Senate Banking, Housing and Urban Affairs Committee

Subcommittee on Securities

Hearing on Fees Collected Under the Securities Act of 1933

Prepared Testimony of Mr. Marc Lackritz
Securities Industry Association

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

Chairman Grams, Senator Dodd, and Members of the Subcommittee, I am Marc Lackritz, President of the Securities Industry Association(1). Thank you for inviting the SIA to testify at this hearing on the subject of securities transaction and other fees. This is a subject on which the Chairman of the full Committee, Senator Gramm, has been a leader for a number of years.

Chairman Grams, this is the first opportunity the SIA has had to testify before the Securities Subcommittee since you became its new Chairman. We greatly appreciate your interest in the subject of today's hearing and, more broadly, your interest in fair, efficient and internationally competitive securities markets. We look forward to working with you on this issue and others that may come before the Subcommittee in this Congress.

Senator Dodd, we also are grateful for the work you have done to reduce regulatory burdens and reduce costs to investors ­ both during your earlier service as Chair of this Subcommittee and, now, as its Ranking Democrat. We appreciate your continued interest and involvement in issues affecting the securities markets.

We believe it is critical that Congress examine the issue of SEC fees, because the facts and assumptions on which enactment of the current statutory fee structure was based have changed. Fees that were developed several years ago to fund the cost of regulating the securities markets now exceed those costs to such a degree that they constitute a tax on capital formation, and a special tax on every American investor and issuer.

Our securities markets serve as a strong engine of growth and job creation for our economy, furnishing the seed capital for start up companies, providing the liquidity essential to bring investors into the market, and creating savings and investment vehicles for millions of Americans. Today, forty-eight percent of U.S. households own stock, directly or indirectly. By the year 2000, the number of individuals who own stock is likely to exceed 80 million. The more than 600,000 men and women who go to work in the securities industry every day work hard to ensure that we have the fairest, deepest and most liquid securities markets in the world.

We know that our markets have been made better, and fairer, by the presence of a strong and effective Securities and Exchange Commission. And, because it is in our interest ­ and, more importantly, in the public interest ­ to have an effective SEC, the SIA has been a strong supporter of full funding for the agency, so that it can carry out its important mission of investor protection. In the past, the SIA has supported full funding for the SEC, even at times when budget freezes and budget cuts were being pressed on all federal agencies.

Three years ago, the industry was asked to step up to the plate and pay additional fees in order to help Congress move to a more reliable funding mechanism for the SEC. We agreed to do so, because we believed it was in the long term interests of our markets. The fee structure adopted as part of the National Securities Markets Improvement Act of 1996 for the first time assessed transaction fees on the NASDAQ markets, establishing parity in the fees assessed on exchange and NASDAQ markets. (2)

While it was expected that, as a result of these changes, the fees paid by investors and the industry would increase in the near term, the ultimate goal of NSMIA's fee provisions was to bring fees collected by the SEC more in line with the cost of running the agency.

But, at the time these provisions were enacted, no one anticipated the explosion of market activity that has taken place over the past several years, and that appears to be continuing and increasing.

While average daily trading volume in 1996 on the exchange, NASDAQ and regional markets was a billion shares a day, by 1998 it had risen to 1.5 billion shares a day. Total annual share volume in these markets was 261 billion shares in 1996; by 1998 volume had risen to 400 billion shares traded annually ­ a 50% jump in just two years.

During this period, SEC appropriations have risen in an effort to give the SEC sufficient resources to oversee the markets and enforce the federal securities laws. However, the increase in transaction and other fees paid by investors, issuers and the industry has far exceeded the increase in the cost of running the SEC. The following chart sets forth the fees collected by the SEC during fiscal years 1996-1998 and estimated to be collected during the current and next fiscal year (including section 6(b) fees, section 31 fees, and other fees), compared with the amounts appropriated or requested to be appropriated to the SEC during these years (dollar amounts in millions):(3)
§ 6(b) § 31 Other Total SEC Budget
FY 1996 $ 575 $ 134 $ 65 $ 774 $297.4
FY 1997 653 274 63 990 305.4
FY 1998 1,034 632 114 1,780 315.0
FY 1999 (est.) 1,040 432 50 1,522 337.4
FY 2000 (est.) 1,079 491 50 1,620 360.8 (Req.)

