"THE UNITED STATES AND SOUTH AFRICA: A PARTNERSHIP FOR PROGRESS" REMARKS BY CHAIRMAN ARTHUR LEVITT UNITED STATES SECURITIES AND EXCHANGE COMMISSION SIGNING CEREMONY AT THE FINANCIAL SERVICES BOARD PRETORIA, REPUBLIC OF SOUTH AFRICA MARCH 2, 1995 This is a very proud day. The Communiques and Declarations we have signed are like the very first cables strung across a chasm in order to build a bridge. They are at once a great triumph, and a sign of greater things to come. I thank and congratulate those who contributed to this historic occasion, and I urge us all to build upon these vital links between our two nations. Ours is an important partnership, for a number of reasons. The capital markets of South Africa and the United States are among the largest in the world. And yet, they are not linked together in the ways that we both know they could be, and should be. In part, this is the bequest of history. But as South Africa has shown the world in recent years, it's possible to overtake history, and even to change its course. The time has come for our agencies, our markets, and our people to work together. There is much to be gained on both sides by sharing information, enforcing standards, and facilitating the capital formation process. But there are other reasons why we ought to be working together more closely. We both embrace democratic principles. We've both been blessed with prosperity far in excess of neighboring nations, and we also have rich resources. And yet we face similar problems, including how to widen the circle of opportunity and prosperity. Surely the richest resource we have is neither petroleum nor diamonds, but the talents and dreams of our people. If the 20th century has shown us anything, it is that the best mechanism for unleashing talent and fulfilling potential is the free market. To my mind, a nation can hardly do better for itself and its people than to broaden and deepen its capital markets. That is what our agencies make possible -- today, and every day. It's a simple formula: A market that is perceived to be honest is more likely to attract investors. A market that is run with integrity, under strict priciples of disclosure, is more likely to profit investors. For us, the 52 million Americans who invest are a sort of continuing referendum on the quality of our markets. No nation has a monopoly on wisdom or morality. We believe we have much to learn from each other. Today, I'll try to initiate this exchange of ideas by sharing some of the ways we've been working to strengthen American markets, in terms of both structure and integrity. But that's not to say that our methods are best or should be emulated; quite the contrary, I'm very anxious to hear about your own approaches to the issues I'll raise. Issues like municipal debt: Few American markets have grown as quickly in recent years as our market for municipal bonds. Outstanding issues now exceed $1.2 trillion -- 76 percent of which are held directly or indirectly by individual investors, as compared with 44 percent just a decade ago. This transformation from an institutional to an individual investor market was accomplished without the protections the public requires: disclosure, transparency and the assurance, as far as possible, of integrity in the offering process. We're moving quickly to remedy that. As I speak, the SEC is working to eliminate a practice known as "pay-to-play," by severing the link between political campaign contributions and the awarding of bond underwriting business. Investors deserve a market governed by the invisible hand, not the greased palm. The debt markets are not the only areas we seek to improve; we're also moving against so-called "rogue" brokers. A joint study we did with the exchanges last year showed that only a small fraction of industry professionals were behind most of the problems. Others might have sighed with relief at this result; for us it was a call to arms. In an industry which relies so heavily on investor confidence, there can be no compromise on ethics -- one bad broker is one too many. Even as we implement the recommendations of our first study, we're planning another sweep of the industry. Full disclosure is another factor that is fundamental to market integrity. George Orwell blamed the demise of the English language on politics, but anyone who's ever read one of our mutual fund prospectuses knows there's plenty of blame to go around. Dense prose often rules, with poetry reserved for claims about performance. In light of the enormous popularity of mutual funds, we're working to simplify and standardize prospectuses so that they are not only comprehensive, but also comprehensible. We are exploring the possibility of instituting a risk gauge for mutual funds. And we have encouraged the industry to develop strict rules to govern the practice of personal trading by fund managers. Enhanced disclosure and better accounting should also go a long way toward addressing concerns about derivatives. These much-maligned instruments can provide valuable risk management tools, when properly used and understood. But their complexity, illiquidity, and volatility can introduce significant risks. We've been working with an industry panel to develop a comprehensive set of guidelines, and we hope to have an announcement from them this month. The measures I've outlined thus far will all serve to protect investors. One of my predecessors described the Commission's mandate by saying, "We've got brokers' advocates; we've got Exchange advocates; we've got investment banker advocates; and we are the investor's advocate." In recent years, our responsibilities have expanded enormously as inexperienced investors left the safety of bank deposits to try out the market. Our mission is not to see that they win or lose the game, but rather to help them understand the rules and to ensure that the field on which they play is fair. To this end, we've begun an investor education campaign, using brochures, speeches, television and radio to make sure people are well informed; we have even instituted our own electronic bulletin board accessible through the Internet. Along with these mostly domestic initiatives, we've been working hard to internationalize our markets, with real success. At a time when cross-border listings in other major markets have either hit a plateau or declined, foreign issuer participation in the U.S. market has grown dramatically in the 1990s -- more than 430 foreign companies have entered our public market for the first time, bringing the number of foreign listings to 662. To foster this, we're continuing to reduce costs for foreign companies entering the U.S. market while maintaining high U.S. disclosure standards. First time entrants now have to reconcile only two years, rather than five years, of historical financial information; threshold levels for requiring reconciliations for acquired businesses, or portions of businesses, have been raised and the reconciliation, if required, is simpler; pro rata consolidation is now permitted for joint ventures; cash flow statements prepared in accordance with International Accounting Standard 7 need not be reconciled; six financial schedules have been eliminated; and simplified registration forms were made available for foreign issuers on the same basis as domestic issuers. We believe it's very much in our interest to link up with other markets, and to encourage foreign firms to list on our exchanges. It provides American investors with more choices and more opportunities, and foreign firms with a rich, reliable, and relatively inexpensive source of capital. Internationalization can benefit all of us -- but only if we demand the highest possible standards of integrity. With our signatures today, we demonstrate our mutual commitment to those standards. Were these agreements the culmination of a process already in motion, I could better interpret their significance. But they are a beginning, not an end. They are a commitment to continue and extend the initial understanding we have achieved. A door, once closed, has been opened. A new set of possibilities has emerged. Let us do all we can, together, to transform today's opportunities into tomorrow's economic success stories. # # #