Hearing on "The Competitive Market Supervision Act"


Prepared Testimony of Mr. Keith Helsby
Senior Vice President and Chief Financial Officer
New York Stock Exchange


2:00 p.m., Monday, February 28, 2000
13th Floor Conference Room - Securities and Exchange Commission Offices
7 World Trade Center, New York, NY

Mr. Chairman and Members of the Committee: I am Keith R. Helsby, Senior Vice President and Chief Financial Officer of the New York Stock Exchange. I am pleased to be here today to testify in support of legislation you have proposed to provide significant reductions in the fees collected by the Securities and Exchange Commission.

Transaction fees, also known as Section 31 fees, along with other SEC fees such as those paid on filings of registration of securities and mergers and tender offers, were intended to fund the operations of the SEC. Since 1983, the fees collected have contributed more to the U.S. Treasury than the SEC received in funds appropriated by Congress. The explosive growth of securities market activity in the past several years, along with the extension of the transaction fee to the over-the-counter market, have caused the amount of fees collected to greatly exceed the SEC's budget. These fees should be used to fund the SEC. They should not be used as a windfall for funding unrelated government projects.

Let me make one thing clear from the outset -- the Exchange supports a well-funded SEC. A strong and effective SEC enhances investor protection and bolsters investor confidence. A confident investing public is the underpinning of U.S. securities markets - investors won't flock to markets where they can't be sure they will get a fair deal. The NYSE invests substantial resources in its own self-regulatory program. We do this in order to enhance the NYSE's "brand." Diligent oversight is a "quality assurance" function that keeps investors confident in our market's integrity. The SEC is our partner in this vital function.

We are pleased to see a provision in your bill to provide the SEC with more flexibility to compensate skilled professionals who might otherwise leave for the private sector or for other federal financial regulators with more flexibility to determine pay and benefits. We agree that the SEC should have the same pay authority as that enjoyed by other federal financial regulators such as the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.

The Exchange is the world's largest equity market. Secondary markets are what we know best. As such, my comments on fees will be limited to the transaction fee imposed under Section 31 of the Securities Exchange Act of 1934.

Transaction fees are paid when securities are sold. They have been imposed on securities listed on national securities exchanges since 1934, when average daily volume on the New York Stock Exchange was 1.2 million shares. With the passage of the National Securities Markets Improvement Act of 1996 (NSMIA), they were extended to apply to securities subject to last-sale reporting in the over-the-counter market.

NSMIA restructured various SEC fees with the intention of creating a predictable funding source for the SEC and, over time, reducing the fees collected by the SEC. This legislation created parity of treatment between exchange-listed and over-the-counter securities by extending the transaction fee, previously imposed only on trading of exchange-listed securities, to Nasdaq-traded securities.

NSMIA also added language to Section 31 explicitly stating that transaction fees are "designed to recover the costs to the Government of the supervision and regulation of securities markets and securities professionals, and costs related to such supervision and regulation, including enforcement activities, policy and rulemaking activities, administration, legal services, and international regulatory activities."

NSMIA was intended to bring SEC fee collections, which over time had grown to significantly exceed the Commission's budget, more in line with the level of funding for the SEC appropriated by Congress. However, the changes that have occurred in the markets since the enactment of NSMIA were unfathomable when the law was enacted in 1996. Specifically, market activity has greatly increased to a level unforeseen in 1996, and trading volume has increased substantially since that time.

At the end of 1996, the Dow Jones Industrial Average was 6,448. At the end of 1999, the Dow was 11,497. This represents an increase of 78%. In 1996, average daily trading volume on the New York Stock Exchange was 412 million shares. In 1999, average daily trading volume had risen to 809 million shares - almost a 100% increase. So far this year, the Exchange is trading approximately 1 billion shares per day. As a result of this increased activity, collections of transaction fees are significantly exceeding the levels projected during consideration of NSMIA, and according to the Congressional Budget Office, this trend will continue into the future.

