<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:60359.wais]
SECURITIES TRANSACTION FEES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
FINANCE AND HAZARDOUS MATERIALS
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
H.R. 1256 and H.R. 2441
__________
SEPTEMBER 28, 1999
__________
Serial No. 106-62
__________
Printed for the use of the Committee on Commerce
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COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Finance and Hazardous Materials
MICHAEL G. OXLEY, Ohio, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana EDOLPHUS TOWNS, New York
Vice Chairman PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania ELIOT L. ENGEL, New York
CHRISTOPHER COX, California DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California BILL LUTHER, Minnesota
GREG GANSKE, Iowa LOIS CAPPS, California
RICK LAZIO, New York EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois RALPH M. HALL, Texas
HEATHER WILSON, New Mexico FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Lazio, Hon. Rick, a Representative in Congress from the State
of New York................................................ 6
McConnell, James M., Executive Director, Securities and
Exchange Commission........................................ 18
Menendez, Hon. Robert, a Representative in Congress from the
State of New Jersey........................................ 10
Material submitted for the record by:
Lew, Jacob J., Director, Office of Management and Budget,
letter dated October 7, 1999, to Hon. Michael G. Oxley..... 28
(iii)
SECURITIES TRANSACTION FEES
----------
TUESDAY, SEPTEMBER 28, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Finance and Hazardous Materials,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:10 a.m., in
room 2123, Rayburn House Office Building, Hon. Michael G. Oxley
(chairman) presiding.
Members present: Representatives Oxley, Largent, Lazio,
Shimkus, Fossella, Blunt, Ehrlich, Towns, Stupak, and Luther.
Staff present: Brian McCullough, professional staff member;
David Cavicke, majority counsel; Robert Simison, legislative
clerk; and Consuela Washington, minority counsel.
Mr. Oxley. The subcommittee will come to order.
The Chair will recognize himself for an opening statement.
This subcommittee held an oversight hearing at the end of
July to examine the impact of the explosive growth in the
securities market on fee collections. We heard testimony from
the affected industry that bears a large share of the tax
burden. Many of us were already aware that fees assessed on all
securities market participants generated over $1.7 billion in
fiscal 1998, and a similar amount is expected to be collected
this year.
Charging investors and market participants nearly $3
billion more than the cost of the regulation for the past 2
years borders on criminal. We can all agree that collecting
more than five times the costs of running the SEC is not
something that was ever intended. Even the most optimistic
forecast could not have predicted the exponential growth in
market and volume that has occurred in the past 3 years. The
surplus revenue collected by these fees is a direct result of
this unprecedented growth, and there is no reason to believe
that market volume will decrease. As the markets continue to
move to extended trading hours, move to decimalization, and
more Americans become investors, transaction fee revenue will
continue to increase, and that is precisely why we are
examining possible solutions.
Chairman Bliley recognized the growing problem of excessive
fees several years ago and through considerable effort was able
to enact reform of the fee structure. Already, the decreasing
fee rate applied to securities registrations is having a
noticeable effect. However, because transaction volume never
could have been predicted to increase so dramatically, no
adjustment was made in the law for transaction fees until
fiscal 2007. For this reason, the legislative proposal before
us only affects transaction fees.
In a perfect world we would simply make the changes to
eliminate the entire excess immediately, but this is
Washington. Unfortunately, that means we have other factors to
consider and hurdles to cross to achieve our goal. After the
oversight hearing in July, I asked staff to examine both bills
to provide me with a preliminary overview of each bill. As part
of the record, I am submitting a memo from the staff of the CBO
to committee staff. The memo is not a final or official cost
estimate, but provides us with a reasonable starting point as
we continue to examine viable options to address this problem.
[The information referred to follows:]
September 27, 1999
MEMORANDUM
To: Majority and Minority Staff, House Committee on Commerce
From: Mark Hadley and Hester Grippando
As requested, we have begun to review H.R. 1256, the Savings and
Investment Relief Act of 1999; H.R. 2441, the Fairness in Securities
Transactions Act; and the draft legislation provided to us on September
23, 1999. Each of these proposals would reduce the total amount of
transaction fees that the Securities and Exchange Commission (SEC)
would collect. This memo responds to your request for information on
whether these proposals would affect direct spending and revenues.
All three proposals would affect revenues; therefore, pay-as-you go
procedures would apply. In addition, H.R. 2441 would affect direct
spending. On balance, we expect that H.R. 1256 and H.R. 2441 would have
net costs for pay-as-you-go purposes. We expect that the draft
legislation would lead to small pay-as-you-go savings.
Under current law, the SEC charges national securities exchanges,
national securities associations, brokers, and dealers transaction fees
equal to \1/300\ of a percent of the aggregate dollar amount of sales
of securities. Fees from national securities associations are subject
to appropriation action and are recorded as offsetting collections,
which are credited to appropriations as an offset to discretionary
spending. Fees from other sources are recorded as revenues
(governmental receipts).
H.R. 1256, the Savings and Investment Relief Act of 1999
H.R. 1256 is similar to draft legislation proposed by Congressman
Solomon's staff in September 1998. H.R. 1256 would impose annual limits
on the total amount of transaction fees collected (that is, the sum of
revenues and offsetting collections). The bill specifies as the annual
targets the amounts of revenues projected under current law plus some
specified amounts.
For the Solomon proposal, we estimated that the total limit on
collections was sufficiently large enough to preclude the possibility
that the proposal would affect revenues. We think, however, H.R. 1256
would decrease revenues in some years, because the cap on total fees in
those years is not much above the current projections for revenues. We
think that the annual loss in revenues would be on the order of the
tens of millions of dollars beginning in 2001.
H.R. 2441, the Fairness in Securities Transactions Act
H.R. 2441 would reduce the existing transaction fee from \1/300\ of
a percent to \1/500\ of a percent. The bill would change the budgetary
treatment of transaction fees by turning all transaction fees into
revenues.
The bill also would require that 10 percent of all fees be
deposited as offsetting collections in the account providing
appropriations to the SEC, which would allow the SEC to spend about $50
million annually without additional appropriations action. Such
additional direct spending would be greater than the change in
estimated revenues.
(In addition, we think that there may be a drafting error in this
bill. Under current law, at start of fiscal year 2007 the transaction
fee would fall from \1/300\ of a percent of the aggregate dollar amount
of sales of securities of a percent to \1/800\. Under H.R. 2441, the
fee would remain \1/500\ of a percent through all of fiscal year 2007,
so the bill would increase revenues by about $500 million in that
year.)
Draft legislation provided on September 23, 1999
Like H.R. 2441, the draft legislation would reduce the fee from \1/
300\ of a percent of the aggregate dollar amount of sales of securities
to \1/500\ of a percent for fiscal years 2000 through 2006. The draft
legislation, however, would require that the SEC collect 9.5 percent of
such fees only to the extent provided in appropriations acts. As under
current law, authority to spend the amounts deposited as offsetting
collections would be available only to the extent provided in
appropriation acts. The draft legislation would expire at the start of
fiscal year 2007.
We estimate that the draft legislation would not affect direct
spending but would increase revenues by $1 million a year or less over
the 2000-2004 period.
If you have any questions or concerns, please feel free to contact
either of us. Mark Hadley may be reached at 226-2860; Hester Grippando
may be reached at 226-2720.
cc: Andrew Ehrlich, Congressman Lazio's Office
Justin Daly, Congressman Fossella's Office
Mr. Oxley. Both proposals would achieve very similar
results, but use different approaches. There are benefits to
each method that should be considered. H.R. 2441 uses a rate
reduction which leaves the current structure in place and, it
appears, would be a very simple change to make. H.R. 1256, on
the other hand, utilizes a preset revenue cap. This approach
has the benefit of providing the certainty that the problem
would not get out of hand again, if market volume exceeds our
best estimates.
We heard some initial discussion of the different
approaches by the industry witnesses during the previous
hearing. I look forward to their continued input and look
forward to hearing the views of the Securities and Exchange
Commission on both of these bills today, as well as their
continued input on any legislative action that this
subcommittee contemplates.
That ends the Chair's opening statement.
I now turn to the ranking member, the gentleman from New
York, Mr. Towns for an opening statement.
Mr. Towns. Thank you very much, Mr. Chairman.
I am pleased, Mr. Chairman, to be at today's hearing, which
will focus on an issue which is important to investors, to the
security industry and to my home State of New York. In fact, I
am the principal cosponsor of one of the bills under discussion
today, H.R. 2441, the Fairness in Securities Transactions Act,
which was authored by my good friend from New York, Congressman
Rick Lazio.
The general issue before us today is whether the revenue
from transaction fees imposed on the securities industry have
become so burdensome that they are now an unfair tax on
investors. Certainly in reviewing adjustments in transaction
fees, we must be mindful of the impact of the operations of the
Securities and Exchange Commission. No one, including the
securities industry, believes that the Commission should
function without an adequate budget. Additionally, we must
ensure that any fee adjustments are budget-neutral.
Finally, Mr. Chairman, it is my hope that we will continue
to discuss this issue in the context of the rapid growth of the
securities markets and the great increase in the volume of
trading. I look forward to hearing from our witnesses today as
we attempt to address the important issue of transaction fee
reduction.
On that note, Mr. Chairman, I will yield back.
Mr. Oxley. I thank the gentleman.
Are there further opening statements?
The gentleman from New York Mr. Fossella.
Mr. Fossella. I will ask unanimous consent to submit my
opening statement for the record.
Mr. Oxley. Without objection.
Mr. Fossella. Mr. Chairman, I would just thank you for
having this as a second hearing and to note that once again, we
are all concerned about the tremendous growth in these fees.
Essentially our goals are very simple: To ensure that the SEC
continues to do a fine job of ensuring that our capital markets
remain the most efficient and liquid in the world, and at the
same time acknowledge that the growth in the market and the
volume has just far exceeded what anybody expected.
That is why I want to compliment my distinguished colleague
Mr. Menendez and I for introducing the legislation that would
increase the cap on the fee. It is very straightforward and has
55 sponsors, 21 of whom are on this committee. I would also be
willing to work with anybody to ensure that we cut this tax on
capital, because that is exactly what it is that is passed on
to the investors, and identify ways to fund the SEC, but at the
same time understand that an unnecessary tax on capital is not
good for the liquidity, not good for capital markets, and not
good for investors.
With that, I yield back, Mr. Chairman.
