[Senate Report 106-360]
[From the U.S. Government Publishing Office]
Calendar No. 712
106th Congress Report
SENATE
2d Session 106-360
_______________________________________________________________________
THE COMPETITIVE MARKET
SUPERVISION ACT
__________
R E P O R T
OF THE
COMMITTEE ON BANKING, HOUSING,
AND URBAN AFFAIRS
UNITED STATES SENATE
to accompany
S. 2107
together with
ADDITIONAL VIEWS
July 25, 2000.--Ordered to be printed
__________
U.S. GOVERNMENT PRINTING OFFICE
79-010 WASHINGTON : 2000
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PHIL GRAMM, Texas, Chairman
RICHARD C. SHELBY, Alabama PAUL S. SARBANES, Maryland
CONNIE MACK, Florida CHRISTOPHER J. DODD, Connecticut
ROBERT F. BENNETT, Utah JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota RICHARD H. BRYAN, Nevada
WAYNE ALLARD, Colorado TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming JACK REED, Rhode Island
CHUCK HAGEL, Nebraska CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania EVAN BAYH, Indiana
JIM BUNNING, Kentucky JOHN EDWARDS, North Carolina
MIKE CRAPO, Idaho
Wayne A. Abernathy, Staff Director
Steven B. Harris, Democratic Staff Director and Chief Counsel
Linda L. Lord, Chief Counsel
Geoffrey C. Gradler, Financial Economist
Stephen S. McMillin, Financial Economist
Dean V. Shahinian, Democratic Counsel
Erin Hansen, Democratic Legislative Assistant
George E. Whittle, Editor
C O N T E N T S
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Page
Introduction..................................................... 1
History of Legislation........................................... 1
Background....................................................... 2
Purpose and Scope of Legislation................................. 5
Section-by-Section Analysis...................................... 10
Section 1. Short Title and References........................ 10
Title I--Fees and Comparability.................................. 11
Section 101. Reduction in Registration Fees; Elimination of
General Revenue Component.................................. 11
Section 102. Reduction in Merger and Tender Fees;
Reclassification as Offsetting Collections................. 11
Section 103. Reduction in Transaction Fees; Elimination of
General Revenue Component.................................. 11
Section 104. Adjustment to Fee Rates......................... 11
Section 105. Comparability Provisions........................ 11
Section 106. Authorization for Appropriations................ 12
Section 107. Effective Date.................................. 12
Title II--Securities Markets Enhancement......................... 12
Section 201. Short Title..................................... 12
Section 211. Exempted Securities and Organizations........... 12
Section 212. National Market Treatment for Certain Securities 12
Section 221. Ensuring Adequate Record Keeping................ 13
Section 222. Elimination of Barriers to Providing Services... 13
Section 223. Reducing Financial Reporting Burdens............ 13
Section 224. Enhancing Transparancy of Records............... 13
Regulatory Impact Statement...................................... 14
Cost of Legislation.............................................. 15
Changes in Existing Law.......................................... 20
Additional Views of Senator Shelby............................... 21
Additional Views of Senators Sarbanes, Dodd, Kerry, and Reed..... 24
Additional Views of Senators Bryan, Sarbanes, Dodd, Kerry, Reed,
and Edwards.................................................... 26
Calendar No. 712
106th Congress Report
SENATE
2d Session 106-360
======================================================================
THE COMPETITIVE MARKET SUPERVISION ACT
_______
July 25, 2000.--Ordered to be printed
_______
Mr. Gramm, from the Committee on Banking, Housing, and Urban Affairs,
submitted the following
R E P O R T
together with
ADDITIONAL VIEWS
[To accompany S. 2107]
The Committee on Banking, Housing, and Urban Affairs, to
which was referred the bill (S. 2107) to amend the Securities
Act of 1933 and the Securities Exchange Act of 1934 to reduce
securities fees in excess of those required to fund the
operations of the Securities and Exchange Commission, to adjust
compensation provisions for employees of the Commission, and
for other purposes, having considered the same, reports
favorably thereon with amendments and recommends that the bill
(as amended) do pass.
INTRODUCTION
On July 13, 2000, the Senate Committee on Banking, Housing,
and Urban Affairs met in legislative session and marked up and
ordered to be reported S. 2107, the Competitive Market
Supervision Act of 2000, a bill to amend the Securities Act of
1933 and the Securities Exchange Act of 1934 to reduce
securities fees in excess of those required to fund the
operations of the Securities and Exchange Commission, to adjust
compensation provisions for employees of the Commission, and
for other purposes, with a recommendation that the bill do
pass, with amendments. The Committee reported the bill
favorably by voice vote.
