THIS USUALLY MEANS THAT(1) NOTICE IS PUBLICLY GIVEN OF A PARTICULAR PROPOSED ACTION~(2) WRITTEN (OR SOMETIMES ORAL) COMMENTS ARE SOLICITED~ (3)A PUBLIC FILE IS MAINTAINED OF THOSE COMMENTS~ AND FINALLY(4) ACTION IS TAKEN BASED ON THE COMMENTS AND INFORMATIONCOMPILED WITH A PUBLISHED STATEMENT OF THE BASIS AND PURPOSEFOR THE DECIDED-UPON ACTION.

THE COMMISSION HAS A GOOD DEAL OF LATITUDE IN CHOOSINGTHE MANNER IN WHICH THESE INFORMAL PROCEDURES ARE FOLLOWEDAND DISCRETION AS TO WHAT OTHER MORE FORMAL PROCEDURESSHOULD BE UTILIZED. IN A RECENT CASE 11 THE UNITED STATESSUPREME COURT STRESSED THAT FORMULATION OF THE PROCEDURES ANAGENCY UTILIZED IN INFORMAL RULEMAKING IS BASICALLY A MATTEROF AGENCY DISCRETION. INFORMAL RULEMAKING NEED NOT BE BASEDSOLELY ON THE TRANSCRIPT OF ANY HEARING HELD BEFORE THEAGENCY. INDEED A FORMAL HEARING NEED NOT EVEN BE HELD.

THE LATITUDE WHICH A REGULATORY AGENCY HAS IN THEINFORMAL RULEMAKING PROCESS HAS CERTAIN PITFALLS~ HOWEVER~PARTICULARLY IN SITUATIONS WHERE A PROPOSED AGENCY RULE HASECONOMIC CONSEQUENCES WHICH FAVOR SOME BUSINESS ENTITIESOVER OTHERS. IN SUCH A SITUATION EX PARTE CONTACTS CANPROVE TROUBLESOME. DURING THE PAST YEAR THE D. C. CIRCUITCOURT OF ApPEALS HANDED DOWN TWO OPINIONS DEALING WITH THEPROPER SCOPE OF EX PARTE CONTACTS DURING THE COURSE OFINFOijMAL RULEMAKING PROCEEDINGS.11 VERMONT YANKEE NUCLEAR POWER CORP. v. NRDC~ 435 U.S. (1978).

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14.THESE DECISIONS ARE IMPORTANT NOT ONLY BECAUSE EX PARTECONTACTS ARE HARD TO COMPLETELY AVOID AS A PRACTICAL MATTER~BUT ALSO BECAUSE AGENCY PERSONNEL AND COMMISSIONERS MUSTHAVE CONTINUING CONVERSATIONS WITH INDUSTRY REPRESENTATIVESIN ORDER TO INCREASE AND MAINTAIN AGENCY EXPERTISE.

IN THE FIRST CASE~ HOME Box OFFICE V. ~ 21 THE COURTOVERTURNED CERTAIN CABLE TV PROGRAMMING RULES ADOPTED BYTHE FEDERAL COMMUNICATIONS COMMISSION IN PART BECAUSE OFEX PARTE CONTACTS BY INTERESTED PERSONS WITH FCC COMMISSIONERSAND EMPLOYEES BETWEEN THE TIME THE COMMENT PERIOD CLOSEDAND THE TIME WHEN THE RULES WERE ADOPTED. THE COURT HELDTHESE CONTACTS WERE IMPROPER BECAUSE SUCH CONDUCT PREVENTEDPUBLIC SCRUTINY OF THE EX PARTE COMMENTS AND PRECLUDED ANADEQUATE RECORD FOR COURT REVIEW.

SUBSEQUENTLY~ HOWEVER~ IN THE SECOND CASEI ACTION FORCHILDRENS TELEVISION V. FCC 3/ THE SAME COURT NARROWED ITSHOLDING IN HOME Box OFFICE. IN CHILDREN'S TELEVISIONI THECOURT SAID THAT SUCH EX PARTE COMMUNICATIONS NEED ONLY BEEXPLICITLY DISCLOSED AND MADE PART OF THE RECORD "WHEN THEREARE COMPETING PRIVATE CLAIMS TO A VALUABLE PRIVILEGE ORTHERE IS SELECTIVE TREATMENT OF COMPETITIVE BUSINESSINTERESTS OF SIGNIFICANT MONETARY VALUE." THE COURT RECOGNIZEDTHE NEED FOR FLEXIBILITY IN INFORMAL RULEMAKING PROCEDURES.

2/ 567 F.2D 9 (D.C. CIR. 1977).3/ 564 F.2D 458 (D.C. CIR. 1977).

15.WITH THIS IN MIND~ IT FELT THAT A BALANCING WAS CALLED FORBETWEEN THE NEED FOR THAT FLEXIBILITY AND THE NEED TOPROTECT THE INFORMAL PROCESS FROM ABUSE. THIS FORMULATIONWITH RESPECT TO EX PARTE CONTACTS IS ESPECIALLY NOTEWORTHYFOR US SINCE MANY OF THE NEW PROMOTIONAL FUNCTIONS COMMISSIONEXERCISES MAY INDEED CAUSE PRIVATE INTERESTS TO COMPETE FORA PARTICULAR~ VALUABLE PRIVILEGE.