[The prepared statement of Hon. Vito Fossella follows:]
Prepared Statement of Hon. Vito J. Fossella, a Representative in
Congress from the State of New York
Mr. Chairman, I want to thank you for calling this important
legislative hearing on Section 31 fees. I know that you have had a
longstanding interest in this issue, and I commend you for your
leadership on this and many other issues that are important to both
securities professionals and ordinary investors in my district and
across the United States. I share your commitment to addressing the
issue of excessive Section 31 fees in a bipartisan, timely and
meaningful fashion.
At the oversight hearing back in July, this Committee heard
testimony from industry representatives and regulators that the
government collected over $1.75 billion in SEC fees last year, which is
over five times the SEC's budget. The SEC performs an essential
function--admirably I might add--of protecting the integrity of the
U.S. capital markets, and helping them remain the deepest, most liquid
and efficient in the world. Having said that, there is simply no public
policy rationale to justify such an excessive amount of user fee
collections. SEC fees have become a tax on capital formation and on
securities trading. This large, hidden, and unintended tax is paid by
all investors.
The legislation I have introduced with one of our distinguished
witnesses this morning, Congressman Menendez of New Jersey, places a
cap on the collection of Section 31 fees. Once the SEC collects a
specific dollar amount, the fee shuts off. Our legislation, H.R. 1256,
would cap SEC fees at levels closer to what was intended in 1996, when
the various SEC fees were restructured. There are several advantages of
a cap: One, there is certainty. The SEC, securities professionals, and
investors would all know in advance the exact amount to be collected.
Two, the cap would ensure that in years when actual dollar volume is
greater than projected--a situation that has become a virtual certainty
each and every year--there is an upside limit on the amount of fees
that can be collected. I must also add that a fee cap, despite some
claims to the contrary, can be administered without much difficulty.
Mr. Chairman, I am pleased that our bill has 55 cosponsors from
both sides of the aisle, including conservatives, moderates and
liberals--reflecting what I believe is the essentially nonpartisan,
nonideological nature of this issue. I also want to thank my 20
colleagues on the Committee who have cosponsored H.R. 1256.
Since July's oversight hearing, my staff and I have been exploring
various solutions to this excess fee problem. I believe that the
essence of meaningful SEC fee reform is, very simply, to have a fee
structure that raises enough revenue to cover the SEC's budget--and no
more. And while some argue that a rate cut may be the most
straightforward method of achieving a reduction in SEC fees, I am
concerned that a rate cut alone will not fully address the fundamental
problem with the current fee structure: that actual dollar volume
growth in the markets has consistently outpaced--by significant
amounts--CBO's and OMB's projections. Without some sort of mechanism
that would provide for a correction during years in which actual fee
collections exceed projections, a rate cut will not solve this serious
problem. In my view, given trends in the markets, dollar volumes will
continue to grow at unprecedented rates. This will result in the
government continuing to collect far more fee revenue than is needed to
fund the SEC.
This situation led Mr. Menendez and me to opt for a cap on fee
collections that is embodied in H.R. 1256. Now I want to again state
for the record that what I am in favor of is real and meaningful reform
that addresses the fundamental problem of a user fee operating as a
hidden tax on capital. There are a number of ways in which this problem
can be addressed, and I look forward to working with my colleagues on
this Committee, as well as my colleagues in the Senate, to craft a
legislative compromise that will accomplish the objectives of all
interested parties--and one that can be enacted this year. However, I
am concerned that unless any such compromise includes some sort of
mechanism--whether it be a cap or otherwise--which ensures that
taxpayers are not forced to pay more in fees than it costs to run the
SEC, we will have failed to address the central problem.
Thank you again, Mr. Chairman, for holding this hearing. I look
forward to the testimony from our distinguished panel.
Mr. Oxley. I thank the gentleman for his leadership.
The gentleman from Michigan.
Mr. Stupak. Thank you, Mr. Chairman. Thank you for holding
this hearing and for the opportunity to have the hearing on the
issue of transaction fees.
The fees at issue today are crucial to the efficient
operation of our Nation's security markets. Set too high, the
fees become a drag on our economy by making equity transactions
more costly than other financial transactions. Set too low, the
fees do not provide enough resources to the Securities and
Exchange Commission, whose oversight of the market is crucial
to its operation. Thus, the goals of the fee should be to
provide ample resources to the SEC while not creating an undue
burden on the equities market.
Mr. Chairman, this year the SEC is expected to collect over
$1.6 billion in fees. The SEC is funded at $337 million.
Clearly, the current fee is set higher than is required for the
operation of the SEC. We are here to examine the best method to
reduce fees at their appropriate level.
H.R. 2441, the Fairness in Securities Transaction Act,
would reduce the level of the fee paid from the current \1/
300\th of a percent to \1/500\th of a percent. The National
Securities Market Act of 1996 would reduce these fees by 2007.
This bill would reduce the fees quicker, to recognize current
and expected trading volumes.
H.R. 1256, the Savings and Investment Relief Act of 1999,
would set a minimum funding level for the SEC. At the point in
the year the funding level is reached, the SEC would then stop
collecting the fees.
Although I believe both bills are well-intended, I would
have to support the approach taken by H.R. 2441. While I
appreciate the increased certainty for a particular funding
level under the approach taken by H.R. 1256, I believe its
unintended consequences are great.
First, the exchanges have expressed concerns regarding
their ability to create an affordable administrative structure
necessary to collect the amount of fees collected with the
precision required by H.R. 1256. Second, H.R. 1256 would tend
to penalize traders before the cap was reached by making them
more costly than one conducted afterwards. I do not believe it
is appropriate government policy to make trades conducted in
the beginning of the year more costly than those conducted at
the end of the year. Furthermore, it is unclear what effect
this disparity would have on the efficient operation of our
markets and our economy.
Mr. Chairman, I would like to work with you and Mr. Towns
and Mr. Lazio to quickly pass H.R. 2441. I understand the
problem with the bill, with the pay-go, according to the CBO,
so I hope we can work with concerned parties to remedy the
deficiencies.
Mr. Chairman, I will listen to our first witnesses, and
then I have to run up to Health and Environment Subcommittee as
we have some hearings going on there, so I will be bouncing
back all day, but thank you again for the hearing and for the
opportunity to make an opening statement.
Mr. Oxley. Are there further opening statements?
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Mr. Chairman, I commend you for holding this hearing today. The
Commerce Committee has been committed to ensuring that our markets
operate as efficiently as possible. The increasing reliance by
Americans on the securities markets for their retirement requires that
Congress do everything possible to guarantee the integrity and
efficiency of the markets.
To that end, the Commerce Committee moved legislation in 1996 (the
National Securities Markets Improvement Act) that was enacted into law.
That legislation reduced unnecessary regulatory burdens, improved the
efficiency of the markets, and restored the fee structure to its
original intent--cost recovery for regulating our securities markets.
Concerns that fees were no longer ``user fees'', but had risen to
be a tax on investors drove the change in the fee structure. Congress
reduced the registration fee rate back to its statutory level to
eliminate the excess fee revenue. Appropriators reliance on fee revenue
as a funding mechanism was reduced. The outcome: the Securities and
Exchange Commission had a more stable funding structure--a goal the
Commission supported.
Because the markets have experienced phenomenal growth since
enactment of the 1996 legislation, similar concerns regarding the fee
structure have been raised again. I do not disagree that the fee
problem persists. Congress agreed on the public policy benefits in 1996
when the revenue collected was double the cost of funding the SEC. Now
revenue collection of these fees has increased to 5 times the cost of
their Federal regulation. It is impossible to argue the current fee
collection reflects the intent of the 1996 legislation. Overcharging
American investors billions of dollars compels us to reexamine this
issue.
I commend the Gentlemen from New York, Mr. Lazio, Mr. Fossella, and
the Ranking Member of the Subcommittee, Mr. Towns, for their interest
and commitment to addressing this problem. I look forward to hearing
more about their proposals, as well as the views of the Commission.
Thank you, Mr. Chairman.
Mr. Oxley. We then turn to our distinguished panel.
Let me invite to the witness stand our colleague from Long
Island, the shy and retiring gentleman from Long Island, also a
member of the committee, Mr. Lazio, and also the Honorable
Robert Menendez from New Jersey. Both of you are welcome. Since
you are a member of the committee, Mr. Lazio, we will begin
with you.
STATEMENT OF HON. RICK LAZIO, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEW YORK
Mr. Lazio. Thank you very much, Mr. Chairman. Let me begin
by thanking you for conducting these series of hearings,
bringing in not just those of us who serve in the House, but
also industry experts who have been commenting on this, and
later on we will hear from the SEC. I want to thank Mr. Towns
for his leadership on this issue and Mr. Fossella and Mr.
Menendez for their commitment to reducing these fees. I am so
pleased that we have the attention of Mr. Ehrlich as well.
I want to say that this issue is one of great importance to
American investors and to securities markets. As Mr. Stupak has
mentioned, the amount of these fees now collected far exceed
the purpose for which they were intended, the funding of the
Securities and Exchange Commission. The excess fees represent a
tax on capital formation, as Mr. Fossella has noted, and I want
to say again how pleased I am that you have recognized it is
time for Congress to revisit the issue of security transaction
fees.
The two bills before us today will take two different
approaches to this goal. I think this has already been
referenced. H.R. 2441, the bill that myself and Representative
Towns and others have sponsored, and that would reduce
transaction fees from the current \1/300\th of 1 percent to \1/
500\th of 1 percent. H.R. 1256, introduced by Congressmen
Menendez and Fossella and others, provides for a continuation
of the current fee rate with an annual cap on fees collected.
Mr. Chairman, I have been working on this for a couple
Congresses. I have been tugging at your arm now to try and
address this issue, and again I want to thank you for your
concern.
Because of concerns raised about the compliance with the
Budget Enforcement Act, I have made some revisions to my bill.
Citing a memo provided to me yesterday from the Congressional
Budget Office, which the Chairman, I think, has referenced, I
quote that memo: ``the draft legislation would not affect
direct spending, but would increase revenues by $1 million a
year or less over the 2000 through 2004 period.'' In fact, the
CBO preliminarily determined that H.R. 1256, which is based on
a bill which was scored budget-neutral last year, would result
in an annual loss in revenues on the order of tens of millions
of dollars beginning in 2001, because the caps have not been
revised in the bill. I think the importance of this new draft
is that we now have a bill that scores neutral, according to
the Congressional Budget Office.
The revised bill will maintain the same reduced rate of \1/
500\th of 1 percent while changing the allocation of fees
collected between general revenues and offsetting collections.
