"MUTUAL FUND DIRECTORS AS INVESTOR ADVOCATES"
                REMARKS BY CHAIRMAN ARTHUR LEVITT
        UNITED STATES SECURITIES AND EXCHANGE COMMISSION
           THE SECOND ANNUAL SYMPOSIUM FOR MUTUAL FUND
                     TRUSTEES AND DIRECTORS
                        WASHINGTON, D.C.
                         APRIL 11, 1995

     To speak frankly about other people's reponsibilities is to
come very close to pontificating.  Joseph Kennedy, Sr., who left
Wall Street to become the first Chairman of the SEC, had a clever
way of avoiding the implication that he was holier than his
audience: he used to tell people that, had the Commission existed
just ten years earlier, he might never have become a millionaire. 
He was kidding, of course.

     The truth is, no one has a monopoly on morality.  As long as
we remember that, then we can reason together about your role as
directors and trustees of mutual funds.  

     This Symposium has attracted such distinguished speakers as
Adam Smith, Mike Lipper, George Putnam, and our own Barry
Barbash.  I thought I would try to complement this rich variety
of views by addressing the issue as a citizen and businessman-
turned-regulator.

     I came to the Commission after managing enterprises in such
fields as finance, agriculture, and publishing, and after serving
on the boards of more than a half-dozen major public companies. 
That experience gave me a healthy respect for the structure and
order imposed on market participants by the securities laws.  The
SEC is part of that structure.  But after almost two years as
Chairman, it is clearer to me than ever just how vital a role you
play in maintaining discipline within our markets.  We hold many
obligations in common.

     We share a responsibility to investors.

     We share a responsibility to funds.

     We share a responsibility to the nation.

     And lately, those responsibilities have grown.

     Mutual funds are now a cornerstone of American investment.

     More than 38 million Americans now depend on us -- they've
entrusted their retirement savings, their children's education
savings, and even their ready cash to the investment company
industry.  

     As the industry has grown, so has the number of questions
about its practices -- and it's our task to address them.

     I would characterize the relationship between the SEC and
fund directors as a partnership in the public interest.  Your
supervision complements our oversight -- in fact, the SEC's
abilities as a watchdog pale in comparison with yours.  You're in
an ideal position to monitor new developments and trouble-shoot
problems as they arise.  

     That's why we're so pleased about this Symposium.  All fund
directors may be called upon to take significant action at some
point.  Yours is a complex job that requires enormous diligence,
skill, and responsibility.  You must be prepared to step in at
any time; you must know what to look for; you must know when to
act; and, lest we forget, you must also know when not to act.

     This conference addresses the critical issues facing fund
directors today.  But underneath all those complex questions lies
a simple truth, one that has guided me without fail in both
private and public sectors.  I've learned over the years that
you'll end up on the right side of almost any issue you'll
confront in the securities industry if you make the interests of
investors your guide.

     This formula applies even to your decision to accept a
nomination.  A few basic questions will give you an idea of your
fellow directors' priorities and degree of commitment to
investors.  I don't mean any one of these should be controlling -
- every rule has exceptions -- but they are important questions
to consider.  For example:

     How many times a year does the board meet?  I don't care how
talented you are, it's hard to be a good watchdog if you're only
on limited patrol.  The commitment of adequate time is an
essential requirement for directors.  

     What kind of people are on the board, and how did they get
there?  I'd be especially wary if I saw too many board members
with personal or social ties to the CEO. 

     Is the board conscientious about expenditures and sensitive
to symbolism, or have its members turned imperial, demanding
expensive perquisites?  Are they more concerned about what they
receive than what they contribute?

     Does the board understand where the investment company has
been and where it is headed?  

     Even more important: Do board members speak their minds, or
do they march in lockstep with management?  Board independence is
crucial; strictly defined, it means that directors are
sufficiently removed from conflicts of interest to be able to
take views without regard to management's interests.

     You've heard by now of the bipartisan legislation introduced
last Friday in the House by Congressmen Fields and Markey, to
modernize mutual fund regulation.  One provision would require
that a majority of directors on investment company boards be
independent -- it's about time this was written into law.

     Asserting an independent voice can be made difficult by one
feature of all successful organizations -- "team spirit."  It's a
wonderful thing, but it can lead people to subordinate personal
judgements to those of the group.  That's where fund directors
play an absolutely critical role.  In many cases, it falls to you
to serve as the fund's conscience.  We at the Commission have a
sense of how thankless a task this can be; it's even harder to
stand apart from the team when you're a member of it, as you are.

     But stand apart you must.  How else is a fund manager to
know when a judgement is wrong, or a standard too low, unless
someone with a clear sense of right and wrong has the courage to
question it?  Even one person can make a tremendous difference. 
Thirty years ago, it was common to curry favor with New York City
policemen by offering them "gifts."  One officer couldn't accept
the system; his efforts succeeded in raising law enforcement
standards in New York and throughout the nation.

     Not every question is that clear-cut.  You are in a position
to define and maintain standards for your funds.  I want to talk
to you today about four broad areas of board activism and
involvement: compliance activities; derivatives; "soft dollar"
arrangements; and disclosure.  I think it's useful to keep
directors abreast of the SEC's agenda for the months ahead.

     Compliance is the least concrete of these issues, but the
most important.  It underlies all the others.  The Commission has
been devoting a great deal of attention to all aspects of
compliance.  We recently consolidated all of our inspection
functions within a single Office of Compliance Inspections and
Examinations, to ensure that our program is as cost-efficient as
possible.  Directors ought to be paying at least as much
attention to compliance activities as we are.

