Senate Banking, Housing and Urban Affairs Committee

Subcommittee on Securities

Hearing on Fees Collected Under the Securities Act of 1933

Prepared Testimony of the Honorable Arthur Levitt, Jr.
Securities and Exchange Commission

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

Chairman Grams, Senator Dodd, and Members of the Subcommittee:

I appreciate the opportunity to testify today on behalf of the Securities and Exchange Commission (SEC or Commission) regarding its fee collections and funding structure. The SEC shares the Subcommittee's concern that fee collections are currently well in excess of initial projections. The existing fee structure, last revised in 1996, was the product of many years of negotiations, involving many players with competing interests. However, tremendous market growth in recent years has pushed fee collections far beyond the levels anticipated during those negotiations. The SEC welcomes an inclusive, reasoned dialogue on fee collections and how best to address this problem.

History of Fees

Federal securities laws direct the Commission to collect three different types of fees: registration fees, transaction fees, and fees on mergers and tender offers. Securities registration fees (Section 6(b) fees) are paid by corporations and investment companies when they register securities for sale. These were first enacted at a rate of 1/50th of 1 percent under Section 6(b) of the Securities Act of 1933. The proceeds from this fee go directly to the U.S. Treasury and are unavailable for funding the SEC. Starting in 1990, the Section 6(b) fee rate was increased yearly through the appropriations process. The increase over the 1/50th of 1 percent (called offsetting collections) can be used to partially fund the agency.

Transaction fees (Section 31 fees) are paid when securities are sold. These were enacted at a rate of 1/300th of 1 percent on exchange-listed securities under Section 31 of the Securities Exchange Act of 1934. Proceeds from this fee are also deposited directly in the U.S. Treasury.

Fees on mergers and tender offers are paid by corporations directly to the U.S. Treasury and are not available to fund the agency.

The SEC's fee collections have been a subject of concern since 1983, when the Commission first began contributing more to the U.S. Treasury than was required to fund the agency. In fact, in 1988, this Subcommittee under the leadership of Senator Dodd requested that the SEC examine its fee collections and funding structure. The report prepared by the SEC in response to this request was the first step in the process that eventually led to the compromise reached in Title IV of the National Securities Markets Improvement Act of 1996 (NSMIA).(1)

Fee Agreement

Title IV of NSMIA mandates a fee structure that was the result of extensive negotiations between six different Congressional Committees, the Administration, and the SEC.

In general, the NSMIA fee structure was designed to:

NSMIA set in motion a gradual reduction in Section 6(b) registration fee rates over a ten-year period intended to more closely align fee collections with the funding needs of the SEC. Specifically, NSMIA authorized the Commission to collect securities registration fees at the rate of 1/50th of 1 percent of the aggregate offering price in fiscal year 2006, declining from 1/34th of 1 percent in 1998. In fiscal year 2007, the rate will be further reduced to 1/150th of 1 percent. In addition, NSMIA classified the portion of the Section 6(b) fees in excess of 1/50th of 1 percent (i.e., the portion declining from 1998 to 2006) as offsetting collections that can be used directly to fund Commission operations, subject to prior approval by the Commission's appropriating committees.

NSMIA also provided equity in the application of Section 31 fees by authorizing the SEC to collect these fees on transactions in the over-the-counter (OTC) market involving securities subject to "last sale reporting." Unlike the Section 31 fees imposed on sales of exchange-listed securities, these new OTC fees are classified as offsetting collections and, therefore, can be used to fund Commission operations, subject to approval by the Commission's appropriating committees. Under NSMIA, all Section 31 fees will fall to 1/800th of 1 percent in fiscal year 2007.

Because the fees collected by the SEC are tied -- directly and indirectly -- to market activity, they are nearly impossible to predict accurately. The fee rates established in NSMIA were based on 1996 projections of market activity. However, the tremendous growth in the markets over the past few years has far exceeded the 1996 estimates on which NSMIA was based, resulting in fee collections well in excess of original estimates. Unfortunately, the potential for either excess collections or shortfalls is inherent in activity-based fees.