I believe that this new bill provides the most workable
approach to reducing securities transaction fees while
maintaining the SEC's budget and not imposing burdensome new
requirements on those involved in collecting the fees,
securities firms, securities market and the SEC. Our bill is
supported by all of the major securities and options markets,
groups representing securities professionals, and major
securities firms.
I would like to include in the hearing record a letter from
these groups supporting this legislation, a letter dated July
26, 1999, and I would ask unanimous consent, Mr. Chairman, if
that could be provided for the record.
Mr. Oxley. Without objection.
[The information referred to follows:]
New York Stock Exchange, Boston Stock Exchange, Chicago
Stock
Exchange, Nasdaq Stock Market, The Options Clearing
Corporation,
The Specialist Association, American Stock Exchange,
Chicago Board
Options Exchange, Cincinnati Stock Exchange, Pacific
Exchange,
Securities Industry Association, Merrill Lynch & Co., Inc.,
PaineWebber Incorporated, Prudential Securities
Incorporated
July 26, 1999
The Honorable Rick Lazio
U.S. House of Representatives
Washington, D.C. 20515
Dear Congressman Lazio: On behalf of the above-listed
organizations, we commend you for introducing H.R. 2441, the Fairness
in Securities Transactions Act. This legislation will reduce fees on
securities transactions while maintaining full funding for the
Securities and Exchange Commission. The amount of fees now collected by
the SEC greatly exceeds the SEC's appropriated budget. We believe that
fee revenues in excess of the SEC's budget represent a tax on capital
which penalizes investors and businesses and puts the U.S. securities
markets at a competitive disadvantage. As organizations involved in the
payment and collection of securities transaction fees, or who represent
the market professionals who pay such fees, we have a strong interest
in bringing the fees paid more into balance with the appropriated
budget of the SEC. We applaud your leadership in developing this
legislative approach, which we believe will address the issues raised
by the Budget Act in the consideration of fee reduction legislation.
Your bill is equitable to investors and easy to administer. We also
believe that your bill will resolve concerns that have been raised
about Budget Act problems and will maintain full funding for the SEC, a
high priority for U.S. securities markets and market participants.
We also believe that H.R. 2441 is consistent with the approach
taken in the National Securities Markets Improvement Act of 1996
(NSMIA). NSMIA restructured various SEC fees with the intention of
creating a predictable funding source for the SEC and reducing, over
time, the fees collected by the SEC. This legislation extended the
transaction fee to Nasdaq-traded securities and provided that the fee
will be reduced from the current \1/300\ of one percent to \1/800\ of
one percent in fiscal year 2007.
NSMIA was intended to bring SEC fee collections more in line with
the level of funding appropriated by Congress. This goal has been
thwarted, however, because market averages have greatly increased to
levels unforeseen in 1996, and trading volume has increased
substantially since that time. As a result, actual collections of
transaction fees are significantly exceeding the levels projected
during consideration of NSMIA, and they are projected to do so into the
future. The revenue generated by Section I transaction fees alone in
fiscal year 1998 was $476 million, which exceeded the SEC's entire
appropriated budget of $315 million. In fiscal year 1999, total SEC fee
collections are expected to exceed $1.6 billion, more than four times
the Commission's appropriated funding of $337 million.
Fees collected in excess of the cost to the government of the
supervision and regulation of securities markets and professionals are
in contradiction of the clear and unambiguous Congressional intent
expressed in Section 31(a) of the Securities Exchange Act of 1934.
Section 31(a), which was added as part of NSMIA, clearly states
Congress's intent that transaction fees be used solely to recover SEC
operating costs.
Again, we commend your recognition of this problem and your
leadership in introducing this important legislation. We hope that
early hearings can be held on this bill, and we look forward to working
with you throughout the legislative process.
Sincerely yours,
New York Stock Exchange, Boston Stock Exchange, Chicago Stock
Exchange, Nasdaq Stock Market, The Options Clearing Corporation,
The Specialist Association, American Stock Exchange, Chicago Board
Options Exchange, Cincinnati Stock Exchange, Pacific Exchange,
Securities Industry Association, Merrill Lynch & Co., Inc.,
PaineWebber Incorporated, Prudential Securities Incorporated
Mr. Lazio. Thank you.
For some time now, the SEC has been collecting securities
transactions fees and other fees far in excess of its budget
which is provided through congressional appropriations. This
fiscal year, total SEC fee collections are expected to exceed
$1.6 billion, more than four times the SEC's budget of $337
million.
These fees are paid directly by American investors when
they trade securities. Any fee reduction will benefit directly
the more than 70 million investors who hold stocks individually
or through professionally managed investments such as mutual
funds and 401(k) plans. Excess transaction fees represent an
indirect tax on investors, many of which you know, Mr.
Chairman, are of modest income and modest means.
I favor a strong and effective Securities and Exchange
Commission, and I know that the securities industry has always
supported full funding for the SEC, but it is not fair to have
ordinary investors pay more than four times the cost of
government regulation.
Congress certainly did not intend for SEC fee collections
to so greatly exceed the SEC's budget. When Congress passed the
National Securities Markets Improvement Act in 1996, it
included the statement that transaction fees are designed to
recover the costs to the government of the supervision and
regulation of securities markets. But increased trading volume
and increased stock prices, unforeseen even 3 years ago, have
driven fee collections to record levels.
NSMIA also provided for the eventual reduction of the
transaction fee to \1/800\th of 1 percent for fiscal year 2007,
but that is too long to delay fee relief and too much time to
pay $1 billion a year more than the cost of industry
regulation. We need an interim reduction now, as provided in my
bill, so that this money can be more productively used in the
U.S. economy. American investors deserve congressional action
in the near future. I hope this hearing will be the beginning
of a process to continue to implement important changes to the
SEC's fee structure begun by Chairman Bliley and Chairman Oxley
with the passage of NSMIA in 1996.
In conclusion, I just want to compliment again my colleague
Mr. Fossella. We have a difference of ideas that we offer to
the committee, but it certainly reflects no difference among
each of our positions in terms of the need to reduce these fees
for a more fair allocation for consumers and investors, and so
it does not reflect at all on our personal relationship, which
I am proud is say is very strong.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Rick Lazio follows:]
Prepared Statement of Hon. Rick Lazio, a Representative in Congress
from the State of New York
Mr. Chairman, I thank you for calling this hearing today on
legislation to reduce securities transaction fees. This is an issue of
great importance to American investors and to the securities markets.
The amounts of these fees now collected far exceed the purpose for
which they were intended--funding the Securities and Exchange
Commission. These excess fees represent a tax on capital formation. I
am pleased that you have recognized that it is time for Congress to
revisit the issue of securities transaction fees.
There are two bills before us today which take two different
approaches to this goal. H.R. 2441, the Fairness in Securities
Transactions Act, which Mr. Towns and I have introduced, along with a
number of other Committee members, reduces transaction fees from the
current \1/300\th of one percent to \1/500\th of one percent. H.R.
1256, introduced by Congressmen Menendez and Fossella and others,
provides for continuation of the current fee rate, with an annual cap
on fees collected.
Because of concerns raised about compliance with the Budget
Enforcement Act, I have made some revisions to my bill. Citing a memo
provided to me yesterday from the Congressional Budget Office, ``the
draft legislation would not affect direct spending but would increase
revenues by $1 million a year or less over the 2000-2004 period.'' In
other words, this legislation has no revenue loss--this is a slight
revenue gain. In fact, the CBO preliminarily determined that H.R. 1256,
which is based on a bill which was scored budget-neutral last year,
would result in an ``annual loss in revenues . . . on the order of the
tens of millions of dollars beginning in 2001'' because the caps have
not been revised in the bill.
My revised bill will maintain the same reduced rate of \1/500\th of
one percent, while changing the allocation of fees collected between
general revenues and offsetting collections.
I believe that my revised bill provides the most workable approach
to reducing securities transaction fees while maintaining the SEC's
budget and not imposing burdensome new requirements on those involved
in collecting the fees--securities firms, securities markets, and the
SEC.
My bill is supported by all the major securities and options
markets, groups representing securities professionals, and major
securities firms. I would like to include in the hearing record a
letter from these groups supporting this legislation. (Letter of July
26, 1999, attached at end)
For some time now the SEC has been collecting securities
transaction fees, and other fees, far in excess of its budget, which is
provided through Congressional appropriations. This fiscal year, total
SEC fee collections are expected to exceed 1.6 billion dollars, more
than four times the SEC's budget of 337 million dollars.
These fees are paid directly by American investors when they trade
securities. Any fee reduction will benefit directly the more than 70
million investors who hold stocks individually or through
professionally managed investments such as mutual funds and 401(k)
plans. Excess transaction fees represent an indirect tax on investors.
I favor a strong and effective Securities and Exchange Commission,
and I know that the securities industry has always supported full
funding for the SEC. But it is not fair to have ordinary investors pay
more than four times the cost of government regulation.
Congress certainly did not intend for SEC fee collections to so
greatly exceed the SEC's budget. When Congress passed the National
Securities Markets Improvement Act (NSMIA) in 1996, it included the
statement that transaction fees are designed to recover the costs to
the government of the supervision and regulation of securities markets.
But increased trading volume and increased stock prices, unforeseen
three years ago, have driven fee collections to record levels.
NSMIA also provided for the eventual reduction of the transaction
fee to \1/800\th of one percent in fiscal year 2007. But that is too
long to delay fee relief and too much time to pay one billion dollars a
year more than the cost of industry regulation. We need an interim
reduction now, as provided in my bill, so that this money may be more
productively used in the U.S. economy. American investors deserve
Congressional action in the near future.
I hope this hearing will be the beginning of a process to continue
to implement important changes to the SEC's fee structure begun by
Chairman Bliley and Chairman Oxley with the passage of NSMIA in 1996.
Mr. Oxley. I thank the gentleman.
Now, Mr. Menendez.
STATEMENT OF HON. ROBERT MENENDEZ, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW JERSEY
Mr. Menendez. Thank you, Mr. Chairman. I want to thank you
and Mr. Towns for holding this hearing. I know there are a lot
of pressing matters you would all like to see accomplished by
the end of the session, so I appreciate how seriously you have
taken up this issue.
For more and more Americans from all walks of life, the
securities market has become a major vehicle for savings and
investment. And while we in Congress sometimes have honest
disagreements about how to accomplish those goals, we all agree
that encouraging savings and investment is essential. That is
why what has happened with section 31 fees in recent years is a
trend we need to address.