Fees now paid by investors, issuers and the industry amount to five times the cost of running the SEC. In 1998 alone, while the SEC's budget was just over $315 million, securities registration, transaction and other fees collected by the SEC totaled more than $1.7 billion. From FY 1998 through FY 2000, if the present trend continues, the amounts paid by investors, issuers and the industry will have exceeded the SEC's budget by more than $3.8 billion. We do not believe it is in the interest of investors ­ or in the interests of our capital markets more broadly ­ for these fees to so grossly dwarf the regulatory benefits received. These fees drain capital from the private markets ­ removing it at the very beginning of the capital raising process -- and diverting it into the U.S. Treasury.

This is real capital that could be used to fund new businesses, to build plants, to create jobs, and to add to the national wealth. But, instead of being allocated by market forces in the private sector, it is "found" money, to be allocated by the U.S. government.

I would remind the Subcommittee that, while this situation has arisen as a result of legislation passed by the Congress, the result certainly was not intended. In fact, the result could not be farther from Congressional intent.

When Congress adopted NSMIA's fee provisions, its intent was clear. The language of section 6(b) states that the registration fees to be collected by the SEC under that section "are designed to recover the costs to the government of the securities registration process, and costs related to such process. . .." The language of section 31 states that the transaction fees to be collected by the SEC "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. . . ."

Unfortunately, the fees have exceeded the cost of regulation; they have unfairly diverted resources which could be used more productively elsewhere in our economy.

There may be some who believe that, since the U.S. stock market is at an all time high, U.S. investors and issues somehow can, or should, pay these fees. So what if they pay a little more here or there?

It simply is not right to charge investors, issuers and the industry five times the cost of regulation. The securities industry has demonstrated that we are more than willing to pay the cost associated with regulation. But a tax by any other name should not fall disproportionately on investors, savers, retirees, issuers, and the securities industry by accident, or because of changed circumstances. In short, this kind of levy should not be allowed to simply "happen."

Mr. Chairman, we urge you to craft a solution that will better align fees with the cost of regulation. We have confidence that Congress, once it reviews the facts, can make a decision that is in the interest of millions of investors. We commit to you to work with this subcommittee to find such a solution.

The securities industry is faced with a number of challenges in the immediate future: how to make a successful conversion to the Year 2000, so that it is seamless for investors and issuers; how to ensure that investors and issuers benefit from the explosion in technology and electronic commerce; and how to meet the competitive challenges of globalization. All of these challenges have required, and will continue to require, significant financial investment on our part, as well as the time and efforts of our most talented industry professionals. We intend to meet these challenges, to maintain and enhance the international preeminence of our capital markets, to help fund the continued growth of the U.S. economy, and to ensure that investors and issuers have even more opportunities in the next century.

We look forward to working with you on the issue before the Subcommittee today and on the many other issues that you and we no doubt will be discussing over the coming year.


1. The Securities Industry Association brings together the shared interests of more than 740 securities firms to accomplish common goals. SIA member-firms (including investment banks, broker-dealers, and mutual fund companies) are active in all U.S. and foreign markets and in all phases of corporate and public finance. The U.S. securities industry manages the accounts of more than 50 million investors directly and tens of millions of investors indirectly through corporate, thrift and pension plans. The industry generates approximately $300 billion of revenues yearly in the U.S. economy and employs more than 600,000 individuals. (More information about the SIA is available on its home page:

2. NSMIA provided for a gradual reduction over 10 years in filing fees for securities registration statements under section 6(b) of the Securities Act of 1933. The securities registration fee was set at $295 per $1 million in 1998, to be lowered over time to $67 per $1 million in 2007. NSMIA also expanded the reach of securities transaction fees, which previously had been assessed on transactions in exchange-registered securities, to include transactions in NASDAQ markets. The transaction fee, under section 31 of the Exchange Act, was set at 1/300 of one percent during the years 1997 through 2006, and was scheduled to be reduced to 1/800 of one percent in 2007.

3. Where estimates of fee collections are indicated, they are OMB estimates; CBO estimates may differ. SEC appropriations for certain years are stated as the amounts requested; actual funding amounts may differ slightly.

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