Hearing on "The Competitive Market Supervision Act"

Prepared Testimony of Mr. J. Patrick Campbell
Chief Operating Officer and Executive Vice President
The Nasdaq-Amex Market Group Inc.

2:00 p.m., Monday, February 28, 2000
13th Floor Conference Room - Securities and Exchange Commission Offices
7 World Trade Center, New York, NY

I am J. Patrick Campbell, Chief Operating Officer of the Nasdaq Stock Market. I thank Chairman Gramm and this committee for this opportunity to testify on the effects of, and need to change, securities fees. I will address my comments today to the transaction fees that are charged under Section 31 of the Securities Exchange Act of 1934 on each transaction completed in the securities markets.

By way of summary, we all agree that the SEC needs to be fully funded and provided the means to retain its senior staff. We also recognize that Section 31 fees were set based on a much less active market. Rates of fees to fund the Securities and Exchange Commission (SEC) were set based on market volume in 1996 that has since jumped dramatically. This has resulted in fees that have also jumped to heights far beyond what is needed to fund the SEC. Those fees are paid by investors for the SEC, but are used for other governmental purposes. They comprise a tax because they are charged in excess of the governmental purpose for which they were enacted. The excess collections should be returned to investors to employ toward the continued growth of the economy. A bill to address these fees should not only update the rates based on the current market levels, it should also incorporate a means to adjust the rate when market dollar volume changes in the future.

My testimony will not delve into the technicality of budget issues such as scoring caps, authorizations, and CBO versus OMB estimates; they are highly technical and we leave those aspects in the capable hands of you and your staff. We instead offer to assist your efforts to reduce these fees to an appropriate level in ways that are useful to getting the legislation enacted into law, recognizing that the Members of Congress are in the best position to know what has to be done and how to do it.


Let me briefly outline the role of the NASD in the regulation and operation of our securities markets. Established under authority granted by the 1938 Maloney Act Amendments to the Securities Exchange Act of 1934, the NASD is the largest self-regulatory organization (SRO) for the securities industry in the world. Virtually every broker-dealer in the U.S. that conducts a securities business with the public is required by law to be a member of the NASD. The NASD's membership comprises 5,500 securities firms that operate in excess of 80,000 branch offices and employ more than 620,000 registered securities professionals.

The NASD is the parent company of The Nasdaq Stock Market, Inc., the American Stock Exchange, and NASD Regulation, Inc. (NASDR). These wholly owned subsidiaries operate under the authority of the parent, which retains overall responsibility for ensuring that the organization's statutory and self-regulatory functions and obligations are fulfilled.

NASD Regulation is responsible for the registration, education, testing, and examination of member firms and their employees. In addition, it oversees and regulates our members' market-making activities and trading practices in securities, including those that are listed on The Nasdaq Stock Market and those that are not listed on any exchange.

The American Stock Exchange is the nation's second largest floor-based securities exchange, and is the only U.S. securities exchange that is both a primary market for listed equity securities as well as a market for equity options, index options, and equity derivatives.

The Nasdaq Stock Market is the largest electronic, screen-based securities market in the world. Founded in 1971 as the world's first all electronic stock exchange, it is the original on-line market, and the pioneer in e-commerce. Nasdaq today accounts for more than one-half of all equity shares traded in the nation and, since January of last year, is also the largest stock market in the world in terms of dollar value of shares traded. On February 17 it passed the two billion shares per day mark. Nasdaq lists the securities of 4,748 domestic and foreign companies, more than all other U.S. stock markets combined. There are over 70 million investors in Nasdaq companies.

Nasdaq ended 1999 with its fifth consecutive year of record gains. That year produced 136 trading days where volume exceeded one billion shares traded on Nasdaq. Annual share volume reached 265.6 billion, up from 201.5 billion in 1998 -- a 32 percent increase for the year. The market value of the more than 4,700 companies listed on Nasdaq ended the year at $5.2 trillion, up over 100 percent from year-end 1998. It is not hard to see, with such explosive growth, how estimates of 1999 and 2000 market volume made in 1996 were too low.

Full funding for the SEC

Effective regulation is the bedrock for confidence in the market, and the SEC having sufficient financial and staff resources is key to the maintenance of that confidence.

The NASD strongly supports full funding for the SEC's budget request to Congress for this year. We see the 12% increase planned in the President's FY 2001 budget as a strong signal that the Administration understands the role of the Commission in maintaining healthy securities markets and knows that it must grow to keep pace with its responsibilities. We recommend that Congress enact at least the amounts requested by the President's budget.

The NASD also supports the special pay initiative to help the SEC retain its key staff and reduce employee turnover. We understand the phenomenon that the SEC is experiencing, because we also experience it at the NASD. In times of record market volume, it is increasingly difficult for regulators to retain their staff when private firms are able to offer much higher salaries. High turnover disrupts government regulatory programs, and additional pay flexibility by the SEC should help stem the tide of those leaving for the private sector's financial rewards.

Excessive Fee Collections

Just because we view securities regulation as an essential, vital function of government does not mean that we think investors should pay almost five times what it costs to provide.

Based on SEC and OMB projections, total fees collected by the SEC for this fiscal year will bring in 4.8 times the SEC's budget of $377 million. Of those fees, 65% (mandatory registration, transaction, and tender/merger fees) are deposited into the Treasury's General Fund for use elsewhere in the appropriations process. The 35% remaining (discretionary registration and transaction fees) are offsetting collections that are used to fund the budget requirements of the SEC.