As THE COMMISSION PROCEEDS TO FACILITATE THE ESTABLISHMENTOF NATIONAL MARKET AND CLEARING SYSTEMS BY WAY OF INFORMALRULEMAKING~ WE-MUST BE VIGILANT THAT THE PROCESS UTILIZED ISALWAYS PROPER AND APPROPRIATE FOR THE ISSUES TO BE RESOLVED.IN THE HOME Box OFFICE CASE THE COURT POINTED OUT THAT THEOBJECT OF THE INFORMAL RULEMAKING PROCEDURE IS TO ESTABLISHA DIALOGUE BETWEEN AN AGENCY AND INTERESTED PERSONS SO AS TOMAKE CRITICISM OR FORMULATION OF ALTERNATIVES TO AN AGENCY'SPROPOSED RULES POSSIBLE.

As PART OF THE PROCESS~ AN INFORMED DIAGLOGUE MUSTOPENLY BE ENGAGED IN AND ALL INTERESTED PERSONS MUSTHAVE FULL OPPORTUNITY TO PARTICIPATE. SUCH PERSONS MUSTALSO TAKE ADVANTAGE OF THE OPPORTUNITY TO PARTICIPATE. ToME~ THIS UNDERLYING PRINCIPLE OF OPEN DISCUSSION AND OPENDECISION MAKING IN A MANNER SUFFICIENTLY FLEXIBLE FOR ANAGENCY'S EXPERTISE TO BE UTILIZED~ IS MORE IMPORTANT THANTHE SPECIFIC HOLDINGS OF THE HOME Box OFFICE ORCHILDREN'S TELEVISION CASES.

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16.THE NSTA IN THE PAST HAS BEEN AN ACTIVE PARTICIPANT IN

MATTERS DIRECTLY AFFECTING ITS MEMBERS. I SINCERELY HOPETHAT IN THE FUTURE THE ASSOCIATION AND ITS INDIVIDUALMEMBERS WILL CONTINUE TO LET THE SEC HAVE THE BENEFIT OFYOUR VIEWS CONCERNING OUR RULE PROPOSALS. OF COURSE~DIALOGUE IS TWO-SIDED. FOR THAT REASON~ I AM GRATEFUL TOTHE NSTA FOR GIVING ME THE OPPORTUNITY TONIGHT TO ADDRESSYOU ON MATTERS OF CONCERN TO ME AS A COMMISSIONER.

THE 1975 AMENDMENTS HAVE GIVEN THE SEC THE OPPORTUNITYAS WELL AS THE OBLIGATION TO ASSIST THE SECURITIES INDUSTRYTO IMPROVE UPON EXISTING SECURITIES MARKETS. BUT THESE SAMEAMENDMENTS~ AND OTHER DEVELOPMENTS IN THE LAW~ HAVE MADE THERELATIONSHIP OF THE SEC TO THE INDUSTRY WE REGULATE A MOREFORMAL ONE. IN ADJUSTING TO THIS CHANGING RELATIONSHIP) WEMUST GUARD AGAINST SUBSTITUTING ADVERSARIAL CONFRONTATIONFOR COOPERATIVE SELF-REGULATION. THAT IS~ THE COMMISSIONCANNOT PERMIT OUR PROSECUTORIAL PROGRAMS TO PREDOMINATE OVEROUR REGULATORY AND DEVELOPMENTAL PROGRAMS. BUT IN COOPERATINGWITH THE SROs~ THE SEC CANNOT BE COOPTED BY THEM. THECOMMISSION CANNOT PERMIT OUR DEVELOPMENTAL PROGRAMS TO CLOUDOUR JUDGMENTS CONCERNING OUR PROSECUTORIAL AND REGULATORYPROGRAMS.

17.I HAVE LONG HAD A GREAT RESPECT FOR THE SECURITIES

INDUSTRY. IF THE SEC DESERVES ITS REPUTATION FOR BEING AGOOD GOVERNMENT AGENCY) PART OF THE CREDIT GOES TO THEINDUSTRY IT REGULATES. THAT INDUSTRY} WHICH YOU REPRESENT}AND THE SEC ARE NOW AT A CRITICAL JUNCTURE. WE MUSTRECOGNIZE THAT OUR RELATIONSHIP TO ONE ANOTHER AND THEINVESTING PUBLIC HAS CHANGED AND WE MUST RESPOND APPROPRIATELYAND CONSTRUCTIVELY TO THAT CHANGE.

ATTENTION IS BEING FOCUSED TODAY ON THE NEED FORINCREASED CAPITAL FORMATION} AND THE IMPACT OF GOVERNMENTREGULATION ON INVESTMENT. IN ORDER FOR CAPITAL TO BEATTRACTED INTO THE PUBLIC SECURITIES MARKETS INVESTORSMUST BELIEVE THAT THE SECONDARY MARKETS ARE FAIR AND HONEST.IT IS THEREFORE IMPORTANT TO THE HEALTH AND GROWTH OF OURECONOMY THAT THE PUBLIC HAVE CONFIDENCE IN THE INTEGRITYOF OUR SECURITIES MARKETS. IT IS THE MUTUAL RESPONSIBILITYOF BOTH THE SEC AND THE SECURITIES INDUSTRY TO DESERVE THETRUST WHICH ENGENDERS SUCH CONFIDENCE.