Hearing on "The Competitive Market Supervision Act"

Prepared Testimony of Mr. Leopold Korins
President and CEO
Security Traders Association

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


Chairman Gramm, Members of the Committee, thank you for the invitation to testify before you today on the subject of SEC transaction fees, an issue in which you, Mr. Chairman, and this Committee have taken a leadership role. I do very much appreciate this opportunity to present the views of the Security Traders Association, and I applaud you for scheduling a hearing on this important issue in the first weeks of this legislative session.

I am Lee Korins, President and CEO of the Security Traders Association - the STA is composed of 32 regional affiliates and over 7,700 individual members throughout North America and Europe, and it is the largest group of its kind in the world. Our membership represents all facets of the securities industry. While many members are traders for securities firms and institutions, others are partners, specialists, floor traders, proprietors or registered representatives - all of whom are charged with the responsibility of executing orders at the fairest prevailing prices. The fact is that no one speaks for individual professionals in the securities industry better than STA. It is the only organization that represents, at all levels, the interests of individuals.

Today, I want to briefly discuss:

History of the SEC Funding Structure

In 1996, the Congress enacted the National Securities Market Improvement Act (NSMIA) reforming regulation of the securities and mutual fund markets and reauthorizing the SEC. NSMIA also modified the SEC fee structure - including extension to NASDAQ trades of the transaction fees imposed by Section 31 of the Securities Exchange Act of 1934. The SEC reauthorization was the result of a complex deal worked out between House and Senate authorizers and appropriators, the Office of Management and Budget (OMB), and the SEC, following years of Congressional wrangling over a new SEC funding mechanism. Unfortunately, however, the 1996 legislation has not functioned as intended.


Since the 1930s, the federal government has levied SEC fees on the regulated community, including registration fees authorized by Section 6(b) of the Securities Act of 1933, and transaction fees authorized by Section 31 of the Securities Exchange Act of 1934. These fees were deposited in the Treasury's General Fund as general revenues. The SEC received no credit for collected fees and could not directly use the funds, but rather was funded through an annual appropriation. Since 1983, the SEC has been a net contributor to the Treasury, collecting far more fees than necessary to cover its budget.

In 1990, the budget rules were significantly changed. Specifically, the 1990 Budget Enforcement Act set limitations on specific spending categories and created "pay-as-you-go" procedures to require offsets for decreases in revenue or increases in entitlement spending. These rules put severe restraints on discretionary spending, forcing appropriators to choose among competing programs. The SEC was thus forced to compete for discretionary funding with the Departments of Commerce, Justice and State, which are funded in the same annual appropriations legislation as the SEC. The income collected by the SEC fees did not create any additional funding for the appropriators.

Beginning in 1990, the appropriators decided to respond to the problem of insufficient resources to fund competing programs by imposing annual rate increases in the Section 6(b) registration fee in each year's Commerce, Justice, and State Appropriations Bill. The amounts attributable to such increases were credited against the agency's appropriation account as an offsetting collection. Offsetting collections are deposited in special appropriations accounts, as opposed to the General Fund, and are available to appropriators to finance agency activities. This funding mechanism increased the overall funds available to the appropriators. This practice eventually led to objections by various Members of Congress on both jurisdictional and policy grounds. Since the agency was collecting far more in fees than its budget required, opponents argued that increasing SEC fees constituted a tax. Members began to call for a new SEC funding structure that allowed the government to cover the costs of the SEC's regulatory activities without artificially inflating the cost of raising capital in the markets. In 1993, the House Commerce Committee, under the leadership of then-Chairman Dingell and current Chairman Bliley, crafted a bill which would have established a mechanism by which the SEC would set and collect fees solely to recover the costs of its regulatory activities. The House unanimously passed the bill.

During that same year, the House and Senate again passed an SEC appropriations measure which raised registration fees and credited the amount as an offsetting collection. Both House Ways and Means and House Energy and Commerce Committee members lodged complaints, and language was included in the conference report on the Commerce, Justice, and State Appropriations Bill indicating that the practice would be ended.

Funding Crisis

When the Commerce, Justice, and State Appropriations Bill for FY 1995 came to the floor of the House on June 28, 1994, the bill again contained a provision that would have imposed additional registration fees as offsetting collections. House Members succeeded in striking the provision from the House bill on procedural grounds, and subsequently prevailed in an effort to keep the provision out of the conference agreement. This move left the SEC with an appropriation of $60 million, significantly below the $297 million originally provided by appropriators. The agency indicated that it would have to severely restrict its operations beginning in October 1994 absent Congressional action.