These fees were intended by Congress to cover the operating
expenses and costs of the Securities and Exchange Commission,
and that is a necessary and valid purpose which I totally, and
I know Congressman Fossella and all of us for that matter,
totally support. Consumers and investment firms benefit from
the market, and it is not unreasonable to ask market
participants to help pay the costs of the very agency that
ensures that the market runs efficiently. However, it is not
reasonable to have these participants pay fees that amount to
five times the funding necessary to keep the SEC operating.
That is no longer a fee, it is a tax.
That is why Congressman Fossella and I introduced the
Savings and Investment Relief Act, H.R. 1256. It is nearly
identical to a bill which I introduced in the last Congress
with Jerry Solomon, the distinguished former Chairman of the
House Rules Committee.
Our approach is straightforward. It simply caps section 31
fees once they have reached the amount necessary to ensure the
SEC is fully funded. We base that amount on the deal reached in
1996 as part of the National Securities Markets Improvement
Act; in other words, the amount the Congress originally
intended. We then added an additional cushion of $20 million
per year. Finally, even beyond that cushion, the cap is
adjustable if the SEC's needs require it, but keep in mind that
for the SEC's needs to go beyond the base cap and the cushion,
it would need to have a rather significant increase in its
budget needs. That is why our bill, I believe, has broad
bipartisan support with 505 cosponsors, 21 of whom are on the
Commerce Committee, and several of whom are members of the
House Democratic and Republican leaderships.
There are those who believe that a transaction fee rate cut
has advantages over the cap Mr. Fossella and I propose because
they argue a rate cut would provide a uniform fee collection
throughout the year and because a cap could cause market
participants to make decisions based on when the cap would kick
in, thus destroying the market. I would like to address those
two major points. Let me take the second one first.
It is not supportable to argue that section 31 fees would
distort a multi-trillion-dollar marketplace. For instance, on a
$15,000 stock trade, the fee is less than 50 cents. Investors
make decisions based on the conditions of the market and the
performance of stocks. The price fluctuation of stock prices
will dwarf the cost of these fees. They are important in the
aggregate, that is why we are all concerned about it, but at
these levels are simply not decisive, I believe, in any
individual transactional situation.
Now, let me take the other point. I argue that it is
actually the rate cut proposal that lacks predictability. That
is because if the CBO overestimates the market growth rate, we
may find at the end of the year that the fees have not
generated the amount necessary to fully fund the SEC, and it
will be too late in the process to correct it. Conversely, if
the CBO underestimates the growth rate, we will soon be right
back where we are today, trying to seek some other form of
relief before the committee. Given that the CBO has,
understandably, rarely predicted the market accurately, and has
usually used overly conservative assumptions of market dollar
volume growth that have significantly understated actual
collections, this is a problem that the rate proposal has that
the Committee needs to consider.
This situation has been and may be further exacerbated as
technological innovations, online investing, greater
participation, the growth of mutual funds, and changes in the
market structure spur even greater and unanticipated dollar
volume growth rates. So unless there is some sort of an
adjustment mechanism installed that accounts for dollar volume
growth rates which differs significantly from the CBO
projections, a mechanism that may be very difficult to develop
given market volatility, the current rate proposal will not
solve the problem. And, of course, if we do consider adding an
adjuster, which I think is one that will seriously have to be
considered if that is the process by which the committee
decides to adopt, one of the key benefits of the rate cut
proposal, namely uniform collections throughout the year, is
undermined, begging the question of why the cap is not better
suited to solve the problem in the first place. That is why I
argue that it is the cap that best provides predictability and
certainty for both consumers and the SEC. Let us solve the
problem without having to revisit it.
Last, Mr. Chairman, let me say that while that is my
strongly held opinion that I share with Mr. Fossella, having
worked on this issue over the last two Congresses, I want to
stress the similarity of purpose we share with our colleagues,
Mr. Towns and Mr. Lazio, who support the rate cut proposal.
Ultimately, our goal is relief for the investor, relief for the
industry, and insuring the SEC's very valid purpose. That is
all--all of those are our mutual goals. We want to make sure,
however, that we give that type of relief, and we look forward
to working with you, Mr. Chairman, and the leadership of the
committee and our colleagues to try to accomplish that goal.
[The prepared statement of Hon. Robert Menendez follows:]
Prepared Statement of Hon. Robert Menendez, a Representative in
Congress from the State of New Jersey
Thank you, Mr. Chairman and Mr. Towns for calling this hearing. I
know there are a lot of pressing matters you would like to move on
before the end of the session, so I appreciate how seriously you have
taken this issue.
For more and more Americans, from all walks of life, the securities
market has become a major vehicle for savings and investment. And while
we in Congress sometimes have honest disagreements about how to
accomplish this goal, we all agree that encouraging savings and
investment is essential.
That's why what has happened with Section 31 fees in recent years
is a trend we need to address.
These fees were intended by Congress to cover the operating costs
of the Securities and Exchange Commission. And that is a necessary and
valid purpose which I totally support. Consumers and investment firms
benefit from the market--it is not unreasonable to ask market
participants to help pay the costs of the very agency that ensures that
the market runs efficiently.
However it is not reasonable to have these participants pay fees
that amount to five times the funding necessary to keep the SEC
operating. That is no longer a fee--it is a tax.
That's why Congressman Vito Fossella and I introduced the Savings
and Investment Relief Act, H.R. 1256. It is nearly identical to a bill
I introduced in the last Congress with Jerry Solomon, the distinguished
former Chairman of the House Rules Committee.
Our approach is straightforward. It simply caps Section 31 fees
once they have reached the amount necessary to ensure the SEC is fully
funded. We base that amount on the deal reached in 1996, as part of the
National Securities Markets Improvement Act--in other words, the amount
the Congress originally intended. We then added an additional cushion
of $20 million per year. Finally, even beyond that cushion, the cap is
adjustable if the SEC's needs require it--but keep in mind that for the
SEC's needs to go beyond the base cap and cushion, it would need to
have a huge and unlikely increase in its budget needs.
That's why our bill has broad bi-partisan support with 55 co-
sponsors, 21 of whom are on the Commerce Committee, and several of whom
are Members of the House Democratic and Republican Leaderships.
There are those who believe that a transaction fee rate cut has
advantages over the cap Mr. Fossella and I propose because, they argue,
a rate cut would provide a uniform fee collection throughout the year,
and because a cap could cause market participants to make decisions
based on when the cap would kick in, thus distorting the market.
To take the second point: It is not supportable to argue that
Section 31 fees would distort a multi-trillion dollar marketplace. For
instance, on an over $15,000 stock trade, the fee is less than 50
cents. Investors make decisions based on the conditions of the market
and the performance of their stocks. The price fluctuation of stock
prices will dwarf the cost of these fees; they are important in the
aggregate, but, at these levels, are simply not decisive in any
individual transactional situation.
And on the first point: I argue that it is actually the rate cut
proposal that lacks predictability. That's because if the CBO
overestimates the market growth rate, we may find at the end of the
year that the fees have not generated the amount necessary to fully
fund the SEC--and it will be too late in the process to correct it.
Conversely, if the CBO underestimates the growth rate, we'll soon be
right back where we are today.
Given that the CBO has, understandably, rarely predicted the market
accurately, and has usually used overly-conservative assumptions of
market dollar volume growth that have significantly understated actual
collections, this is a problem with the rate cut proposal worth
considering.
This situation has been, and may be further exacerbated as
technological innovations, online investing, greater participation, the
growth of mutual funds, and changes in the market structure spur ever
greater and unanticipated dollar volume growth rates. So unless there
is some sort of ``adjuster mechanism'' installed that accounts for
dollar volume growth rates which differ significantly from CBO
projections--a mechanism which may be difficult to develop given market
volatility--the current rate cut proposal will not solve the problem.
Of course, by adding an adjuster, one of the key benefits of the
rate cut proposal--namely uniform collections throughout the year--is
undermined, begging the question of why the cap is not better suited to
solve the problem in the first place.
That is why I argue it is the cap that best provides predictability
and certainty for both consumers and the SEC Let's solve this problem
without having to revisit it.
Of course, while that it is my strongly held opinion--having worked
on this issue over two Congresses--I want to stress that the similarity
of purpose I share with my colleagues who support the rate cut
proposal, is far greater than the differences of method that separate
our bills. This is especially true of my colleagues Mr. Towns and Mr.
Lazio, who have worked very hard on this issue on behalf of America's
investors and savers. I thus look forward to working with them, this
Committee, my Leadership, and with all interested and involved parties,
to find a fair and workable solution to the problem of these excess fee
collections.
Thank you.
Mr. Oxley. Thank both of you for your excellent testimony.
Let me begin with both of you and ask, there has been some
discussion that perhaps we could meld the two approaches
legislatively; that is, to follow the concept of reducing the
fees, and yet have an overall cap at the same time that would
protect us both on the short end and the long end.
Do you have any comments in that regard, and particularly
if that is agreeable, how do we get from here to there to be
able to put that together, just mechanically?
Mr. Lazio. Mr. Chairman, let me comment on that, if I can,
because I was here when we received some testimony suggesting
that perhaps a blend might not be inappropriate.
We have, subsequent to that, made this change in the bill
which did speak to the issue of scoring and the Budget
Enforcement Act, which was a problem. Mr. Stupak had referenced
it in terms of getting a waiver, and I think we have now made
the adjustments so a waiver is no longer necessary.
In my opinion, and I, like Mr. Menendez, would support
either of these methodologies if it was these two or nothing,
but I think that with the change that has been made, building
on the rate reduction or the rate fee that was set back in the
1996 act with the rate reduction set to kick in in 2007, there
is more equity in terms of investor participation. Whether you
trade early or trade late in the year, it seems to me you
should not be punished by paying excessive fees as an investor
simply because you ended up trading earlier in the year. You
have 70 million investors that now participate in the market,
either through mutual funds or retirement plans or through
direct investment. It seems to me as well for SEC, it is not
inappropriate to ask the SEC to be both authorized and
appropriated through this Congress, that the Congress has an
oversight rule over the SEC which it should diligently
discharge.
So while this version, this revised version, continues to
speak to an offset, a 9.5 percent offset, I think in terms of
overall fairness and in terms of ensuring that there is
adequate cash-flow, that this revised bill is superior to a
blend or to H.R. 1256.
Mr. Oxley. I did not hear the last part.
