"Preserving Municipal Market Trust --The Road Ahead"
               Remarks by Chairman Arthur Levitt
        United States Securities and Exchange Commission
        New York State Government Finance Officers Assn.
                        Albany, New York
                         March 21, 1997


For some New Yorkers, there will always be only one Arthur
Levitt.  No matter what I may achieve in my own life, no matter
what esteem I may earn, it will never approach the esteem with
which my late father is still remembered in this town -- long
after his 24 years as New York State Comptroller.  I'm honored to
be here today to talk about some of the same issues that
concerned him so many years ago.

During his career as Comptroller, my father constantly pursued
initiatives to improve financing practices in this State.  He had
an extraordinary appreciation for the pressures placed upon local
finance officers.  Addressing the Municipal Bond Women's Club
almost a quarter of a century ago, he remarked upon the magnitude
of state and local government debt and the extent of the burden
on the borrower, noting, "Our public requirements for capital
facilities seem insatiable.  At the same time the taxpayers
justifiably demand a limit to their burden... Nationwide,
borrowing in this area has increased almost fourfold in the last
decade -- rising from $7 billion in 1960 to about $25 billion in
1971.  It is questionable whether this rate of increase can -- or
should -- be maintained during the present decade.  But there is
no doubt that the demand for new borrowings will continue to be
high."

Well, there may be those who disagreed with my father on any
number of points, but he was not off the mark on the growth in
borrowing -- by 1996, the amount of long term municipal debt
nationwide had grown to more than $183 billion annually.

My father also understood the importance of disclosure -- and
used his office to make available "a pro-forma Official Statement
indicating what local governments can be expected to disclose
about their finances and local economies when selling bonds and
notes."  That was in 1977, when the purchasers of those bonds and
notes largely were banks and other institutional investors.

Today, individual investors hold more than 72 percent of
outstanding municipal bonds, either directly or through mutual
funds.  This fact alone should do much to explain the
Commission's focus on the municipal securities markets.  In 1997,
the holder of a municipal bond is likely to be a parent saving
for her children's education, or planning for his retirement --
or a person using a tax-exempt money market fund  as part of a
personal cash management plan.  The holder may even live in the
issuing community and desire exemption from state and local
taxes, in addition to federal.  But whoever the investors are,
the law mandates, at a minimum, that the disclosure information
provided them be free of misleading statements and omissions.

When I became Chairman of the Securities and Exchange Commission
three and one-half years ago, the need for reform in the
municipal bond market was obvious.   There were conflicts of
interest and practices, like "pay-to-play," that would have
stirred the envy of Boss Tweed -- practices that tarnished the
reputation of the municipal market.  Moreover, investors were
deprived of continuing disclosure and price transparency -- basic
information that is taken for granted in other markets.  At the
beginning of the twenty-first century, the municipal market
appeared to be stuck in the nineteenth.  And yet the importance
of a healthy municipal market is well known to everyone in this
room.

I knew about some of the problems from my own experience. Several
weeks before I came to Washington, three young securities
professionals came to talk to me about their career plans -- I
always try to accommodate young people in that position.  They
worked in the municipal bond department of two major firms.  One
of them commented that the only way he was able to survive in the
municipal bond business was by buying tables at political
fundraising dinners, or by making contributions to officeholders
in a position to award lucrative underwriting contracts.  The
others agreed this was common behavior.  This practice is known
as "pay to play."

How terrible, that even the newest entrants into this very vital
part of the securities business were being assimilated into this
culture of pay-to-play.  Little wonder that confidence in
government is at such a low ebb today.  This experience convinced
me to try to change the practice, before it could be ingrained in
the minds of a generation that will soon be the leaders of the
industry.

When I came to Washington, I had a long talk about pay-to-play
with Frank Zarb, one of the wise men of Wall Street. Frank
suggested a voluntary ban on political donations by firms seeking
underwriting business, and was able to persuade key people in the
industry to sign on.  This was the catalyst for a cultural shift
that took place almost overnight and has since been reinforced
with MSRB rule G-37.

The Board followed with a rule that shed light on consulting
arrangements in the municipal market.  It required written
agreements between dealers and consultants who were retained to
obtain municipal securities business.  It also mandated the
disclosure of such arrangements to issuers and to the MSRB.

One dealer challenged the Board's rule forbidding pay-to-play on
first amendment grounds and was rejected by the courts. Last
March, the Commission brought its first proceeding for violation
of this rule; our action against FAIC Securities, Inc. of Florida
resulted in penalties and disgorgement in excess of  $400,000.

There is more work to be done before the fight against pay-to-
play is won.  Lawyers, in particular, must take steps to sever
the tie between political contributions and bond counsel work.
The practice is almost impossible to defend -- it undermines the
independence and credibility of bond counsel; it gives the
appearance, if not the reality, of unethical conduct at best, and
political corruption at worst.  What a positive statement it
would be if the lawyers were to raise themselves to the same
standard of ethical conduct as the bond dealers.  The Association
of the Bar of the City of New York would like to do just that, by
changing the disciplinary rules in New York State, and by asking
the American Bar Association to consider similar steps later this
year.  How proud we would all be, to see the State of New York
continue to lead the way.