This funding crisis prompted Congress, to pass a stop-gap measure (P.L. 103-352), authorizing a registration fee increase for another year, in order to fund the Commission through 1995. House Report 103-739 indicated that this was done as a one-time fix to avert an SEC shutdown, and contemplated passage in the next Congress of an SEC reauthorization that would "eliminate the need for one-year-at-a-time increases in registration fees." The stage was thus set for an SEC reauthorization that would establish a predictable and adequate fee structure to recover funds solely to offset the cost of the Commission's regulatory activities.

Action in the 104th Congress

In 1995, control of Congress shifted to the Republican Party and the legislative agenda was crowded, leaving unaddressed the SEC fee issue. However, in light of the prior year's funding crisis, the Administration's FY 1996 budget proposal stressed the need for a sound, stable and long-term funding structure for the SEC. The FY 1996 Commerce, Justice, and State Appropriations Bill (H.R. 2076), was vetoed by the President due to unrelated policy disputes, and the SEC's FY 1996 budget was funded by a series of continuing resolutions. Ultimately, Congress and the President agreed to an omnibus spending bill (H.R. 3019) that funded the SEC for the remainder of the year.

In 1996, House Commerce Committee Chairman Bliley (R-VA) introduced H.R. 2972, the SEC Reauthorization Act of 1996. The bill was designed to end the appropriators' practice of funding SEC activities through the yearly ritual of raising registration fees as offsetting collections. The proposal would have reduced 6(b) registration fees over a 6-year period, incrementally extended the Section 31 transaction fees to NASDAQ trades, and reduced the rate for all transaction fees beginning in 2002. In total, the package was projected to reduce fee collections by $751 million by 2002. Initially, a portion of the fees was to be deposited as offsetting collections. Beginning in 2002, all fees would be deposited as general revenue and no fees would be allotted as offsetting collections. Thus, by 2002, the SEC would rely on the allocation made from the funds available for the Commerce, Justice, and State Appropriations Bill. The House unanimously passed H.R. 2972 on March 12, 1996

Mr. Chairman, in 1996 you introduced a similar bill, S. 1855. However, in response to concerns by Senate Democrats and the Administration you and then-Senate Banking Committee Chairman D'Amato (R-NY) agreed to postpone consideration of the legislation. Your colleagues and the Administration expressed concern that ending the offsetting collections funding practice would require appropriators to fund the SEC's full budget out of the General Fund, subject to the discretionary spending caps, forcing reductions in other programs.

The House passed H.R. 3005, the Securities Amendments of 1996, on June 19, 1996, but not before adding the SEC reauthorization provisions originally embodied in H.R. 2972. The Senate amended and passed H.R. 3005 without the fee provisions on June 27, 1996, setting up a conference in which the SEC fee issue would have to be resolved. The fee issue was highly controversial in conference. Negotiations among House and Senate authorizers and appropriators, the OMB, and the SEC held up the bill for weeks and threatened to entirely derail the legislation. An agreement was finally reached on the fee issue and the bill was passed in the closing days of the 104th Congress. H.R. 3005 became P.L. 104-290 when the President signed the bill on October 11, 1996.

Under the complex deal worked out in conference, transaction fees remain stable until FY 2007, when they drop dramatically. A portion of the registration fee is deposited as General Fund revenue, and a portion is made available to appropriators as offsetting collections. Transaction fees remain at 1/300th of 1% until FY 2007, when they are reduced to 1/800th of 1%. Beginning in 1997, NASDAQ trades became subject to the full transaction fee rate. While the exchange transaction fees are collected as General Fund revenue, the NASDAQ transaction fees are deposited as offsetting collections. By pushing general revenue losses into the out-years, the new fee structure avoided budget scoring problems.

Current Situation and Impact

Unfortunately, actual fee collections have significantly outpaced the CBO's and OMB's conservative estimates of market growth relied on by this Committee and Congress in enacting the fees. In FY 1997, actual collections from all sources grew to $990 million dollars - over three times the SEC's budget of $305 million. In FY 2000, the SEC's budget is $370 million, but it will collect over $1.8 billion in fees. The new CBO projections show runaway growth in this tax from $1.994 billion in FY 2001 to $3.132 billion in FY 2005. In other words, total SEC fees are projected to raise $12.5 billion over the next five years ostensibly to finance an agency that will require about $2.1 billion in funds over the same period. This continued overfunding, at almost six times projected funding needs, will continue to tax investors and savers unless Congress acts in the very near future.