Mr. Lazio. I think my position would be that the revised
bill is a superior version to either a blend of the two
versions or, if I have the number, Mr. Menendez and Mr.
Fossella's bill, I think it is H.R. 1256. I am not sure if it
was a matter of compromise, I think, for the sake of getting
the votes, that would be certainly something that I would not
stand in the way of, but if it was a matter of just currently
what is the best vehicle for getting the reduction and getting
relief to the investors, I think an across-the-board, year-long
rate reduction is the fairest and most effective thing to do.
Mr. Oxley. Mr. Menendez.
Mr. Menendez. Mr. Chairman, I would just say, again, we
have mutual goals, but let me just point out this to the
committee. No. 1 is one of the things that we seek to do
through our legislation is to create predictability, and the
fact of the matter is, once you blend and you have an adjuster
clause, which I think is needed under any set of circumstances
if you adopt Mr. Lazio's approach, then one of the major
advantages of Mr. Lazio's and Mr. Towns's bill is somewhat
undermined, which is that you have uniform collections
throughout the year. The mere fact if you have an adjustor
actually that has to kick it, it really does not provide for
that uniform collection throughout the year, which begs the
question of why have the cap in the first place.
Second, I believe that our fee cap actually creates
predictability, creates predictability for the budgeteers, it
creates predictability for the SEC. And as I understand, part
of what you will hear from the SEC today on both of these bills
is they are concerned about the funding as it relates to them,
and ours clearly provides insurance for them that their budget
will be met, plus. So therefore, while we are certainly open to
compromise, we question whether the nature of it in the first
place doesn't beg the question as to the rate cap being the
more appropriate way to go on pay-go issues, on the question of
predictability, and on the question that if you have an
adjuster at the end of the day, don't you provide for the
uncertainty that some are concerned about in terms of our
legislation, because at some point the fee will be obviously
adjusted so that, in fact, you can meet the necessity of the
SEC.
So therefore, this argument about long-term, steady, one
rate under the Lazio proposal is somewhat undermined at the end
of the day.
Mr. Lazio. Mr. Chairman, if I could just respond briefly.
There is a reason why all of the stakeholders, basically all
the stakeholders, are supporting the approach of H.R. 2441 with
Mr. Towns and myself, and I would say with all due respect to
Mr. Menendez that the revised edition, which includes a 9.5
percent offsetting revenue for the SEC, is no different than
the current version and creates no new cap that would be
similar to the version that would be supported by Mr. Menendez.
It simply is an adjustment that would allow us to score budget-
neutral, and it is based on the CBO conferences that we have
had.
Mr. Oxley. Thank you.
The Chair's time has expired.
The gentleman from New York Mr. Towns.
Mr. Towns. Thank you very much, Mr. Chairman.
Let me ask Mr. Menendez, how do you respond to the fact
that if you trade early, you know, you have to pay the fee, and
if you trade late, you are not penalized? I mean, how do you
respond to that?
Mr. Menendez. Well, Mr. Towns, I would just simply say what
I said earlier, that transaction fees that are substantial in
the aggregate, all of the fees that are collected, which is why
we are all concerned in the first place, because it far exceeds
the need of the SEC, in essence, it is a tax, they are
relatively small as a result of an individual trade, as a
percentage of an individual trade. So I think it is unlikely
that sellers would time their trades until after the fee shuts
off. Stocks are sold primarily for other reasons: a declining
or increasing market, to lock in capital gains, to free up
cash. So I think investors are also not likely to risk having
the value of their holdings decline while waiting for the fee
to shut off.
Moreover, the cap would only serve to reduce the tax on
capital, and any reduction would simply benefit investors. As a
matter of fact, this concept of an annual cap is not
necessarily a new concept. It might be new in the context of
the SEC, but we already have it under the Oil Spill Liability
Trust Fund.
So I think that, in fact, we have an opportunity that will,
in terms of the individual trade, not affect anybody's
judgment. People are going to make those judgments for other
reasons in the marketplace, and at the end of the day, all
investors are benefited because once we have the fee cap, we
have no greater collection of that fee for the rest of the
year, and I don't think that that is going to
disproportionately affect any individual trade in the context
of the small percent. I mentioned earlier in my testimony, for
example, for the $15,000 trade, we are talking about 50 cents.
That is not going to make somebody decide whether or not they
are going to move their trade in order to make sure they take
care of whatever the market conditions are at the time.
Mr. Towns. Let me ask you, what is your problem with the
other bill?
Mr. Lazio. Well, I would say, Mr. Towns, that there are
four or five issues, I think, that separate the two bills. One
is the equity issue. I agree with Mr. Menendez that this would
not likely result in market distortions in terms of people
making decisions about wanting to invest. I think it is an
equity issue, though. The equity issue is why should somebody
who trades later in the year have to pay a different price than
someone who trades earlier in the year? Why should they pay a
higher tax? It seems like it is just patently unfair to
investors to fix this tax based on the timing of their
decision.
Second of all, it is an easier bill to implement. It does
not require additional regulation; it does not require costly
computer reprogramming or other administrative costs by
securities firms, and those are collected fees, stocks or
options exchanges, NASD; it would not require monitoring or
rebates relevant in class action litigation if the cap is not
properly administered. Third of all, it is consistent with
NSMIA, the current law that we operate under, which reduces the
transaction fee to \1/800\th of 1 percent effective in the year
2007.
Our version would simply accelerate the rate reduction
already approved by Congress in 1996 and would not impose any
new system which would be in effect for only a limited time. As
I said before, no extensive rulemaking authority for the SEC
would be granted as a result of this bill, and it maintains
funding for the SEC, full funding for the SEC, generous funding
overall, scores out at neutral, zero, so we have no Budget
Enforcement Act issue, and I think that is the reason why you
have every major exchange, every major stakeholder supporting
the version which you have been the prime cosponsor.
Mr. Towns. All right. Thank you very much, Mr. Chairman. My
time has expired.
Mr. Oxley. I thank the gentleman.
The gentleman from New York Mr. Fossella.
Mr. Fossella. Thank you, Mr. Chairman. I want to also
compliment both Mr. Towns and Mr. Lazio for being at the
vanguard of this debate.
I guess to use the analogy, Mr. Menendez and I want to run
the ball down the field, and you want to throw the ball down
the field, but we both want to score, and perhaps we can, I am
sure Mr. Menendez would agree, form an offensive pattern,
combining both the run and the throw, and at the end of the
day, we will score that touchdown. So I want to compliment you
on that.
I guess what, Mr. Chairman, what you alluded to earlier is
the other parts to this game, the budgeteers and the
authorizers and the appropriators. I guess integral to this is
also the fact that the Chairman of the SEC Mr. Levitt testified
before this hearing a couple of months ago that he would
support a cap, or, if I heard him correctly, prefer that to the
other. I assume that is still true. I have not heard anything
to the contrary.
So I guess what we are trying to do is put a lot of
different pieces together. We all understand, this is important
to me as it is to Mr. Menendez and Mr. Lazio and Mr. Towns,
because so many of the people are constituents or work for the
financial service industry, are affected directly by any tax on
capital, but again, the more important issue is across this
country there are more than 70 million investors that are
adversely affected by an unnecessary and, I think, a repugnant
tax.
So I would just throw out the question that if we can
somehow find that solution, perhaps it is a combination of the
two, and that is fine, but I still think the intent of the
legislation is to cap, or to fund the SEC with a degree of
certainty. If that is the intent, then we should try everything
we can to ensure that the SEC is appropriately funded. How we
again combine those run and pass patterns, I am open-minded
about, but I still think, as Mr. Menendez said, this provides
the highest degree of predictability and certainty, which
Congress is pursuing to fund the SEC.
I yield back, Mr. Chairman.
Mr. Oxley. The gentleman yields back. Are there further
questions?
The gentleman from Minnesota.
Mr. Luther. Thank you, Mr. Chairman. Just a couple of quick
questions. Again, thanks for your excellent presentations.
One of the arguments, as I understand it, for doing this is
because there is, in effect, discrimination against this form
of investment versus other forms of investment. If we have an
inordinately high tax, or whatever, even if it is as small as
has been said here, has there ever been an attempt to quantify
what is called discrimination by looking at the taxes,
subsidies on various forms of investment; has that ever been
quantified? I have seen the argument presented, but I am just
wondering if there is anything to quantify that.
Mr. Lazio. I am not aware of it, Congressman. I think right
now we are at $1.6 billion in terms--$1.66 billion in terms of
what fees are collected for the SEC's current budget, which is
$337 million, and current offsetting revenues of $501 million.
So it is far in excess, obviously, of over four, four and a
half times of what is necessary to fund the SEC, and it doesn't
just hit the big guys, it hits the smaller investors, and we
have sort of evolved from the Nation of savers to a Nation of
investors. So those of us who have blue-collar districts with
people who invest or are trying to have some pension security
or retirement security through the stock market, they are
affected by this. Everybody is affected by this, and it seems
as a basic issue of equity that we reduce the amount of fees to
more closely proximate, but still far exceed, the cost of the
SEC operation.
Mr. Luther. Just one other question. Has there ever been an
attempt to quantify other expenses related to securities other
than just the cost of the SEC, for example?
Mr. Lazio. It includes transactional fees. I wouldn't know
the answer to that, quite frankly. I would not be surprised at
all if either the committee staffs or GAO would have some
answer to that, or the SEC itself.
Mr. Menendez. If I might, I would like to go to the first
question and just for the Committee's consideration impose what
your question, I think, inherently implies. No. 1, as has been
said, this is almost five times as much. It is supposed to be
as the SEC presently needs. It is supposed to be a fee. That
was what the 1996 agreement was all about, was to fund the SEC,
make sure that its vital role is fully funded, and for what it
is doing and maybe even for an expanded role within that
context. The bottom line is it is not supposed to be a tax.
In essence, the committee, in its consideration, I would
say, has to consider whether or not, if the section 31 fees are
going to be used for, which, in essence, they are, for programs
outside of the Securities and Exchange Commission, then
obviously even jurisdictionally it would change the nature of
the fees, and, in fact, a fee to a tax, and it might even very
well be considered something that the Ways and Means Committee
would consider.
So I would hope that at the end of the day, and I think
this is where the Chair and the ranking member and others are
headed, that the committee clearly doesn't insure or justify
the deleting of the section 31 fees with the funding of the
SEC. It should be a user fee and not a tax, and, in fact, at
the end of the day, if that is the course the committee takes,
then we will have fully met what all of us in 1996 voted for
the purpose of the act in the first place, which was to have a
fee that funded the SEC and does not in essence use it as a tax
for a variety of other programs, including programs that are
outside of the jurisdiction of the committee.