While the NSMIA fee structure has eliminated the funding uncertainties and crisis situations that surrounded the agency's funding from the late 1980s to the mid-1990s, it has not reduced total collections due to unexpectedly strong market activity.

Budget Enforcement Act

The rules enacted as part of the Budget Enforcement Act (BEA) have restricted efforts to undertake a comprehensive fee reduction. The BEA splits our fee collections into two different categories: mandatory and discretionary. Under the BEA, any fees in existence prior to 1990 are deemed mandatory and are deposited directly in the General Fund of the U.S. Treasury; they are unavailable for SEC use. The SEC's fees that fall into this category are:

These fees, which account for nearly 70 percent of total SEC collections, are estimated to reach nearly $1.1 billion in fiscal year 2000. Because these collections are protected by the BEA rules, they cannot be reduced without a corresponding increase in revenues or decrease in federal spending elsewhere. According to the Congressional Budget Office's (CBO) estimates, to fully repeal these fees, other collections flowing to the Treasury's General Fund would have to increase by $9.6 billion over the next seven years, or spending from the General Fund would have to be reduced by the same amount.

The remaining 30 percent of SEC collections are unaffected by the requirements of the BEA. These "discretionary" fees, available for use by our appropriators under NSMIA, are the fees previously identified as our offsetting collections. Specifically, they are:

Section 6(b) registration fees collected above 1/50th of 1 percent; and

Section 31 fees on transactions in securities subject to "last sale reporting" in the over-the-counter market.

The following chart shows recent CBO estimates of total fee collections broken down between mandatory and discretionary under the BEA.

($ in millions)
Fiscal Year Mandatory Discretionary Total Collections
2000 $ 1,155 $ 501 $ 1,656
2001 $ 1,206 $ 498 $ 1,704
2002 $ 1,260 $ 503 $ 1,763
2003 $ 1,314 $ 516 $ 1,830
2004 $ 1,422 $ 508 $ 1,930
2005 $ 1,544 $ 552 $ 2,096
2006 $ 1,675 $ 601 $ 2,276
2007 $ 783 $ 285 $ 1,068

As the chart illustrates, fee collections are projected to steadily increase through fiscal year 2006, and then fall sharply in 2007 when the final NSMIA fee reductions go into effect.

Fee Reductions

The Commission recognizes the magnitude of this issue, and has tried to reduce fees, where possible, when it is within its authority to do so. The Commission has taken two specific actions to reduce fees and administrative burdens. In 1996, fees for filing certain disclosure documents were eliminated, saving public companies an estimated $8-12 million per year. While this is a small amount relative to the size of the industry, it is significant in reducing the administrative burden on registrants, as well as the SEC. In addition, the Commission responded to industry concerns that there was a double counting of transactions in the over-the-counter market imposing an unfair burden on certain market participants. The Commission encouraged and actively supported changes in industry practices to eliminate this problem and expects the NASD to implement its proposed rule change addressing this issue shortly.


Today, we are faced with fee collections well above the levels anticipated in NSMIA. As stated earlier, CBO's estimates for fiscal year 2000 fee collections are $1.66 billion. Not only is that amount far greater than our budget request of $360.8 million, but 70 percent of that figure is unavailable to fund the agency because of the restrictions imposed by the BEA rules.

We also are faced with many of the same issues that required years of Congressional negotiation to address in the ultimate compromise embodied in NSMIA. Given the difficulties in reaching that compromise, one possible solution is simply to allow NSMIA to do what it was intended to do -- reduce fees gradually over a ten-year period.

However, as these discussions move forward, the Commission believes that any alternatives should consider:

The SEC welcomes this dialogue on fee collections and how best to address this continuing problem. I would like to thank all the interested parties (with whom I have spoken this year) for expressing a desire to see that our agency remains adequately funded regardless of the approach taken.


1 Report submitted in response to the request of the Securities Subcommittee of the Senate Committee on Banking, Housing and Urban Affairs (S. Rpt. 100-105), December 20, 1988.

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