Senate Banking, Housing and Urban Affairs Committee

Subcommittee on Securities

Hearing on Fees Collected Under the Securities Act of 1933

Prepared Testimony of Mr. Robert W. Seijas
Executive Vice President
Fleet Specialists
Co-President of the Specialists Association

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

Chairman Grams, Members of the Subcommittee, good morning. 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 accompanied today by Andrew Cader, Vice President and member of its Board. I am appearing before you to present the Association's views concerning the transaction fees imposed by Section 31 of the Securities Exchange Act of 1934.

The Specialist Association is comprised of 32 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 169 billion shares of stock were traded on the Exchange in 1998 in over 135 million transactions. Specialists participated as principal, selling for their own accounts, in 12.6% of those transactions, paying in excess of $30 million in Section 31 fees last year (an amount we expect to increase to in excess of $40 million this year). A total of $242.6 million was paid in Section 31 fees in 1998 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 ever since 1983. As discussed below, those collected amounts now surpass the SEC's budget by a factor of five. In short, the Section 6(b) and Section 31 fees have become a general tax on capital raising.

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.

When Congressional appropriators began to increase the Section 6(b) registration fees annually in 1990, various members of Congress recognized that the fee increases amounted, in reality, to a new tax because the amounts collected so significantly exceeded the SEC's annual budget. In 1993, the House responded by unanimously passing a bill that, after fiscal 1998, would have required the SEC to set and collect fees for the exclusive purpose of recovering for the government the cost of funding the SEC's regulatory activities. No further action was taken on that bill. A similar effort was made by both chambers of Congress in 1996 in the National Securities Markets Improvements Act, to compel a slow-down and, finally, a reduction in the amounts of Section 6(b) and 31 fees collected. The basic idea of limiting the Section 31 fee to the cost of funding the SEC, however, has proven to be very elusive.

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. To bring transaction fees back into line with the cost of running the SEC, a bipartisan bill was introduced in the House in 1998 to cap Section 31 fees. Another bill was introduced in the House in that year that would have cut the Section 31 fee in half rather than capping it. These initiatives were cosponsored by over 60 House members and one or the other was endorsed by, among many others, the Security Traders Association, the Chicago and Pacific Stock Exchanges, the Securities Industry Association, the NASD, the Profit Sharing/401(k) Council, Americans for Tax Reform, the National Taxpayers' Union, Citizens for a Sound Economy, the U.S. Chamber of Commerce, as well as the New York Stock Exchange and our Association. Neither bill was voted upon.

In fiscal 1998, the SEC's fee collections mushroomed to an astounding $1.78 billion. That is, the SEC's fee collections amounted to five and one-half times its $322 million budget.

Our colleagues of the Security Traders Association have laid out in detail in their written testimony to the Subcommittee the history of how the Section 31 fee has been transformed from an SEC funding mechanism into a general tax and the efforts of members of the House and Senate over the last decade to return the Section 31 fee to its original purpose. We wish to associate ourselves with the STA's recitation of that history and see no need to repeat or elaborate upon it.

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 individually small participants in mutual funds, pension plans, and other forms of retirement accounts.

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 applaud your inquiry into this matter and hope for a solution in the near term. We would support any realistic method of achieving the objective of bringing the revenue collected from the Section 31 fee back into line with the SEC's annual budget.

The Association is thankful for this opportunity to express its views on the Section 31 fee. Thank you, Mr. Chairman.

My colleague, Mr. Cader, and I would be pleased to respond to any questions you, other Senators, or your staff may have.

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