Senate Banking, Housing and Urban Affairs Committee

Subcommittee on Securities

Hearing on Fees Collected Under the Securities Act of 1933

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

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

I. Introduction

Chairman Grams, Members of the Subcommittee, thank you for the invitation to testify before you today on the subject of SEC fees. I do very much appreciate this opportunity to present the views of the Security Traders Association, and I applaud your leadership in scheduling a hearing on this important issue. I also want to commend Senator Gramm, the Chairman of the full Committee, for making this issue a priority for the Senate Banking Committee this year.

I am Lee Korins, President and CEO of the Security Traders Association (STA). I am accompanied today by our esteemed STA Chairman, Mr. Arthur Kearney, who is Director of Capital Markets and a Member of the Board of Directors at John G. Kinnard & Co., a broker/dealer located in Minneapolis, in Senator Grams's home state of Minnesota. STA is composed of 34 regional affiliates and over 7,000 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 over 7,000 individuals.

I just want to take a moment at the outset to commend the SEC and its staff for the admirable job that they do in overseeing the securities markets and securities professionals, and for helping to ensure that the U.S. securities markets remain the safest, soundest, most liquid and efficient capital markets in the world. STA strongly supports full and ample SEC funding.

II. History of the SEC Funding Structure

Public Law 104-290, the National Securities Market Improvement Act of 1996, was signed into law by President Clinton on October 11, 1996. The Act combined securities and mutual fund market reforms with a reauthorization of the Securities and Exchange Commission (SEC). The Act extended the imposition of the Securities Exchange Act of 1934's Section 31 transaction fees to NASDAQ stock transactions. 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.


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 from the Appropriations Committee. 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. The income collected by the SEC fees did not create any additional funding for the appropriators.

Beginning in 1990, appropriators decided to respond to the problem of insufficient resources to fund competing programs by imposing one-year rate increases in the Section 6(b) registration fee in the annual Commerce, Justice, State Appropriations Bill through which the SEC is funded. 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 public 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 unanimously passed H.R. 2239, 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.(1)

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. After several complaints were lodged with the Appropriations Committee by both House Ways and Means and House Energy and Commerce Committee members, language was included in the conference report on the Commerce, Justice, State Appropriations bill conference report indicating that the practice would be ended.

Funding Crisis

The funding situation came to a head the following year. When the Commerce, Justice, State Appropriations Bill for fiscal year 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 frustrated with the Senate's failure to act on the SEC funding issue 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 $59.6 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 the registration fee increase(2)

and offsetting revenue practice for another year, in order to fund the agency 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 bill originated in the House Ways and Means Committee with the support of the House Commerce Committee. 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 agency's regulatory activities.

Action in the 104th Congress

During 1995, the first session of the 104th Congress, control shifted to the Republicans 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 submitted at the beginning of 1995 stressed the need for a sound, stable and long-term funding structure for the SEC. H.R. 2076, the Commerce, Justice, State Appropriations Bill which passed that year, 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. Finally, an omnibus spending bill (H.R. 3019) was passed, after the well-publicized government shut-downs, providing SEC funds 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 ultimately 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 were 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 to the appropriators for Commerce, Justice, State and related programs. The House unanimously passed H.R. 2972 on March 12, 1996.

A similar transaction fee provision was included in a bill also introduced in 1996 by then Senate Banking Securities Subcommittee Chairman Gramm (R-TX), S. 1855. However, Gramm and then Senate Banking Committee Chairman D'Amato (R-NY) agreed to postpone consideration of the SEC reauthorization in response to concerns by Senate Democrats and the Administration. They were concerned 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. The conference report was agreed to by the House on September 28, 1996, and by the Senate on October 1, 1996. 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, registration fees are gradually reduced 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 1/300 of 1% until FY 2007, when they drop dramatically. 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 and must be triggered on each year by Appropriations Act. By pushing general revenue losses into the out-years, the new fee structure avoided budget scoring problems.

1998 Congressional Action

Section 31 transaction fees were explicitly designed to recoup the costs of the SEC's supervision and regulation of the securities markets and securities professionals ­ they were intended to be user fees, not general taxes. However, in fiscal year 1997, actual SEC collections from all sources grew to $990 million ­ over three times the SEC's budget of $305 million.