HISTORY OF LEGISLATION
During the first session of the 106th Congress, on
Wednesday, March 24, 1999, a hearing was held by the
Subcommittee on Securities on the need to reduce the excess of
user fees collected by the Securities and Exchange Commission
(SEC or Commission). Testimony was received from Arthur Levitt,
Chairman, Securities and Exchange Commission; Marc Lackritz,
President, Securities Industry Association; Lee Korins,
President and Chief Executive Officer, Security Traders
Association; Arthur Kearney, Chairman, Security Traders
Association; and Robert W. Seijas, Executive Vice President of
Fleet Specialists and Co-President of the Specialists
Association.
The full committee conducted a legislative hearing in New
York on February 28, 2000, on S. 2107, the Competitive Market
Supervision Act of 2000. Testimony was received from SEC
Chairman Arthur Levitt; J. Patrick Campbell, Chief Operating
Officer and Executive Vice President, Nasdaq-Amex Market Group
Inc.; Keith Helsby, Senior Vice President and Chief Financial
Officer, New York Stock Exchange; Hardwick Simmons, President
and Chief Executive Officer, Prudential Securities Inc.;
Leopold Korins, President and Chief Executive Officer of the
Security Traders Association; and Robert Seijas, Executive Vice
President, Fleet Specialists, and Co-President, Specialists
Association.
On July 13, 2000, the Committee met in legislative session
to mark up the Competitive Market Supervision Act of 2000 (S.
2107). During the mark up the Committee considered three
amendments. Chairman Gramm offered an amendment to authorize
appropriations for the SEC and another amendment to provide
regulatory relief to the securities markets. Both of these
amendments were accepted by voice vote. Senator Shelby offered
an amendment designed to prohibit the buying and selling of
Social Security numbers without consent. The Shelby amendment
was not adopted, on a vote of 10-10 (Senators voting ``Aye''--
Shelby, Sarbanes, Dodd, Kerry, Bryan, Johnson, Reed, Schumer,
Bayh, and Edwards; Senators voting ``No''--Gramm, Mack,
Bennett, Grams, Allard, Enzi, Hagel, Santorum, Bunning, and
Crapo). The Committee by voice vote reported the bill as
amended to the Senate for consideration.
BACKGROUND
Origins of securities fees
Since its creation, the Commission has collected
securities-related fees. Section 6(b) of the Securities Act of
1933 imposed fees on the registration of securities at a rate
equal to one one-hundredths percent of the offering price. In
1965, registration fee rates were increased to one fiftieth
percent. These fees were deposited in the Treasury as general
revenue. Section 31 of the Securities Exchange Act of 1934
imposed fees on transactions of exchange-traded securities at a
rate equal to one five-hundredths percent of the aggregate
amount of sales. This fee rate was later increased to one
three-hundredths percent, and, like the registration fees, were
deposited in the Treasury as general revenue. The 1983
Securities Exchange Act Amendments (Public Law 98-38; June 6,
1983) imposed general revenue fees on mergers, proxy
solicitations, and other activities to the extent registration
fees were not already imposed, at a rate equal to one fiftieth
percent of the value of the securities involved.
As amended by the National Securities Markets Improvement
Act of 1996, Paragraph (1) of Section 6(b) states that
registration fees ``are designed to recover the costs to the
government of the securities registration process,'' while
subsection (a) of Section 31 states that transaction fees ``are
designed to recover the costs to the government of the
supervision and regulation of securities markets and securities
professionals.'' However, since the fees were all deposited as
general revenues, resources to operate the Commission had to be
provided in annual appropriations acts. Beginning in fiscal
year 1990, and continuing though FY 1997, annual appropriations
acts contained language increasing registration fee rates to
one twenty-ninth percent, with the amount of fees in excess of
the one fiftieth percent rate credited as offsetting
collections. By imposing new fees and dedicating them to
offsetting appropriations for the Commission, the
appropriations acts effectively reduced the amount of direct
appropriations required to fund the Commission.