Mr. Luther. I yield back, Mr. Chairman. Thank you.
Mr. Oxley. Are there further questions for the
distinguished panel?
Thank you both for an excellent presentation.
Mr. Oxley. We will now call up the second panel, which is
made up of Executive Director James McConnell from the
Securities and Exchange Commission. Mr. McConnell, welcome to
the panel. You may begin whenever you want to.
STATEMENT OF JAMES M. McCONNELL, EXECUTIVE DIRECTOR, SECURITIES
AND EXCHANGE COMMISSION
Mr. McConnell. Thank you, Mr. Chairman.
Chairman Oxley, Ranking Member Towns and members of the
subcommittee, I appreciate this opportunity to appear today on
behalf of the Securities and Exchange Commission regarding
securities transaction fees. The SEC's fee collections have
been a subject of concern ever since 1983 when the Commission
first began contributing more to the U.S. Treasury than was
required to fund the agency.
In 1996, the National Securities Markets Improvement Act
mandated a fee structure designed to do four things: Gradually
reduce total fee collections; extend transaction fees to the
over-the-counter market instead of only exchange-listed
securities; provide the SEC with a stable, long-term funding
structure; and gradually align fee collections with the funding
needs of the SEC.
Today, market growth and activities have pushed fee
collections much higher than anticipated in 1996, far beyond
what is needed to fund the agency. But we believe the key
phrase in this is what is needed to fund the agency. As was
evident at a hearing last March before the Senate Subcommittee
on Securities and also at a hearing held last July by this
subcommittee, all parties to this discussion seemed to share
the goal of ensuring that the SEC is fully funded and that it
is appropriate for fee collections to cover the cost of the
services and regulation that we provide for the industry.
NSMIA has succeeded in eliminating the funding
uncertainties that plagued the SEC for years, but it has failed
to reduce total collections. Efforts to undertake a further
comprehensive reduction in fees have been restricted by several
factors, primarily the Budget Enforcement Act. As you know, the
BEA splits our fee collections into two different categories,
mandatory and discretionary. The mandatory receipts by law must
be deposited into the Treasury, while the discretionary
collections are available to our appropriators to fund the
agency.
House Resolutions 2441 and 1256 have been creatively
crafted to reduce fees and accommodate the restrictions on the
BEA. The result, however, is that the entire amount of the fee
reduction in both proposals comes from the 30 percent of total
fee collections that is currently available to the
appropriations committees to fund the SEC. The original version
of H.R. 2441 would reduce the amount available to offset
appropriations by approximately $2.6 billion over 7 years, and
H.R. 1256 will reduce it by $2 billion over the same period.
We are concerned that reductions of this size could
seriously jeopardize the SEC's funding.
In this current environment of tremendous activity and
change, it is imperative that funds be available to support
both current levels and much-needed increases in resources. Any
funding structure, whether it is implemented by a cap or a rate
reduction or some other mechanism, must provide for full and
stable long-term funding that allows the agency to adequately
protect investors.
I welcome this discussion on fee collections. Thank you for
inviting me, and I ask that my written testimony be submitted
for the record. Before moving to questions, however, I would
like to point out that subsequent to our preparation of the
written testimony, we received a revised version of H.R. 2441.
We understand that this version satisfies the scoring problems
that we referred to in the written testimony. There are some
other changes, including timing, that we need to analyze, and I
am prepared to discuss the new proposal today. However, we
believe that it still does not ensure full and stable long-term
funding for the SEC.
I would be happy to answer any of your questions at this
time.
[The prepared statement of James M. McConnell follows:]
Prepared Statement of James M. McConnell, Executive Director, U.S.
Securities and Exchange Commission
Chairman Oxley, Ranking Member Towns, and Members of the
Subcommittee: On behalf of the Securities and Exchange Commission (SEC
or Commission), I appreciate this opportunity to appear before the
Subcommittee today to discuss securities transaction fees and current
proposals to address the issue of fee collections in excess of the cost
of funding the SEC. The SEC shares the Subcommittee's concern regarding
excess fee collections. 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
and reasoned dialogue on potential solutions to the problem of excess
fee collections.
Given the complexity of the fee collection issue, I will first
review the history of SEC fees, the fee agreement contained in the
National Securities Markets Improvement Act of 1996 (NSMIA), the Budget
Enforcement Act (BEA), and SEC's efforts to address fee issues before
addressing the current proposals.<SUP>1</SUP>
---------------------------------------------------------------------------
\1\ See also Statement of the U.S. Securities and Exchange
Commission Concerning Securities Transaction Fees, Before the
Subcommittee on Finance and Hazardous Materials of the House Committee
on Commerce (July 27, 1999).
---------------------------------------------------------------------------
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/
50\th of 1 percent under Section 6(b) of the Securities Act of 1933.
Starting in 1990, the Section 6(b) fee rate was increased yearly
through the appropriations process. The first \1/50\th of 1 percent
goes directly to the U.S. Treasury and is unavailable for funding the
SEC. The amount over the \1/50\th of 1 percent (called offsetting
collections) can be used to fund the agency through appropriations.
Transaction fees (Section 31 fees) are paid when securities are
sold. These were enacted at a rate of \1/300\th of 1 percent on
exchange-listed securities under Section 31 of the Securities Exchange
Act of 1934 (Exchange Act). Proceeds from this fee are deposited
directly in the U.S. Treasury and are not available to fund the agency.
Fees on mergers and tender offers are paid by corporations directly
to the U.S. Treasury and also 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 1988, the Securities
Subcommittee of the Senate Committee on Banking, Housing, and Urban
Affairs 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 NSMIA.<SUP>2</SUP>
---------------------------------------------------------------------------
\2\ 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.
---------------------------------------------------------------------------
Fee Agreement in NSMIA
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:
<bullet> gradually reduce total fee collections;
<bullet> ``level the playing field'' by extending Section 31
transaction fees, which had previously only applied to
transactions involving exchange-listed securities, to
securities subject to ``last sale reporting'' in the over-the-
counter (OTC) market;
<bullet> gradually align fee collections with the funding needs of the
SEC; and
<bullet> provide the SEC with a stable, long-term funding structure.
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 \1/50\th of 1 percent of the aggregate offering price in
fiscal year 2006, declining annually from \1/34\th of 1 percent in
1998. In fiscal year 2007, the rate will be further reduced to \1/
150\th of 1 percent. In addition, NSMIA classified the portion of the
Section 6(b) fees in excess of \1/50\th 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 appropriations committees. After fiscal year 2006,
Section 6(b) fee revenue will only go into the General Fund of the U.S.
Treasury and will not be available to fund Commission operations.
NSMIA also provided equity in the application of Section 31 fees by
authorizing the SEC to collect these fees on transactions involving
securities subject to ``last sale reporting'' in the OTC market. 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 appropriations committees. Under NSMIA,
all Section 31 fees will fall to \1/800\th 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. Moreover, the
SEC's long-term funding structure remains at risk. Notably, current
estimates of the Congressional Budget Office (CBO) indicate that the
SEC will collect $285 million in offsetting collections in fiscal year
2007, which would not even be enough to fund the agency today.
Budget Enforcement Act
The rules enacted as part of the 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 into the General Fund
of the U.S. Treasury; they are unavailable for SEC use. The SEC's fees
that fall into this category are:
<bullet> the first \1/50\th of 1 percent of Section 6(b) registration
fees;
<bullet> Section 31 fees on transactions involving exchange-listed
securities; and
<bullet> fees on mergers and tender offers.
These fees, which account for nearly 70 percent of total SEC
collections, are estimated by CBO to exceed $1.1 billion in fiscal year
2000. Because these collections currently are protected by the BEA
rules, they cannot be reduced without a corresponding increase in
revenues or decrease in federal spending elsewhere. According to CBO's
estimates, to fully repeal these fees, other collections flowing to the
Treasury's General Fund would have to increase by $9.6 billion over the
next seven years, or spending from the General Fund would have to be
reduced by the same amount.
The remaining 30 percent of SEC collections, deemed
``discretionary'', were not in existence prior to 1990 and are
unaffected by the requirements of the BEA. These fees are the
offsetting collections that have traditionally been used by our
appropriators to fund the agency. Specifically, they are:
<bullet> Section 6(b) registration fees collected above \1/50\th of 1
percent; and
<bullet> Section 31 fees on transactions in securities subject to
``last sale reporting'' in the OTC market, as enacted in NSMIA.
As the traditional source of SEC appropriations, these offsetting
collections are crucial to full and stable funding of the SEC.
The following chart shows the current CBO estimates of total fee
collections broken down between mandatory and discretionary under the
BEA.
($ in millions)
------------------------------------------------------------------------
Total
Fiscal Year Mandatory Discretionary 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, total fee collections are projected to
increase through fiscal year 2006, and then fall sharply in 2007 when
the final NSMIA fee reductions go into effect.
We understand that there may be a major change in the budget rules
under the BEA in the event that an on-budget surplus materializes as
expected, which could have an important effect on the fee debate.
Specifically, there is a possibility that fee rates could be changed
without having to accommodate the requirement of an offsetting revenue
increase or spending cut for any reduction in fees classified as
mandatory under the BEA.
Fee Reductions by the Commission
The Commission recognizes the magnitude of excess fee collections,
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 to $12 million per year. While this is a small amount
relative to the size of the industry, the elimination of these fees
significantly reduced the administrative burden on registrants and the
SEC. This year, the Commission responded to industry concerns that
there was a double counting of transactions in the OTC market imposing
an unfair burden on certain market participants. The Commission
encouraged and actively supported changes in industry practices to
eliminate this problem and approved NASD rule proposals to implement
this change in March 1999.
Fee Reduction Proposals
Two members of the Subcommittee have introduced bills this session
to address the issue of excess fee collections. The bills take
different approaches to addressing this issue. Representative Lazio has
introduced H.R. 2441, the ``Fairness in Securities Transaction Act'',
which attempts to address the issue by reducing the Section 31 fee
rate. Representative Fossella has introduced H.R. 1256, the ``Savings
and Investment Relief Act of 1999'', which attempts to address the
issue by capping total Section 31 fee collections. Both bills involve
complex budget scoring and related issues.