This situation caused concern among a number of Senate and House Members. Specifically, it prompted former Representative Jerry Solomon, then the Chairman of the House Rules Committee, and Chief Deputy Democratic Whip Bob Menendez to introduce legislation in the House to address the worsening problem of the SEC fee overage. H.R. 4213, the Savings and Investment Relief Act of 1998, would have capped SEC transaction fees at levels closer to those assumed when NSMIA was enacted. In fact, Mr. Chairman, as I understand the legislation, it would have provided the SEC and the Appropriations Committees with $20 million per year more than what NSMIA assumed and what all parties agreed would be needed to adequately fund the SEC.

This bi-partisan legislation was cosponsored by 62 House Members and was endorsed by a myriad of groups, including the STA, the New York Stock Exchange Specialists Association, the Chicago Stock Exchange, the Pacific Stock Exchange, the NASD, the Electronic Traders Association, the Profit Sharing /401(k) Council, Americans for Tax Reform, the National Taxpayer's Union, Citizens for a Sound Economy, the U.S. Chamber of Commerce, the NFIB, and literally dozens of other groups. I should also note that a revised version of H.R 4213 was drafted to comply with budget scoring rules and was revenue neutral.

A separate bill to reduce SEC transaction fees introduced in 1998 would have cut the transaction fee rate in half, from 1/300th of one percent, to 1/600th of one percent. The bill, H.R. 4269, was introduced on July 17, 1998 by Reps. Forbes (R-NY) and Kelly (R-NY). The bill also gained three other cosponsors.

III. Current Situation

Now, Mr. Chairman, the Administration's FY2000 budget shows and the CBO confirms that the situation has only continued to worsen. In fiscal year 1998, actual SEC fee collections ballooned to a staggering $1.78 billion ­ five and one-half times the SEC's $322 million budget. Clearly, this is not the scenario Congress intended when it redesigned 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 in over five times as much fee revenue as is reasonably needed to fund the SEC. What were explicitly designed to be user fees have become large and I believe unintended taxes on capital and the securities markets. Last year, in endorsing H.R. 4213, House Ways & Means Committee Chairman Archer expressed the Committee's view that "these [transaction]'fees' are taxes because they greatly exceed the SEC's regulatory costs." And Full Committee Chairman Gramm recently echoed these sentiments when he stated that excessive SEC fees "amount[] to a general government tax on businesses that are trying to get capital to create jobs." We wholeheartedly agree.

Excessive transaction fees have a negative effect on the securities markets and impact all Americans who save for the future by investing in stocks ­ including mutual fund investors, pension plan beneficiaries, and those who invest through 401(k) plans and other self-directed retirement accounts. Most Americans probably are not even aware that they pay this tax to the government, however, because it is often rolled into overhead costs or management fees. And while these fees might seem small as applied to an individual trade, they are substantial in the aggregate ­ quickly closing in on a $1 billion per year tax on all Americans selling stock.

Excessive SEC fees also have a tremendously negative impact on the securities professionals who comprise STA's membership. The effect is particularly severe for NASDAQ market markers and exchange specialists, who often must trade from their own accounts in order to fulfil their legal responsibility to maintain orderly markets and to provide customers with on-demand liquidity. Section 31 transaction fees operate as a gross receipts tax on these 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 percent of OTC trading income over a recent sixteen month period. Another firm found that its section 31 fee payments were a greater expense than its rental payments for the building housing its trading activities.

I should also note that it appears 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. The transaction fee overage is not a result of a temporary spike in volume, but is a reoccurring and compounding problem. Without a statutory correction that somehow limits the amount of fees collected, the amount of the fee collection overage will continue to grow exponentially into the foreseeable future.

IV. Conclusion

SEC transaction fees are no longer user fees ­ they have become a gross receipts tax on the sale of securities. We urge 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 will fully support any initiative that produces meaningful relief for all investors, including a rate cut, a cap or another mechanism.

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


1. H.R. 2239, passed on July 20, 1993, would have authorized the SEC to continue to collect general revenues for fiscal years 1994 through 1998, in order to avoid raising the deficit and maintain pay-as-you-go budget scorecard neutrality. After fiscal year 1998, SEC fees would have been set and collected so as not to exceed the costs of running the agency.

2. The fee was continued at 1/29 of 1% of the maximum offering price of the securities, the rate supplied in the FY 1994 Commerce, Justice, State Appropriations Act. Without the stop-gap extension, the rate would have fallen to its statutorily authorized rate of 1/50 of 1%.

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