We've made progress on other fronts -- with the help of other
measures crafted with the cooperation and guidance of the
issuers, underwriters, and investors who make this market work.
Only a few years ago, for example, information about the issuer
of a given municipal security was hard to come by.  Today, not
only do investors purchasing most newly offered municipal bonds
receive a copy of the official statement, they also have
continuous access to financial and other material information
contained in central repositories -- a framework for disclosure
established in partnership with muni market participants.

Three years ago, trading information for municipal bonds was
beyond the reach of the average investor.  Starting January 1st,
price and volume information for retail trades of municipal
securities will be publicly available within 24 hours through the
MSRB's Price Transparency Program.  In addition, the Program will
provide regulators with a centralized audit trail of municipal
securities transactions.

The last few years have also brought more than twenty enforcement
actions by the Commission in connection with the offer or sale of
municipal securities.  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, consultants --
and even issuers and elected officials.

The basic rules needed to reform the municipal market are now in
place.  We've worked hard with you and others to reach this
point.  It's up to all of us to do our share and make these
measures work.  For our part, you can count on the SEC to work
with you to make sure issuers and others understand their
obligations under the securities laws -- as we did last year in
preparing the booklet "Questions to Ask Before You Approve a Bond
Issue."

Issuers, for their part, are primarily responsible for the
disclosure in their offerings.  They must live up to that
responsibility by providing accurate and complete information to
investors.  When an issuer fails to meet this serious obligation,
it should surprise no one to see us take action, as we did in
Orange County, California.

Even with the new measures we have put in place, regulation of
the municipal market is limited, compared to other markets.
Brokers and dealers are obliged to have a reasonable basis for
the recommendations they make to their customers, to deal fairly
with them, and to avoid conflicts of interest.  We'll be
monitoring dealer compliance through our Office of Compliance,
Inspections and Examination and we expect the self regulatory
organizations to do the same.

All persons who participate in a municipal securities transaction
should now understand, if they didn't before, that they are
prohibited from making material misstatements or omissions in
connection with the offer, purchase or sale of a security.  It
should now be clear, if it wasn't before, that the antifraud
provisions of the securities laws will be vigorously enforced in
the municipal market as in every other market.  The problems we
continue to look at range from simple failure to disclose
material information to pay-to-play practices and more complex
problems like yield burning.

No change of this magnitude can be expected to go perfectly
smoothly -- there will always be bumps in the road.  Those bumps
do not mean, however, that our direction will change.  The road
thus far has been surprisingly smooth.  The bumps we've
encountered point to a need for better communication.

Here's a good example: Some investors have complained that
issuers, on the advice of their bond counsel or financial
advisors, have reduced information flow to the minimum required
under rule 15c2-12.  Any such advice would be simply wrong-
headed.  Disclosure is the cornerstone of a healthy market.  Our
measures were put in place to move those at the back of the
disclosure pack forward, not to allow those at the front to drop
back.

There have been a few surprises along the way.  This, too, is to
be expected.  Three years ago, when we set out on the path of
reform, no one expected a general obligation issuer bankruptcy of
the magnitude of Orange County.  That experience carried its own
important messages for issuers of municipal bonds.  The need for
great care in management of public funds is as important today as
it was in my father's time.  Over the last two years, Treasury
Secretary Rubin and I have carried that message to municipal
finance officers throughout America.

The Orange County bankruptcy reminded us that the municipal bond
market is based upon trust -- and trust is won with difficulty,
and easily lost.  Trust erodes each time Chapter 9 is considered
as an alternative to responsible but unpopular decisions to
fulfill the obligations incurred by local governments -- such as
making payments to bondholders.

There are also more subtle ways to erode trust -- such as the
disturbing use of "eminent domain" calls by some issuers to
refinance outstanding debt, callously breaking faith with their
bondholders.  A handful of small issuers have tried using this
strategy recently, as an end-run around restrictions that
otherwise prevent them from calling their bonds.  These townships
don't demolish public buildings -- but they do demolish the
public trust.

Such short-sighted maneuvers jeopardize the municipal market's
hard-earned reputation for credit quality.  That reputation
assures issuers of a receptive market for their offerings and
thus an efficient source of funds.  If commerce runs on certainty
and contract, it follows that the most harmful thing that could
happen to our markets is to breach that trust.  The resulting
skepticism erodes trust for all.  "Eminent domain" deals may save
issuers a few basis points -- but they come at the cost of the
investors who bought the original bonds, not to mention the
market itself.

It should be obvious by now that I inherited my father's passion
for disclosure as well as his belief in the importance of the
municipal market.  I like to think that I also share some of his
sensitivity to the concerns of local governments.  I know these
matters are close to your hearts as well.

The trust on which the municipal market is based can only be
preserved by responsible action -- your responsible action along
with that of every other participant in this market.  The reform
measures we have together put in place should help reinforce that
trust.  But the rules alone will never secure trust -- only the
continuing responsible actions of all participants in the
municipal market will preserve the bedrock of investor confidence
on which these securities depend.  I thank you for your
leadership and support on many of these issues -- and I look
forward to continuing to work with you for the benefit of
American municipalities, American markets, and American
investors.

                          #     #     #