     We don't expect directors to be involved with day-to-day
matters, but we do expect you to ask the hard questions.  What
resources has a fund manager devoted to compliance activities? 
The mutual fund business can be a very profitable one.  Isn't it
incumbent upon fund managers to plow some of those profits into
making funds work better, as compliance surely does?  Does the
compliance staff receive the full support of management?  To whom
do they report?  When the auditors report a problem, what is the
reaction of management?  When SEC examiners send a deficiency
letter, how quickly does management respond?

     Asking these questions makes good business sense.  A fund
manager's financial success depends heavily on reputation. 
Compliance problems are suicide -- they can take you off the road
to prosperity and into the vicious circle of bad publicity,
shareholder redemptions, further compliance problems, fewer new
shareholders and so on.

     And speaking of bad publicity, let's move on to derivatives.
A few years ago, few people had heard the word "derivative," and
most did not know what it meant.  Today, "derivative" has become
a household word... and most people still don't know what it
means. 

     When I called upon directors more than a year ago to review
derivatives policies, some people were skeptical.  "That's of
concern to money managers, not directors," they said.  

     Some asserted that I was expecting too much of directors,
asking them to get involved with something as technical as
derivatives.  But like it or not, you're already involved with
something the moment it appears in your fund's portfolio.

     It might be argued -- though not by me -- that the average
American can afford to be ignorant on this esoteric subject; but
in your case, when it comes to derivatives, ignorance is not
bliss -- it's an invitation to disaster.  Consider the casualties
over the last year alone:  Gibson Greetings.  Proctor & Gamble. 
Bankers Trust.  Air Products.  Piper Jaffray.  Orange County,
California.  Barings PLC.  All ended up on the wrong side of some
pretty big bets.

     Let me make it clear that I do not view these as solely "a
derivatives problem," as if derivatives somehow had the power to
force people to invest in them.  As I've said on numerous
occasions, it would be a grave error to demonize derivatives and
blame them for these losses.  Derivatives are not inherently good
or bad -- they're something like electricity: dangerous if
mishandled, but bearing the potential to do good.  What these
spectacular losses highlight for me is the importance of proper
oversight and supervision.  The best defense any system of
investment can have against major loss is an effective risk
management system and stringent internal control mechanisms.  

     If directors don't take the time to understand how
derivatives work, how a fund is using them, how clearly they are
described to shareholders, and what the exposure of shareholders
is -- well, if the investment portfolio begins to explode, those
directors are likely to get burned along with the fund and its
shareholders.

     We've been working with the securities industry and our
fellow regulators to establish voluntary standards for dealers'
use of derivative products.  Earlier this month, we announced the
adoption of guidelines by the 6 securities dealers with the
largest derivatives business.  I commend these guidelines for
your review -- the principles discussed in them may be useful for
funds as well.  

     The use of "soft dollars" is another issue directors would
do well to stay on top of, for it also presents the potential for
problems.  In the typical soft-dollar arrangement, an adviser
routes client brokerage orders to particular brokers and in
exchange, gets research.  More recently, brokers have agreed with
some funds to pay for or provide certain services that funds
normally would pay for directly, including custodian arrangements
and transfer agent services.  

     The Investment Company Act requires directors to request and
review all information necessary to evaluate the terms of the
contract between adviser and investment company.  Because they
may bear upon the reasonableness of advisory fees, soft dollar
arrangements must be disclosed to boards by fund managers.  As
directors, you need to react to this disclosure, because the
practice opens the door to so many valid questions:  Which broker
is being used, and why not another?  What is the value of
services being provided?  How does it benefit shareholders? 

     That brings us to public disclosure, an area in which
directors clearly can make a difference.  Your responsibility for
the fund's disclosure obligations gives you an extraordinary tool
with which to protect investors.  Does the fund clearly describe
its strategies?  Are risks adequately conveyed?  

     As you know, the Commission has taken a special interest in
cutting through some of the dense prose that has come to
characterize mutual fund prospectuses.  The law of unintended
results has come into play: the Commission's passion for
disclosure has interacted with portfolio managers' thirst for
flexibility and lawyers' instinct for ironclad liability
protection.  The result has been prospectuses that are more
redundant than revealing.  

     How can we expect investors to read and understand materials
that even securities lawyers find daunting?  Why not set a
standard:  If board members cannot readily understand the fund's
prospectus, then it's back to the drawing board until the
drafting committee gets it right.  

     The Commission is encouraging the industry not only to use
clearer language in writing prospectuses, but also to organize
information in more accessible ways.  Last year, I announced that
eight major fund groups had stepped forward to pilot a "profile
prospectus," that is, a prospectus that includes a concise
summary of salient points, for clarity and comparability.  We and
our state regulator colleagues now have prototypes in hand, and
we hope that profile prospectuses will be in use in the very near
future.

                          *     *     *

     I hope that I've given you an idea of my views on the
responsibility we share in protecting investors.  I recognize
that not all of you may agree with what I've said.  Some of you
may think I've overstated the obligations of the board.

     In reply, I ask you to remember your critical role as
investor advocates.

     I ask you to remember that you have a constituency, usually
numbering in the thousands.

     Every time you sit down at the table with your fellow
directors, thousands of investors sit with you.

     Every time you stand up for what's right, even if you think
you may be alone, thousands of investors stand with you.

     What's more, the SEC stands with you.  For the actions you
take, and the standards you set, have an impact far beyond any
individual fund.  The 38 million Americans who invest in mutual
funds are counting on you and me to look after their interests.  

     That's a tremendous show of faith.  We must keep that faith
-- in the years ahead just as well as in years past.  I'm sure we
will.

     Thank you very much.

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