Senate Banking, Housing and Urban Affairs Committee

Subcommittee on Securities


Hearing on Fees Collected Under the Securities Act of 1933

Prepared Testimony of Mr. Arthur Kearney
Chairman
Security Traders Association


10:00 a.m., Wednesday, March 24, 1999

Good morning, Chairman Grams, Members of the Subcommittee. I am Arthur Kearney, Chairman of the STA. I also am the Director of Capital Markets and a Member of the Board of Directors at John G. Kinnard & Co., a Minneapolis investment company. I must say, Mr. Chairman, that testifying in front of a fellow Minnesotan makes me feel not quite so far from home. I do appreciate the opportunity to be here, and I just wanted to make a couple of brief points.

First, I want to stress that excessive Section 31 fees effect all investors ­ not just professional traders. Institutional investors own over 50% of the all the stock traded in the U.S. ­ this means that individuals who own stock indirectly, such as through a mutual fund or pension plan, pay the bulk of these excessive fees.

Second, I thought that what I might best be able to add here would be some perspective, not as Chairman of the STA, but as an employer in the regional brokerage and underwriting business. Our firm trades NASDAQ stocks and underwrites initial public offerings ­ many in the state of Minnesota. Some of the recent IPOs we have been involved in include Excelsior-Henderson, a motorcycle manufacturer, and Zomax, an optical media software company. We also make markets in approximately 175 NASDAQ stocks. Kinnard employs over 350 people.

As Lee pointed out, section 31 fees operate as a gross receipts tax. This means that fees are paid before federal and state taxes, before salary, and before allocations for overhead. The result is to magnify the impact on our firm's profitability. Changes in the NASDAQ market ­ which include increasing costs pressures associated with the new order handling rules, decimalization and year 2000 computer upgrades ­ are already reducing the profitability of NASDAQ market making activities. Excessive section 31 fees only exacerbate this situation.

Mr. Chairman, excessive section 31 fees negatively impact our trading revenue, and reduced revenues translate directly into fewer jobs. As a manager, when I am looking at reduced revenue from section 31 fees, what it means to me is that I can hire one less analyst, one less trader, one less support staff. Reduced revenues go right to our bottom line, and right to our core business decisions. It's really that simple. Excessive fees also contribute to reduced liquidity in the market. The major impact falls on thinly traded stocks in small and start-up companies.

I promised that I would be brief, so I will end by urging Congress reduce the excessive tax on American investors, and restore SEC transaction fees to their intended purpose: funding the SEC's regulation and supervision of the securities markets. With that, Mr. Chairman, I thank you again for this opportunity to appear before you, and I join with Lee in commending you and Chairman Gramm for your leadership on this important issue.


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