Fees charged on Nasdaq transactions - which were instituted in 1997 - are all offsetting collections and have grown more quickly than anticipated. This year the Office of Management and Budget is estimating that Nasdaq transaction fees alone will total $400 million, $23 million more than the SEC's FY 2000 budget of $377 million. The President's budget for next year, FY 2001, projects Nasdaq fees will grow $26 million larger than the SEC's budget of $423 million. The growth in fees that the NASD collects are shown in the following table:


SEC 31a Fee Collected
Calender Years 97-99
($ Millions)

Source Transaction 1997 1998 1999
OTC Securities Transactions $157.8 $215.8 $368.0
Third Market Exchange Listed $5.3 $26.2 $39.1
Total All Sources $163.1 $242.0 $407.1
% Increase From Prior Year 48.4% 68.2%

This investor overpayment of SEC fees lies beyond what was contemplated by the legislation that established the collections. The statute that created these overpayments, the National Securities Markets Improvements Act of 1996 (NSMIA), specifically sets out that the Section 31 fees it imposed were to fund market regulation by the SEC. Section 405 (a) of NSMIA states:

RECOVERY OF COST OF SERVICES - The Commission shall, in accordance with this subsection, collect transaction fees that are designed to recover the costs to the government of the supervisions and regulation of securities markets and securities professionals, and costs related to such supervision and regulation, including enforcement activities, policy and rulemaking activities, administration, legal services and international regulatory activities.

It is important to bear in mind the state of the stock markets in 1996, when the rates to collect on market transactions were set in NSMIA, and Nasdaq was for the first time required to collect a transaction fee. In 1996 the total dollar volume on Nasdaq was $3.3 trillion. By 1999, dollar volume had increased almost exactly three fold, to $11 trillion. In the one month of January 2000 alone, we have experienced dollar volume that is more than half as large as the entire year of 1996. Since the fees were based on 1996 dollar volumes, the spectacular growth in volume has produced a spectacular growth in Section 31 fees.

We know that it is difficult to estimate trading volume in the stock markets because we continuously review the capacity requirements for the Nasdaq computers. We do not think that the estimates are so difficult to make or update, however, that the government should require investors to pay five times the level of the SEC budget.

Excess Funds Belong to Investors

We believe that the clear public policy should be to allow investors to use their money that is not necessary to fund the SEC to instead invest in companies that fuel growth and create jobs.

The equity markets are important contributors to today's robust economy. Equity markets are one of the primary means of channeling risk capital from investors to the companies who need it. Equity shares allow investors to take part in the profit of firms while at the same time allowing firms to undertake the projects that lead to their growth. It is bad public policy to take money not needed for regulation from investors who would otherwise employ it toward the nation's economic growth.

Moreover, when fees are collected to fund a particular governmental function in excess of what is needed to fund that purpose and those fees are used for general governmental functions, the fees constitute a tax. Here, fees collected ostensibly to fund the SEC result in revenue five times the size of the SEC's budget. The excess fees are spent by the government as general revenue and are a tax on the capital that funds growth in US companies.

We also need to underline that the fee reduction is not a tax reduction for the "rich," because 48% of Americans are now invested in the stock market, and have to pay the additional fees whenever their stocks are traded.

Legislation Needed

We have identified several characteristics needed in a bill to address the fee problem.

Any bill needs to reduce the rate of the fees. The current fee of 1/300 of 1% of dollar volume traded is currently too high because it was set at a time when market dollar volume was about a third of what it is today. A reduction in the rate is an obvious change that should be made.

Further, any bill has to recognize that predicting the future is risky. It should provide for an update of rates and amounts collected to recognize when actual market volume behavior varies from predicted market volume behavior. Projecting the size of market growth, especially more than year out, is something that has confounded the best and most highly paid economic experts on Wall Street -- or anywhere else in the U.S., for that matter. To ignore the difficulty of that task and to not provide for a way to update rates will doom to failure any bill addressing this problem.

Any bill should therefore have a means to update the amounts collected based on changed conditions. Such updates should be employed to raise the amount collected if it appears that it will fall too low to finance the SEC's budget comfortably. Likewise, the updates should also be able to reduce the amount collected if it appears that collected revenue will fall above a prescribed amount.

Finally, any bill has to recognize the real world difficulty of collecting and tabulating fees quickly enough to update the predicted fees for the year.

We have been working with your staff, Mr. Chairman, and need to commend them and you on your efforts to craft a bill that meets these criteria. We have viewed versions of such a bill that have been shared with us, and those drafts demonstrate that you have the best interests of the investors, the SEC, and the industry in mind as the legislation is being written.


In conclusion, we all start from the point that the SEC needs to be fully funded and provided the means to retain its top staff. We also recognize that Section 31 fees were set based on the much lower market volume in 1996, which has since soared. This low base has resulted in fees that have also soared, to heights beyond what is needed to fund the SEC. Those fees are paid by investors for the SEC, but are used for other governmental purposes. The fees comprise a tax because they are charged in excess of the governmental purpose for which they were enacted. They should be returned to investors to employ toward the continued growth of the economy. A bill to address these fees should not only update the rates based on the current market levels, it should also incorporate a means to adjust the rate when dollar volume changes in the future.

Thank you for the opportunity to testify, and I will be happy to answer any questions that you may have.

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