Chairman Gramm, Members of the Committee, good afternoon. I am Robert W. Seijas, Co-President and member of the Board of Directors of The Specialist Association of the New York Stock Exchange. I am pleased to appear before you to present the Association's views concerning the transaction fees imposed by Section 31 of the Securities Exchange Act of 1934 and the registration fees under Section 6(b) of the Securities Act of 1933.
The Specialist Association is comprised of 24 broker-dealer firms which include all of the individual specialists of the New York Stock Exchange. Our specialists are at the heart of the auction market of the world's most active stock exchange. The Exchange's auction trading marketplace is the mechanism through which the prices of stocks listed on the Exchange are "discovered" and liquidity is provided to buyers and sellers. We supply liquidity when necessary to the proper operation of the market, acting as buyer or seller in the absence of public demand to buy or sell in our respective specialty stocks. We coordinate orderly trading in those stocks. Over 200 billion shares of stock were traded on the Exchange in 1999 in more than 169 million transactions. Specialists participated as principal, selling for their own accounts, in 13.1% of those transactions, paying approximately $38 million in Section 31 fees last year (an amount we expect to increase to $50 million this year). A total of $290 million was paid in Section 31 fees in 1999 on NYSE transactions by all NYSE member firms and their customers.
Beginning in the 1930s, the federal government, through the Securities and Exchange Commission, has collected fees in respect to the sales of securities registered under the Securities Act of 1933 ("Section 6(b) fees") and in respect to the sales effected in the trading markets subject to regulation under the Exchange Act ("Section 31 fees"). Although these fees were conceived as user fees to defray the costs of federal securities regulation, the amounts collected have exceeded the cost of running the SEC since 1983. As discussed below, those collected amounts now surpass the SEC's budget by more than a factor of five. In short, the Section 6(b) and Section 31 fees have become a general tax on capital raising. Moreover, as I will discuss in a moment, Section 31 fees represent a tax imposed at a particularly inopportune time in the life cycle of a specialist's or market maker's capital.
Before going further, please let there be no misunderstanding. We support continued full funding for the Securities and Exchange Commission, an agency that has overseen our constantly growing, remarkably fair and efficient markets that raise new capital and serve the public investor, contributing to our worldwide reputation for fairness and integrity. What we object to is misuse of the financing mechanism designed to compensate the government for providing that funding — the Section 31 fee — through over-collection of the fee and application of the proceeds to completely unrelated objectives.
As things stand, the Section 31 fee cannot be viewed as anything but a tax on the sale of securities, a purpose for which it was never intended. That tax, although levied in relatively small increments, is creating a near billion-dollar drag on the capital markets. That drag on our markets represents a cost paid by all investors, including the huge number of individual participants in mutual funds, pension plans, and other forms of retirement accounts.
In fiscal 1997, the SEC's collections from Section 6(b) and 31 fees (and all other sources) grew to $990 million, significantly more than three times the agency's budget of $305 million. In fiscal 1999, the SEC's fee collections mushroomed to $1.75 billion. That is, the SEC's fee collections amounted to more than five times its $337 million budget.
To bring transaction fees back into line with the cost of running the SEC, there have been efforts to cap or reduce Section 31 fees. These efforts are supported by, among many others, Americans for Tax Reform, the National Taxpayers' Union, Citizens for a Sound Economy, the U.S. Chamber of Commerce, the Profit Sharing/401(k) Council, the Security Traders Association, the Chicago and Pacific Stock Exchanges, the Securities Industry Association, the NASD, as well as the New York Stock Exchange and our Association.
Also, we expect the trading volume on the Exchange to continue to increase, which will have the effect of increasing the Section 31 tax. In fiscal 1998, the average daily trading volume was 673 million shares. In 1999, it was 809 million shares. To date in 2000, it is 1.054 billion shares. And with decimalization to start later this year, volume will surely increase again by a significant percentage (as it did when the standard trading increment was reduced to 1/16 from 1/8).
The Section 31 tax is unfair particularly to our members because it in effect imposes a tax on the amount of gross revenue, rather than on profits. Thus, our members must pay this tax regardless of whether their business is profitable.
Moreover, the Section 31 "tax" is imposed at a particularly inopportune time in terms of its ultimate effect on market liquidity. Unencumbered by Section 31 fees, revenue generated by specialists and market makers in securities transactions would, in many cases, be put to its normal use and leveraged in a manner allowing these market professionals to provide liquidity to the market in a multiple exceeding the absolute amount of the revenue itself. Thus, investors and the market in general lose more than simply the amount of the Section 31 fees themselves in terms of sacrificed market liquidity.
We would also be wise to remember that we have had the benefit of a thriving and competitive bull market for an unprecedented number of years. During such times, the impact of measures placing inappropriate burdens on capital formation and market activity can be softened or blunted. As is often the case with respect to ill-advised policy, it is only when market conditions eventually decline and liquidity becomes more scarce that the full brunt of a cloaked tax such as the current Section 31 fees will be felt by us all. This will be particularly true to the extent that market prices stagnate or decline, but today's record volume levels remain the norm.
In conclusion, general tax revenue is the objective of other laws, not the Exchange Act. Congressional action to restore the unintended tax now represented by the Section 31 fee to its original purpose — to fund the operations of the SEC, and not for any other type of federal expenditure — is long overdue. We understand that Chairman Gramm is in the process of introducing a bill and we believe that the proposed bill strikes an appropriate balance. It will provide significant relief to investors while ensuring that the SEC is adequately funded. We applaud your efforts regarding this important matter.
The Association is thankful for this opportunity to express its views on the Section 31 fee. Thank you, Mr. Chairman.
I would be pleased to respond to any questions you, other Committee members, or your staff may have.
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