The primary factor contributing to the transaction fee collection overage is that the projections for the dollar volume growth in the markets have been based on extremely conservative assumptions. Actual transaction fee collections have consistently outpaced the government's projections by a significant amount because of the remarkable dollar volume growth of the markets over the last few years. For example, the average daily volume on the New York Stock Exchange increased from 530 million shares in 1997, to 674 million in 1998, to 809 million in 1999 and is projected to be over one billion in 2000. The NASDAQ has grown even faster with average dollar monthly volumes climbing threefold over the same period.

With growth like this, it is not surprising that the budget estimates have fallen far short of actual fee collections even as the budget experts scramble each year to revise their estimates upward. Recent Administration budget proposals illustrate the trend:

In short, estimates of these collections are regularly off by 100% or more. Worse still, because the fees are tied to volume, investors will continue to pay more regardless of whether the markets are rising or falling. It just so happens that the fee overages of recent years coincided with a bull market.

Clearly, this is not the scenario this Committee intended when it fought to redesign the SEC funding structure in 1996 to reduce the amount of the fee surplus. I want to emphasize that the issue here is not SEC funding. The issue, very simply, is that the government is taking over five times as much fee revenue as is reasonably needed to fund the SEC's activities. What was explicitly designed to be a user fee has become a large, unintended backdoor tax on investors, savers and the securities markets.

Impact on Securities Professionals

Section 31 transaction fees operate as a tax on the gross trading revenue of securities professionals. One STA member firm which makes markets in about 100 NASDAQ stocks estimated that its Section 31 fee payments amounted to a whopping 60% of OTC trading income over a recent sixteen month period. Another firm found that its Section 31 fee payments were twice the amount of its rental payments for the building housing its trading activities. 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. Because Section 31 fees are in essence a gross sales tax, market makers and specialists may face potential losses in a down market as margins are further squeezed.

Impact on the Markets

Excessive fees also reduce liquidity in the market. The major impact falls on the thinly traded stocks of small start-up companies. Therefore, the fees deter capital from flowing to the entrepreneurial, high technology companies that have driven the new economy and the largest expansion in U.S. history.

Impact on the Investing Public

But ultimately, the investing public shoulders this burden. Section 31 fees are a tax on personal savings and investment in the form of lower return. And as more Americans invest, more people pay this tax. Indeed, recent Federal Reserve data show that the percentage of households owning equities has increased from around 32% in 1989 to 41% in 1995 and to almost 50% in 1998. What is the impact of these fees on people saving through mutual funds or pension plans? Take for example two widely held mutual funds, the Vanguard Windsor II Fund and the Vanguard Growth Fund. Each pays close to one quarter of a million dollars annually in these fees. The returns to state pension plan participants are also hurt by Section 31 fees. For example, according to our calculations, the New York State Teachers' Retirement System pays almost one quarter of a million dollars in Section 31 fees each year. Likewise, Calpers pays millions in fees annually. At a time when the government is encouraging savings and planning for the future, it is inconsistent for it to levy a pernicious tax on investment.


STA urges Congress to take swift, corrective action to eliminate the SEC transaction fee excess and reduce this burdensome and unintended tax on American savers, investors and securities professionals. While this result could be achieved though a number of approaches, STA has committed to support any initiative that produces meaningful relief for all investors. For these reasons, we support the Fossella (R-NY)-Menendez (D-NJ) bill, H.R. 1256, and the Lazio (R-NY)-Towns (D-NY) bill, H.R. 2441. We also support the version of the Lazio-Towns bill that the Subcommittee on Finance and Hazardous Materials reported out by voice vote - with bipartisan support - on February 15.

I want to commend you, Mr. Chairman, on your recent draft proposal to reduce Section 31 fees by over 50%. While the proposal results in fees somewhat more than the SEC budget, it is the most significant SEC fee reduction proposal put forth to date. It goes a long way towards mitigating the negative effects of the current fee system. We strongly applaud the inclusion of a fee cap and floor concept that insures against the unintended over-collection of fees while protecting the SEC from any possible shortfall.

The proposal would return the fee collection system closer to its original purpose, that is, providing a stable source of funding for the SEC.

We are also heartened that SEC Chairman Arthur Levitt testified last March that the fee problem needs to be addressed, and pledged to work with Congress to fashion a solution. As I noted earlier, we want to reduce fees while maintaining adequate funding for the SEC.

In closing, Mr. Chairman, STA applauds you for scheduling this prompt hearing on an issue of great importance to our members across the United States. Thank you, and I will be happy to answer any questions.

Home | Menu | Links | Info | Chairman's Page