The National Securities Markets Improvement Act of 1996
To balance the goals of providing sufficient resources to
the Commission and minimizing taxation of investment, Congress
enacted the National Securities Markets Improvement Act of 1996
(NSMIA). This legislation began a gradual reduction in
registration fee rates from the equivalent of one twenty-ninth
percent in FY 1997 to one fiftieth percent in FY 2006, with a
further reduction to one one-hundred-fiftieth percent in FY
2007 and thereafter. In addition, NSMIA set up a reduction in
transaction fee rates, which remain at one three-hundredth
percent through FY 2006 and then drop to one eight-hundredth
percent in FY 2007 and thereafter.
Accompanying this reduction in fee rates was a reallocation
of fees credited as offsetting collections. Registration fees
credited as offsetting collections would slowly be phased out
(leaving only general revenue registration fees), while
transaction fees would for the first time be applied to last-
reported-sale securities traded primarily on the national
market systems, with these new transaction fees credited as
offsetting collections. Using projections of securities market
activities available at the time, total fee collections were
expected to fall from $711 million in FY 1997 to $351 million
in FY 2007. In the words of the Joint Explanatory Statement of
the NSMIA conference report, ``It is the intent of the Managers
that at the end of the applicable ten year period, the SEC
collect in fees a sum approximately equal to the cost of
running the agency.''
Since the time NSMIA was signed into law on October 11,
1996, there has been an unexpected surge in securities market
activity, with growth in share values and trading volumes far
outstripping the projections that guided NSMIA's authors.
According to the Office of Management and Budget (OMB), Nasdaq
transaction fees alone were expected to grow at a 5 percent
annual rate. Instead, these fees have more than quadrupled in
just three years, and are now projected to grow at an annual
rate of 15 percent according to OMB, and at an annual rate of
25 percent according to the Congressional Budget Office (CBO).
Registration fees and fees on exchange-traded securities
transactions have also grown enormously and are now running at
double the levels projected at the time of NSMIA. Thus, while
the goal of NSMIA was to have fee collections approximately
equal the cost of running the Commission, in actuality the
Commission will collect about five hundred percent of its
budget in fees in FY 2000. Moreover, while projections at the
time of the enactment of NSMIA showed a significant share of
total fees being allocated to offsetting collections, the bulk
of these offsetting collections would be reclassified as
general revenues if the NASDAQ Stock Market ceases to be a
national market system and becomes a national stock exchange.
U.S. Congress,
Congressional Budget Office,
Washington, DC, May 11, 2000.
Hon. Phil Gramm,
Chairman, Committee on Banking, Housing, and Urban Affairs, U.S.
Senate, Washington, DC.
Dear Mr. Chairman: I am pleased to provide you with the
information you requested regarding the budgetary impact that
would result if NASDAQ becomes a national securities exchange
on September 1, 2001. CBO estimates that such a change would
increase revenues (governmental receipts) and decrease
offsetting collections by a total of $13.6 billion over the
2002-2010 period.
Under current law, the Securities and Exchange Commission
(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
securities sales. Fees from national securities associations
are collected subject to appropriation action and are recorded
as an offset to discretionary spending (offsetting
collections), while fees from national securities exchanges,
dealers, and brokers do not require appropriation action and
are recorded as revenues (governmental receipts).
The National Association of Securities Dealers (NASD) is
the only national securities association, and NASDAQ is a
subsidy of NASD. Currently, transactions for three types of
securities flow through NASD: national market securities,
small-capitalization stocks, and over-the-counter (OTC) stocks.
If NASDAQ becomes an exchange, CBO expects all of the fees
generated from transactions of national market securities and
small-capitalization stocks would be recorded as revenues. It
is not clear whether OTC stocks would qualify as exchange-
listed securities, even if NASDAQ were an exchange.
For the purposes of this estimate, CBO assumes that OTC
stocks would qualify as exchange-listed securities and that
transaction fees collected on those issues would be recorded as
revenues. In 1999, the SEC collected $51 million for
transactions involving OTC stocks--about 9 percent of its total
offsetting collections. CBO does not anticipate that the volume
of securities traded would change if NASDAQ becomes a national
securities exchange.
The SEC collects transaction fees twice each fiscal year--
in March and September. If the NASDAQ becomes an exchange on
September 1, 2001, the change would first affect how
collections are recorded in the budget beginning in fiscal year
2002 because the revenues that would reflect this change would
initially be collected in March 2002. Based on the historical
growth in the volume of trades executed, CBO estimates that SEC
collections from NASDAQ will be about $1 billion in fiscal year
2002. Thus, if NASDAQ becomes a national securities exchange,
revenues would increase and offsetting collections would
decrease by about $1 billion in 2002. This amount would be
about 90 percent of the total offsetting collections
anticipated for the SEC in that year. The shift in subsequent
years would be greater.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Market
Hadley and Hester Grippando.