We commend you for your commitment to reforming the fee structure and your leadership in crafting legislation which achieves that goal while maintaining full funding for the SEC.

Transaction fees are currently 1/300th of one percent, and under current law are scheduled to drop to 1/800th of one percent in fiscal year 2007. Your bill would provide a significant reduction in such fees beginning in fiscal year 2001, with a further major reduction in fiscal year 2007. It would provide further safeguards against excess fee collections by requiring the SEC to project fee collections for each fiscal year on a monthly basis, with the possibility of a mid-year revision of the fee rate, or suspension of collections, for that fiscal year.

To understand why fee reform is necessary, one needs only to look at the revenues that the current fee schedule will produce. The President's budget released earlier this month estimates that for the current fiscal year 2000, Section 31 transaction fee collections will be $790 million, and all fees collected by the SEC will total more than $1.8 billion. The SEC's appropriated funding for fiscal year 2000 is $368 million. Thus, transaction fees alone are more than double the SEC's budget, while total fee collections are nearly five times the agency's budget.

These excess fee revenues represent a tax on capital which could be put to more productive economic use in the private sector, such as creating jobs and increasing investments in technology.

Transaction fees are paid directly by investors. They are imposed at the time of sale of securities and add to the cost of each transaction. Each confirmation statement received by investors includes a notation of the payment of a Section 31 transaction fee. Securities firms pay fees collected from their customers to the market where the trade occurred, such as the New York Stock Exchange, American Stock Exchange, regional stock exchanges, or Nasdaq.

Let me briefly describe how such fees are collected by the New York Stock Exchange and ultimately reported to the SEC. Our member firms pay to the Exchange all transaction fees collected from their customers on a monthly basis. These payments are due by the tenth of each month based on trading in the previous month. For example, for a trade occurring today, the securities firm pays the fee to the Exchange by the tenth of March. The Exchange currently reports the amount of fees collected each month to the SEC by the tenth of the following month. Thus, the SEC would know about the fee from today's trade by the tenth of April, under current practices.

As you can see from this example, there is a necessary time lag between trading and SEC knowledge of total fee collections, from the Exchange and from other markets, for each month. The current system has been in place for many years, and there has been no business reason for us to shorten the time frames for collecting fees and reporting them to the SEC. These time frames could be compressed if requirements were changed.

Your bill would create a new reporting requirement which would require changes in the current timetable for collecting and reporting transaction fees. The bill requires that each national securities exchange and national securities association file with the SEC, within ten days after the end of each month, an estimate of the transaction fee required to be paid for transactions during that month. This provision would accelerate the current timeframe in which firms report and pay fees to the Exchange, and in which we report fees to the SEC. We can certainly speed up our reporting of fee collections to the SEC, but note that in doing so, we would need to require our member firms to accelerate their submissions of reports to us. (I will leave it to the member firms themselves to address the feasibility of this.)

The Exchange is interested in making sure the process for possible mid-year changes in the transaction fee rate or suspension of fee collection, based on SEC projections for fee collections for each fiscal year, is administratively workable. We need to ensure that this process takes into account the multi-step process of collecting and reporting transaction fees.

I would like to call your attention to a possible scenario in which there might not be adequate notice to the securities markets and securities firms of a change in the transaction fee rate. As I understand your bill, the fee rate for each fiscal year would be set by Congressional appropriators as part of the SEC's appropriations legislation. If appropriations legislation were not enacted until very close to the beginning of the fiscal year, or even after the fiscal year had begun, there would be little or no advance notice of the change in the fee rate for that fiscal year. We would be happy to work with the Committee to find a workable approach to address this issue.

We are appreciative of the difficulty of crafting legislation to reduce excessive fees on securities transactions while ensuring that the SEC has the funds it needs to be an effective regulator. Your bill balances both of these purposes. We appreciate your efforts and are pleased to support this legislation and work with you for its speedy enactment.

Thank you again for the opportunity to testify on behalf of the Competitive Market Supervision Act. I would be pleased to answer any questions you may have.



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