Cream of the Crop 21/Cream of the Crop 21 (Terry Blount) (October 1996).iso/faq/nasdaq.zip/SPEECH.TXT

Text File | 1996-08-12 | 9KB | 192 lines

        STATEMENT BY CHAIRMAN ARTHUR LEVITT
        U.S. SECURITIES AND EXCHANGE COMMISSION
        PRESS CONFERENCE REGARDING THE NASD
        WASHINGTON, DC -- AUGUST 8, 1996



        This is a good day for investors, and a good day for our
markets.  Today we are announcing the settlement of an
enforcement action against the National Association of Securities
Dealers, which operates and oversees the Nasdaq stock market --
the second largest market in America.

        Nasdaq is a powerful engine of growth for our economy.  It
is home to some of the largest companies in the world, and some
of the smallest.  It provides millions of Americans with the
opportunity to share in these companies' growth.

        But markets exist by the grace of investors.  When those who
direct them lose sight of that cardinal rule, and sacrifice
investor interests on the altar of short-term gain, then far from
helping their market, they hurt it.  History regularly attests to
this truth: witness the New York Stock Exchange in the 1930s, the
American Stock Exchange in the 1960s, and now Nasdaq, in the
1990s.

        During an 18-month investigation, the Commission found
serious shortcomings in the way this market has operated.  In a
few moments, the Commission's Director of Enforcement, Bill
McLucas, will describe the laws that were violated, as well as
the details of our settlement.  I want to set the context for
this action, and talk about the future.

        Our securities markets operate under a "self-regulatory"
system.  Markets serve an important public interest, and deserve
public oversight; but markets are also innovative and fast-
moving, and easily stifled by the heavy hand of government.

        So Congress arrived at a formula in which the industry
polices itself, with SEC oversight.  This keeps us out of most
day-to-day affairs, and allows us to keep our hands off, but our
eyes open.  And on those rare occasions when self-regulation goes
off track, the SEC must act in the public interest.

        This is one of those occasions.

        I will state it simply and up front.  We have found a
widespread course of conduct among market makers to coordinate
their quotes.  Investors paid too much, and received too little ,
when they bought and sold stock on Nasdaq.  New traders were, as
a matter of course, trained in this fashion.  Over time, this
practice became the expected standard.  In some instances, those
who did not comply were harassed and penalized, even if they had
acted in the best interest of investors.

        This culture of collaboration subverted the price mechanism
and curtailed competition.  It raised the cost of capital and
undermined market efficiency.  It hurt investors and damaged the
reputation of Nasdaq.

        Where was the NASD, the cop on the Nasdaq beat?

        The NASD was not blind to these practices in the
marketplace.  It simply looked the other way.

        As the issue of the pricing convention was brought to the
attention of the NASD, as the press and others raised it with
increasing frequency, the NASD sounded no alarm; it conducted no
investigation.

        Nor was the pricing convention the only unacceptable
practice.  The NASD failed to ensure the accuracy and fairness of
quotation and transaction information -- the backbone of
securities trading.  It failed to apply certain rules to its
members, and selectively enforced rules against others.  The NASD
allowed the interests of large marketmaking firms to have undue
influence over the conduct of its affairs and the regulation of
its market.

        The evidence -- gathered from hundreds of witnesses,
thousands of hours of tapes, and more than a million pages of
documents -- shows that the NASD did not fulfill its most basic
responsibilities -- and I quote from its charter: to promote
just and equitable principles of trade for the protection of
investors.   On the contrary, American investors were hurt --
large and small, sophisticated and inexperienced, institutional
and individual -- all were hurt by these practices.

        Nor has the SEC emerged unscathed.  To the extent these
practices took place on our watch, we should have acted sooner.
We, as well as the NASD, need to be faster and more vigilant, to
assure that the public interest is protected.

        So far, IÆve talked about the past.  But a brighter future
lies ahead, and in fact has already begun.  Both the SEC and the
NASD are taking steps to assure that investors can have full
confidence in our markets.

        One year ago, the NASD commissioned a blue ribbon committee
under former Senator Warren Rudman to examine this SRO and make
recommendations.  Chief among those was the reorganization this
spring of its corporate structure, and the creation of a new
regulatory subsidiary, NASDR.  The Board of the NASD now has a
majority of public directors, and its operating companies have
boards balanced among all the NASD's constituencies.  The members
of these boards are as highly qualified and dedicated as any
directors anywhere.  They will guard the interests of investors
with energy and enthusiasm.  They have my complete confidence,
and they deserve yours, too.

        In addition, by the terms of our settlement, the NASD will
spend an additional $100 million over the next five years on
regulatory enhancements, in lieu of a financial penalty.  Changes
have already been made in surveillance and enforcement.  These
and other changes made in the context of our settlement will
ensure that the NASD moves into the next century as a vibrant
marketplace and staunch defender of investor interests.

        ItÆs inevitable that some will complain that weÆre hurting
the market by reducing profitability.  ThatÆs the perennial
refrain, uttered at every turning point in the industry, from
registering stock in the 1930s to unfixing commissions in the
1970s.  ItÆs a phony argument.  Far from condemning the dealer
market, our action today affirms it.  Let the firms make as much
profit as they can -- we donÆt care.  All we ask is that prices
be set by competition, not coordination.

        The Commission has also taken steps to sharpen its own
watchdog skills.  More than a year ago, we consolidated our
inspections and examinations functions, including those that
relate to SRO oversight, into a new, more efficient group that is
independent of any operating division.  This will assure a higher
level of oversight of all SROs.

        Comprehensive and lasting reform of this market, however,
requires fundamental change.  The Commission proposed last year a
series of order handling rules that will address structural
problems in all markets.  But I believe they will play an
especially important role in protecting investors on the Nasdaq
market.  We hope to have these rules in place this year.

        Let me now address a few words to the people of Nasdaq.
This is a difficult moment.  But long experience in the industry
has taught me that the vast majority of people who work in it are
good, honest, decent people.  Any system can lend itself to
excesses, especially under the pressures of explosive growth.
But where we find such excesses, we can do no less than to face
them forthrightly and put them behind us.  No one is saying that
the Nasdaq market has been bad for investors, but simply that
it could and should be better for investors.  I look forward to
working together to ensure that it is.

        I would be remiss if I failed also to say a word to the many
dedicated SEC staff who worked on or contributed to this case.
YouÆve done an extraordinary job that will serve our nationÆs
investors well for many years to come.

        If I seem passionate about this issue, itÆs because IÆve
been around the capital markets for most of my life.  I owe
almost everything I have to those markets and IÆve seen firsthand
the enormous good they can do for our communities, for our
economy, and for our nation.  I believe that the historic changes
taking place today and in the weeks and months ahead will result
in the strongest, most innovative, and best-led dealer market in
history, and I will dedicate myself to maki