Sincerely,
Dan L. Crippen, Director.
Securities Markets Enhancement Act of 2000
Early last year, Senators Gramm, Grams, Sarbanes and Dodd
began an extensive effort to solicit from a broad range of
market participants suggestions to reform the U.S. securities
statutes to update outdated and unneeded provisions in the
securities statutes. By the end of April, suggestions had been
received from individual investors, professional groups, the
New York Stock Exchange, the National Association of Securities
Dealers, the Securities Industry Association, the Bond Market
Association, the Investment Counsel Association of America, the
Financial Planning Association, the National Association of
Personal Financial Advisors, the Certified Financial Planner
Board of Standards, and the American Bankers Association. The
SEC and the North American Securities Administrators
Association also provided suggestions. On June 28, 1999, the
Committee published a list of suggested changes and requested
comments from interested parties. Those comments and the
original suggestions were used to craft the Securities Markets
Enhancement Act of 2000, that was accepted on a voice vote as
an amendment during mark up and is now contained as Title II of
the legislation.
PURPOSE AND SCOPE OF LEGISLATION
Reduction of securities user fees
The original objective of the user fees collected by the
SEC was to provide a funding source for the agency's
operations. However, increases in stock market volume and
valuation have spawned revenues that far surpass what is needed
to operate the agency. For example, aggregate fee revenue in FY
1999 was $1.76 billion while the SEC's budget totaled only $341
million. The latest Congressional Budget Office (CBO)
projections predict that this imbalance will worsen even
further, with total SEC fee revenues increasing to over $3.5
billion by FY 2006.
The Committee believes that, rather than user fees, these
revenues have become taxes on savings and investment that fund
general government operations. In the Committee's view, the
excess collections of Section 31 fees are simply a tax that
lowers the returns of every investor who buys stock, owns a
mutual fund, or plans to use Individual Retirement Accounts,
401(k) plans, or pensions to retire. Furthermore, excess
Section 6(b) fees are particularly harmful since these taxes
are imposed at the beginning of the investment cycle,
subtracting from the economy monies that could be leveraged
into several times their value to finance companies' efforts to
spur growth, employment, and wealth creation.
Section 101 of the reported legislation amends Section 6(b)
of the Securities Act of 1933 to lower registration fee rates.
In addition, this section eliminates the general revenue
portion of the registration fee. The offsetting collection rate
is set at $67 per $1 million of securities registered for FY
2001-06, and at $33 per $1 million for FY 2007 and thereafter.
Section 102 reduces merger and tender fee rates in Section
13(e)(3) and Section 14(g) of the Securities Exchange Act of
1934 from one fiftieth percent under current law to $67 per $1
million of securities involved for the period FY 2001-06, and
reduces rates further to $33 per $1 million for FY 2007 and
thereafter, and all fees are also reclassified from general
revenues to offsetting collections. The Committee realizes the
importance of harmonizing the fee registration, and merger and
tender fee rates so as to provide no distortions or inject any
unintended incentives into the managerial decision as to when a
merger should occur.
Under Section 103, all transactions included in Section 31
of the Securities Exchange Act of 1934 are consolidated, with
the same fee rate applied to each as an offsetting collection.
Transaction fees in any particular fiscal year will be set in
appropriations acts at a rate estimated to collect the target
dollar amount set in Section 103 for that year. The target
dollar amount is calculated to approximate the amount of
transaction fees required so that, when combined with
anticipated registration and merger/tender fees, total
offsetting collections will approximately equal the offsetting
collections produced by NSMIA. If current projections prove
accurate, this will reduce transaction fee rates by as much as
two-thirds.
Authority of SEC to adjust to fee rates
Given the difficulty in predicting fee revenues, the
Committee realizes the importance of providing a framework that
ensures full funding for the SEC. Therefore, Section 104 of
this legislation provides the SEC with the authority to adjust
fee rates to ensure that the agency is fully funded in the
event that reductions in market valuations or volume bring
about revenues below the legislative targets. In addition,
Section 104 requires the agency to lower fee rates when fees
are projected to bring in revenues that are in excess of the
cap on fee collections laid out in the bill. To provide a
safeguard against misuse of the authority granted in Section
104, the legislation requires the agency to report to Congress
before it exercises any authority to adjust fees.