H.R. 2441. Representative Lazio's bill would reduce the Section 31
fee rate from \1/300\th of 1 percent to \1/500\th of 1 percent on
transactions involving both exchange-listed securities and securities
subject to ``last sale reporting'' in the OTC market. In an attempt to
alleviate the BEA issues raised by a fee rate reduction involving the
``mandatory'' portion of our fee collections, the bill redesignates 90
percent of the fees collected on last-sale-reported securities as
mandatory (i.e., general revenue) from the current 100 percent as
discretionary (i.e., offsetting collections available to fund the
agency). The bill also redesignates 10 percent of the fees collected on
exchange-listed securities as discretionary from the current 100
percent as mandatory. In effect, the bill reallocates 90 percent of
combined Section 31 fee collections to general revenue, leaving only 10
percent as offsetting collections available to fund the agency.
H.R. 2441 raises several problems in its current form. The bill
does not provide the SEC with full and stable long-term funding. The
reallocation of Section 31 fees significantly reduces the amount of
offsetting collections available to fund the agency, making shortfalls
in Commission appropriations more likely. Although the bill contains a
provision to address possible shortfalls, we do not believe that the
proposed language provides the necessary assurance of full funding for
the Commission in the event of a shortfall. The language appears to
allow the Appropriations Committees to increase Section 31 fees through
a supplemental appropriation to address a shortfall. However, this
mechanism would not operate in a timely fashion. It appears that the
proposed mechanism would go into effect after the fact--when a fee
revenue crisis had already occurred--making it difficult for the SEC to
operate effectively in the event of a fee revenue crisis. The mechanism
would appear to require our appropriators to move a supplemental
appropriation through Congress in an emergency situation when quick
action would be necessary to avert such a crisis.
In addition, the bill does not take into consideration the timing
of fee collections. The SEC collects transaction fees twice a year--on
March 15 (for four months) and on September 30 (for eight months). The
larger collection in September occurs well after supplemental
appropriations bills normally are enacted. Thus, H.R. 2441 has serious
operational problems that need to be addressed.
The bill also eliminates a portion of the Exchange Act (enacted as
part of NSMIA) that provides for the continuation of offsetting fee
collections in the event of a lapse of appropriations at the beginning
of a fiscal year. The enactment of Section 31(d)(3) of the Exchange Act
solved a serious administrative problem for the agency and eliminated
potential interference with the capital raising process and confusion
in the financial community. We strongly oppose its deletion.
While we defer to the Congressional Budget Office (CBO) as the
technical experts on budget scorekeeping issues, we believe that there
may be some scoring problems with the bill. Although the bill attempts
to alleviate the BEA issues, reducing the fee rate alters the economic
model CBO uses to estimate fees. Revised fee estimates may potentially
create scoring problems.
H.R. 1256. Representative Fossella's bill would cap the dollar
amount of Section 31 fees that can be collected in fiscal years 2000
through 2006. In an attempt to alleviate the BEA issues, the bill also
combines the mandatory and discretionary categories of Section 31 fees.
Of the total Section 31 fees to be collected in each fiscal year, a
specified amount of fee collections is designated as general revenue,
and the remaining amount of fee collections, if any, up to the cap for
that fiscal year is designated as offsetting collections.
H.R. 1256 also raises a number of concerns in its current form.
First, the bill does not provide the SEC with full and stable funding.
H.R. 1256 includes the same language as H.R. 2441 addressing
insufficient fee collections. As discussed above, this language does
not provide adequate protection for full SEC funding in the event of a
shortfall in fee collections. This bill thus exposes the SEC to the
possibility of an emergency budget situation that could severely impact
Commission operations.
Second, the bill does not specify the degree of precision required
in implementing a cap or what to do if fee collections exceed the cap.
To cut off fee collections precisely when the cap has been reached
would be administratively difficult, if not impossible, under the
current fee collection system. To effectively implement such a tight
cap, the SEC would have to develop a complex and potentially costly
recordkeeping system that could track fee collections by the exchanges
and the National Association of Securities Dealers (NASD) to determine
when the fee cap has been reached.
Over the past few months, the Commission staff has had an
opportunity to discuss with industry participants the administrative
and technical issues associated with implementation of a fee cap. These
discussions have revealed a number of issues. The New York Stock
Exchange (NYSE) staff indicated that their collection process is not
entirely automated. There is currently at least a six-week gap between
the time a transaction takes place on the NYSE and the time when volume
information on that transaction is reported to the SEC. As a result,
the NYSE currently does not have the ability to provide timely
information with respect to the collection of Section 31 fees. The NYSE
staff also represented that the automation of their fee collection
process could not begin until mid-2000 due to Y2K and decimalization
system enhancements. The NASD staff made similar comments with respect
to the American Stock Exchange. The NASD staff did indicate, however,
that it would have no serious programming problems with implementing a
cap on an annual basis for NASDAQ.
Finally, we believe that H.R. 1256 may also have CBO scoring
problems similar to H.R. 2441, resulting in revised CBO estimates for
the outyears.
Conclusion
Today, we are faced with total fee collections well above both the
cost of funding the SEC and the levels anticipated in NSMIA. CBO's
estimates for fiscal year 2000 fee collections are $1.66 billion. Not
only is that amount far greater than our funding requirements for
fiscal year 2000, but 70 percent of that figure is unavailable to fund
the agency because of the restrictions imposed by the BEA rules.
Reducing fee collections, however, presents many of the same issues
that required years of Congressional negotiation resulting in the
compromise embodied in NSMIA. As the Commission has stated in the past,
any alternative funding mechanism must:
<bullet> provide full and stable funding for the SEC;
<bullet> spread the costs of regulation among those who benefit;
<bullet> consider the effect of market conditions on collections; and
<bullet> address the competing interests of all parties.
Both H.R. 2441 and H.R. 1256 raise a number of concerns. Most
significantly, neither bill provides a sufficient funding mechanism for
the SEC. In particular, the fee rate reduction contained in H.R. 2441
could likely result in a serious funding shortfall for the SEC in the
event of a downturn in market activity. Based on our discussions with
industry participants, we believe that the fee cap proposal in H.R.
1256 would be more difficult to implement, especially in light of the
Y2K issues and the lack of specificity in the bill.
The SEC would welcome the opportunity to discuss the current
proposals in greater detail. The Commission staff is available to
discuss these proposals in more detail and to provide assistance in
crafting solutions to our concerns. We appreciate the help and support
of all the interested parties in ensuring that the SEC remains
adequately funded regardless of the funding approach taken.
Mr. Oxley. Thank you, Mr. McConnell. Let me begin, your
testimony states that H.R. 2441 does not properly take into
account the timing of the fee collections by the SEC, and you
state that this presents problems regarding a supplemental
funding legislation that might be necessary. Could the SEC
under its own rules alter the timing of its collections?
Mr. McConnell. I don't believe so. I believe the timing is
set in the law.
Mr. Oxley. Could you pull the microphone closer?
Mr. McConnell. I don't believe we have the authority. The
timing is in the law that we collect twice a year, in March and
at the end of September, the section 31 fee charges. That would
require a change to NSMIA.
Mr. Oxley. It would require a change in the statute?
Mr. McConnell. Yes.
Mr. Oxley. Does the Commission believe the transaction
volume will increase or decrease given the change in the
markets that--many experts obviously think the market volume
will increase because of conversion to decimals and the
extension of hours for trading. If volume continues to increase
or at least remain steady, is there still a concern of funding
shortfalls, and, if so, why?
Mr. McConnell. Well, I have been advised by my Chairman to
never predict the direction of the market, as he so often has
stated, but we have experienced in the past--certainly ups and
downs with respect to transaction activities after 1987 and
1989. There were downturns in the level of transactions.
Mr. Oxley. In volume?
Mr. McConnell. In the volume.
Mr. Oxley. How long did that last?
Mr. McConnell. I don't know precisely. In 1987, it was at
least a year. In 1989, it was a shorter period, but there are
blips that occur.
Mr. Oxley. Well, if the market were to go down, you would
still have significant transactions.
Mr. McConnell. Well, in fact, short-term decreases in the
market oftentimes result in increases in transactions because
of the selling activity, but you stretch that out over a year
period perhaps, and we have seen absolute decreases in the
total level of transactions.
Mr. Oxley. The sponsor and the cosponsor of H.R. 2441 have
an amended draft of their legislation that was provided to you.
Does the amended version alleviate the Budget Enforcement Act
issues, in your estimation?
Mr. McConnell. From our analysis, it does alleviate those
Budget Enforcement Act problems. It would seem to score budget-
neutral.
Mr. Oxley. Thank you.
Let me yield to my friend from New York, Mr. Towns.
Mr. Towns. If it was a perfect world, which you know it is
not, but my colleague and I, we are working on it, trying, what
would you like to see that is not in either one of these bills?
Is there anything?
Mr. McConnell. Well, in a perfect world I think a fee rate
reduction is much easier--it is a better system for the
industry. It is predictable. People can make business decisions
knowing exactly what they encounter. The problem with that is
that the Budget Enforcement Act makes the world somewhat
imperfect with respect to the SEC's funding.
We may have an opportunity here, though, that has been
discussed a little bit. The Budget Enforcement Act does provide
for the elimination of pay-go restrictions in the event of on-
budget surpluses. No one really knows how that works, but it
does seem to offer the opportunity to deal with fee rate
reductions without necessarily having to satisfy all the
requirements of pay-go. It is an opportunity that has just come
to us. No one has really implemented that, but I think it is
something we can throw into the discussion on this issue as to
how to lower fee collections.
Mr. Towns. Thank you very much, Mr. Chairman. I yield back.
Mr. Oxley. Gentleman from New York Mr. Fossella.
Mr. Fossella. Just a couple of questions. What is the
budget of the SEC this year?
Mr. McConnell. Our current budget is approximately $340
million.
Mr. Fossella. H.R. 1256 provides for fiscal year 2000 $463
million. I am just curious as to how do you square that circle,
the funding, appropriate funding, for the SEC, when you are
over $100 million more under this legislation than what the SEC
currently receives?
Mr. McConnell. Our understanding is that the amount made
available under H.R. 1256, actually coming from the offsetting
collection, is much less than that. It is $287 million in the
first year, so that the appropriators would have to make up the
difference between what they are typically relying on through
offsetting collection to achieve full funding. The shortfall
occurs because just the amount that is available from the
offsetting collections gives them the scoring.
Mr. Fossella. So you are concerned that the appropriators
themselves may not fund adequately the SEC?
