[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
                      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


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 60-359CC                    WASHINGTON : 1999
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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.1
---------------------------------------------------------------------------
    \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.2
---------------------------------------------------------------------------
    \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:

 gradually reduce total fee collections;
 ``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;
 gradually align fee collections with the funding needs of the 
        SEC; and
 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:

 the first \1/50\th of 1 percent of Section 6(b) registration 
        fees;
 Section 31 fees on transactions involving exchange-listed 
        securities; and
 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:

 Section 6(b) registration fees collected above \1/50\th of 1 
        percent; and
 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:

 provide full and stable funding for the SEC;
 spread the costs of regulation among those who benefit;
 consider the effect of market conditions on collections; and
 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
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