SEC pay comparability
Section 105 amends the Securities Exchange Act of 1934 to
permit the Commission to adjust base rates of compensation for
all of its employees outside the Civil Service's General
Schedule (GS). Under existing law, the SEC may do so only for
its economists. The provisions allow parity among the SEC and
Federal banking agency compensation programs. An amendment also
is made to the Federal Deposit Insurance Act to bring the SEC
within the consultation and information-sharing requirements of
other agencies mentioned at 12 U.S.C. 1833b with respect to
rates of employee compensation. A further technical amendment
to section 1833b deletes references to entities that have been
abolished.
Although the Committee believes in the need to provide
parity of compensation to the SEC, the legislation does not
require the SEC to institute such changes. In testimony earlier
this year before the Congress, SEC Chairman Arthur Levitt
stated that during the past two years, the Commission lost 25
percent of its attorneys, accountants, and
examiners.1 During FY 1999, SEC records reflect an
overall staff attrition rate of 13 percent, ``nearly twice the
government-wide average. * * *'' 2 According to
Chairman Levitt, the level of staff turnover and inability to
attract qualified staff adversely affects the productivity of
the Commission.3 Indeed, during FY 1999, only 46
percent of the Commission's available accountant positions were
filled.4
---------------------------------------------------------------------------
\1\ Testimony of Chairman Arthur Levitt, before the Committee on
Banking, Housing, and Urban Affairs, United States Senate, February 28,
2000, p. 8.
\2\ Id., p. 9.
\3\ Id., pp. 8-9.
\4\ Id., p. 12.
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The legislation assures that reductions, if any, in the
base pay of an SEC employee represented by a labor organization
with exclusive recognition in accordance with Chapter 71 of
Title 5 of the United States Code, result from negotiations
between such organization and SEC management, rather than by
reason of the enactment of this amendment.
Securities markets enhancement
The Committee strongly endorses the practice of continually
reviewing statutes, rules, and regulations under its
jurisdiction. Therefore, in addition to creating a new
framework for fee collections and providing pay comparability
for employees of the agency, the Securities Markets Enhancement
Act of 2000 (Title II of the reported legislation) is designed
to eliminate unnecessary, outdated, and duplicative regulation
in the securities markets.
Under Section 3(b) of the Securities Act of 1933, the SEC
has discretionary authority to establish exemptions from
registration under Section 5 of the Securities Act of 1933 for
offerings not exceeding $5,000,000. This maximum dollar amount
has not been increased for a substantial period of time, and
the utility of some of the exemptions under this section has
been questioned given the current maximum dollar limitation.
Therefore, Section 211 was included to increase the exemption
threshold to $12 million, as well as provide for subsequent
inflation adjustments.
In addition, Section 211 proposes an amendment to the
exemptive provisions of the Securities Exchange Act of 1934
that would exempt from the broker-dealer provisions certain
persons who market and sell exempt securities on behalf of
charitable organizations. This provision would amend Section
3(e) of the Securities Exchange Act of 1934 to permit a person
registered, licensed, or certified by a federal or state
agency, self regulatory organization or professional licensing
authority as an attorney, financial planner, insurance agent,
or other enumerated professional is not subject to the broker-
dealer provisions of the Securities Exchange Act of 1934,
provided that the criteria in Section 3(e)(2)(B) are met.
Section 212 is designed to rationalize the treatment of
certain securities under Section 18(b)(1) of the Securities Act
of 1933. Currently, issuance of a warrant or subscription right
not listed on an exchange where the underlying security is
listed may be subject to state registration requirements. The
result is that the exemption from the registration requirements
of state securities laws in NSMIA is inconsistent with that of
exchange-listed securities described in Section 18(b)(1) of the
Securities Act of 1933. The Committee believes that this
anomaly should be remedied by including as a covered security
any warrant or right to purchase or subscribe to any security
described in Section 18(b)(1) (A), (B), or (C).
Also under Section 212, the treatment of interests in
employee benefit plans is changed to lower regulatory burden.