Mr. McConnell. Exactly.
Mr. Fossella. With respect to--and Mr. Levitt testified
before this committee, I guess, a couple of months ago or so, I
forget the specific date, and I thought it was his, if I heard
him correctly, that the cap was preferable to a rate cut.
Again, if the intent here is a user fee to fund with a degree
of certainty the SEC--and from your perspective I guess your
main concern is that you get that check, right?
Mr. McConnell. That is correct.
Mr. Fossella. Everything else being equal, what is more
certain than a specific cap?
Mr. McConnell. We stand by----
Mr. Fossella. And with that, you know, predictability and
certainty, you know, depending on the volatility of the volume
of the market, are we to assume that that is less predictable
than the SEC will receive no more than X amount of dollars each
year?
Mr. McConnell. As it currently stands with the proposals
before us, the SEC still believes that the cap is preferable.
It offers us the best protection, the lowest amount of risk
with respect to us receiving adequate funding. So we would
still support a cap given what we know today and given what is
available today.
Mr. Fossella. Thanks, Mr. McConnell.
Thank you. I yield back, Mr. Chairman.
Mr. Oxley. The gentleman from Illinois Mr. Shimkus.
Mr. Shimkus. Just two mischievous questions, Mr. Chairman.
If there were no transactions, zero, would there be a role for
the SEC which would require funding?
Mr. McConnell. If transactions weren't occurring on the
exchanges?
Mr. Shimkus. If there were no transactions. This is a
theoretical question.
Mr. McConnell. The role for the SEC is law enforcement. We
must ensure that people aren't perpetrating fraud against
investors through all manner of mechanisms. We also have the
function of registering----
Mr. Shimkus. I am trying to address the question of as
transactions decline----
Mr. McConnell. Right.
Mr. Shimkus. [continuing] is the law enforcement aspects of
the SEC--would they decline proportionately with the number of
transactions?
Mr. McConnell. Actually, we believe that if there is a
change in the market direction, and if it would go down and
things decline, you would see more need for enforcement because
people would be more concerned about what is happening to their
investments in a declining market, and there would be perhaps
greater possibility to have accounting fraud and those matters.
So we don't think our enforcement requirements would go down at
all in a declining market.
Mr. Shimkus. And these fee rates were initially increased
by whom and why?
Mr. McConnell. Well, the original 1933 act establishes
registration fees on securities, and then the 1934 act
establishes the \1/300\ of 1 percent of the transaction fee on
the exchanges. NSMIA extended that \1/300\ of 1 percent to the
entire marketplace, both exchanges and the over-the-counter
market.
Mr. Shimkus. So, my question is, was there a fee increase
identified with this budgeted base to increase the ability of
the Federal Government to fund other operations? Talk to me
about this 1990 fee increase that the appropriators imposed
upon us.
Mr. McConnell. Well, the 1996 NSMIA funding mechanism
started out by trying to deal with the registration fees that
people believed were way too high. The 1996 registration fees
paid by companies to go public was also way in excess, far in
excess of what our funding needs were. So we attempted to
address that problem through a long-term reduction in those
registration fees.
In addition, there had been a long-standing proposal to
extend the transaction fees to the entire marketplace, as a
matter of equity as much as anything else. That was \1/300\ of
1 percent. So both transactions occurred at the same time. The
\1/300\ of 1 percent extension also provided a little bit more
stability to the appropriations process by broadening the fee
collection population.
Mr. Shimkus. But the equity debate that you just mentioned
is still part of this new debate with the cap versus the fee?
Mr. McConnell. Correct. I mean, we believe that the cap can
be set at a level most easily to protect the agency's
resources.
Mr. Shimkus. But not to promote equity in the transactions
across the year?
Mr. McConnell. It could have that negative effect.
Mr. Shimkus. That's all, Mr. Chairman. I yield back.
Mr. Oxley. Gentleman yields back.
The gentleman from Oklahoma is--let me then ask you a
couple of other questions before we complete your appearance.
In your testimony you state that H.R. 2441 deletes section
31(d)(3), and that you oppose that deletion. Could you explain
to the committee what that section does and why you oppose it,
propose the deletion?
Mr. McConnell. I think that the revised version changes
that, but I will double-check, but basically that is the
provision that allows continuation of the fee in the absence of
an appropriation. That has been a very--before we had that
protection, it created a lot of uncertainty in the marketplace
as to what fees to pay, and it also created uncertainty with
respect to the SEC's funding arrangement under those fees. That
was built in to provide certainty in the marketplace, and
certainty that there would be a continuation of the fees
collected to support the SEC's budget going into the new year.
Mr. Oxley. Yes. I think it is--my understanding is the
revised version does take care of that----
Mr. McConnell. I believe, yes.
Mr. Oxley. [continuing] and reinstates the section. Thank
you.
Does the Commission believe that investors, given a rate
cap as proposed in 1256, would time their investment decisions
based on whether or not a transaction fee was applied, or would
that proposal have any overall market behavior change in it?
Mr. McConnell. As a general matter, we don't believe that
on a separate transaction or individual trade that the \1/300\,
whether it is there or not, would affect an investment or
business decision. In the aggregate that is obviously a huge
number, but when it gets down to individual trades, we don't
think it would affect market activity.
Mr. Oxley. Let me ask you, how common are user fees applied
to regulated entities to pay for their Federal regulation?
Mr. McConnell. It has become fairly common. There are a
number of agencies that rely upon user fees for a portion of
their budget. The SEC may be somewhat unusual in that basically
our entire budget now is supported by these offsetting fee
collections.
Mr. Oxley. And you think that may be unique? I don't know.
I think it probably is.
Mr. McConnell. It is unusual. I would have to do some work
to say that we are unique, but we are definitely unusual in
that respect.
Mr. Oxley. I know the FCC, for example, gets some funding
from license fees and that kind of thing.
Mr. McConnell. They do.
Mr. Oxley. Gentleman from New York.
Mr. Towns. Not a question, just sort of a suggestion,
recommendation. I am anxious to move this, and I think in order
to do it we need to walk down every avenue, every road, every
street. And I think I would feel comfortable if the SEC would
submit for the record what you feel should be done in order to
make both bills, you know, stronger. I think that if you could
submit that for the record, and we could leave the record open
for that information, to review that, because, Mr. Chairman, I
am hoping we can get this and get together and sort of move
this legislation. I don't want to leave anything out, and I
think that by getting that input from the SEC, it would be
very, very valuable in terms of some of the things that you
said earlier and others that you might feel that would
strengthen the bills. And I would appreciate that kind of
information coming, Mr. Chairman.
Mr. Oxley. I think that is a worthy idea and would
recommend that to Mr. McConnell, from SEC's staff. And we want
to pledge to work with you, and our staff also, to come to a
good conclusion on this issue, and would also point out that
the CBO was unable to testify today, but I am going to leave
the record open for--I am sorry, OMB, I get all those bean
counters mixed up. I knew it was a B. I will ask unanimous
consent that the record remain open for 5 days to allow that
information to be available to the committee.
And again, Mr. McConnell, we thank you for your testimony.
If there is no further business to come before the
subcommittee, we stand adjourned.
[Whereupon, at 11:10 a.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Executive Office of the President
Office of Management and Budget
October 7, 1999
The Honorable Michael G. Oxley
United States House of Representatives
Committee on Commerce
Rayburn House Office Building, Room 2125
Washington, DC 20515-6115
Dear Representative Oxley: Thank you for seeking the Office of
Management and Budget's (OMB) views on H.R. 2441, the Fairness in
Securities Transactions Act, and H.R. 1256, the Savings and Investment
Relief Act of 1999.
All securities market transactions and registrations require
regulation and oversight to maintain the investor confidence that makes
American securities markets the most liquid and trusted in the world.
The fees on transactions (Section 31) and registrations (Section 6(b))
collected by the SEC help offset the costs of necessary and valuable
oversight and regulation of these markets. While the cost of the fee is
likely passed to consumers, transaction fees comprise a small portion
of the cost of trading securities. The SEC fee assessed on securities
transactions is \1/300\ of one percent, or thirty-three cents on a
transaction of $10,000. In comparison, the cheapest Internet brokerage
charges consumers five dollars to make a typical stock transaction. We
believe the cost of the transaction fee is more than outweighed by the
liquidity and integrity of U.S. securities markets.
The current level of activity on U.S. securities markets,
reflecting one of the longest bull markets in history, has generated
fee collections well above our original expectations when the National
Securities Markets Improvement Act (NSMIA) was enacted in 1996.
Presently, the fee collections available to the SEC are fully adequate
to fund the Commission's activities. Due to phased reductions in
registration fees as provided in NSMIA, however, in future years fee
collections will be insufficient to fund the SEC's activities,
necessitating the provision of general fund appropriations. While we
project that the level of offsetting collections available for the
SEC's use under NSMIA will be sufficient to fully fund the Commission's
program needs through fiscal year 2006, enacting either H.R. 2441 or
H.R. 1256 would cause the collections available to the SEC to fall
short of the Commission's funding needs starting in the 2000 or 2001
fiscal year, respectively, and in future fiscal years. Moreover, even
if the SEC relied upon previously collected fees to make up the funding
shortfall, these fees would be exhausted by fiscal year 2003, only
delaying the funding shortfall. Large increases in direct
appropriations for the SEC would unnecessarily divert needed funds from
other priorities in the Commerce/Justice/State appropriations bill.
H.R. 1256, in particular, raises other concerns. Both the SEC and
the self-regulatory organizations (SROs) would need to modify their
reporting systems, jeopardizing a smooth transition for the Year 2000
and the conversion to decimilization. It is also unclear whether SROs
will be able to immediately stop collecting fees once the cap is
reached, or what occurs if fees are collected in excess of the cap.
In conclusion, the structure and rate of fees imposed on U.S.
securities markets are complex issues that should be discussed with all
affected parties. Congressional staff, OMB, and other interested
parties concluded extensive negotiations regarding fees in the
securities markets with the passage of the NSMIA in 1996. NSMIA was
intended both to ensure equitable treatment of U.S. securities markets
and to provide more stable funding for the SEC. New legislation
altering fee collections and SEC funding--if enacted without adequate
consideration or input from all affected parties--could upset the
delicate balance so carefully crafted in 1996, and jeopardize the
stability and oversight on which our securities markets thrive.
Thank you for your interest and involvement in this matter. I look
forward to working with you on this issue.
Sincerely,
Jacob J. Lew
Director