In the past, some states have required exemption filings to be
made for participation interests in employee benefit plans
because the interests were not covered securities under NSMIA,
even though the underlying securities to be issued pursuant to
the plan were covered securities under Section 18(b)(1). It is
the Committee's belief that there are no investor protection
issues at stake to compel registration filing of an employee
benefit plan where the securities to be issued pursuant to the
plan are covered securities. Therefore, the legislation amends
Section 18(b)(1) to include interests of employee benefit plans
whose underlying securities are covered securities under
Section 18(b)(1) (A), (B), or (C).
Section 212 also addresses the problem encountered by
securities brokerage firms when they need to verify whether
foreign stocks are covered securities under Section 18(b)(1) or
(b)(4)(A) before they effect a customer trade. These
transactions are known as secondary market, non-issuer
transactions. In these instances, brokers must check the laws
of each state to insure that there is a secondary market
transaction exemption available prior to executing a customer's
order. It is the intent of the Committee to eliminate the need
for brokers to check for state secondary market exemptions for
a foreign equity security that is defined as a margin security.
The Committee does not believe that this section diminishes
investor protection, as persons effecting these transactions
remain subject to state and federal laws requiring broker-
dealer and agent registration.
Section 212 clarifies the original intent of NSMIA with
respect to notice filings and fees. It is the Committee's
intent that the states are permitted to receive the entire SEC
Form D, including those items of Form D which are not required
to be filed with the SEC. Section 212 also amends Section
18(c)(2) of the Securities Act of 1933 to address the fact
that, under NSMIA, states were allowed to continue to receive
notice filings and fees with respect to certain transactions
exempted under Section 3(a) of the Securities Act of 1933. With
this provision, states would be prohibited from imposing notice
filings or fees for these transactions. However, it is the
intent of the Committee that this provision shall not preclude
application of state notice filing or fee requirements to
certain municipal securities exempt under Section 3(a)(2) of
the Securities Act of 1933, and state registration provisions
applicable to securities exempt under Sections 3(a)(4) and
3(a)(11) and expressly deemed not to be covered securities
under Section 18(b)(4)(C) of Securities Act of 1933.
Section 212 creates Section 18(e) of the Securities Act of
1933. This new subsection clarifies the intent of Congress in
NSMIA that states cannot require registration of individuals as
agents if they represent an issuer in a Rule 506 offering and
if the individual receives no compensation in connection with
the offering.
Section 221 amends Section 203A(b)(2) of the Investment
Advisers Act of 1940 to reaffirm Congress' intent when it
enacted NSMIA. Specifically, nothing was meant to prohibit
states from (1) investigating and bringing enforcement actions
with respect to fraud or deceit against, or (2) receiving a
notice filing, consent to service of process, and a fee from a
federally registered adviser, provided the de minimis
provisions enacted in this legislation are honored. It is the
intent of the Committee that Section 203A(b)(1) (A) and (B) and
Section 203A(b)(2) (A) and (B) not be read as requiring a state
to exercise one of these grants of authority to the exclusion
of the other. With regard to notice filings, Section 221
clarifies Congress' original intent in NSMIA that states can
only require those documents from federally registered advisers
that they file with the SEC under the Investment Advisers Act
of 1940.
Under Section 222, a new subsection, Section 203A(e), is
added to the Investment Advisers Act of 1940 to create de
minimis provisions relating to prohibitions on states from
requiring notice filings, fees and registrations. The Committee
believes that adoption of a single statutory section provides
an effective and efficient way to identify restrictions
applicable to the states for all investment advisers. Section
203A(e)(1) prohibits states from requiring the filing of
documents, or payment of fees, from a supervised person of a
federally registered adviser if that individual has no place of
business in the state. While the vast majority of states do not
subject these individuals to multi-state licensure, a few
states have required notice filings and fees from these
persons. In adopting this provision, the Committee intends to
stop this practice and insure that these prohibitions apply not
only with respect to a supervised person directly, but also to
anyone who might be required to make a filing or pay a fee on
behalf of a supervised person. Section 203A(e)(2) establishes a
national de minimis provision applicable to federally
registered advisers. This section creates an exemption from
state notice filing, fee, and consent to service requirements
when the adviser has a place of business in another state and
has a de minimis number of clients in the state which seeks to
impose the requirements. Section 203A(e)(3) is the national de
minimis provision that was originally enacted in NSMIA as
Section 222(d) of the Investment Advisers Act of 1940
pertaining to state registered advisers. The Committee has
moved this provision and has incorporated it within the single
provision for all investment advisers.
Section 222 also creates the new subsection Section
203A(f), that preserves the ability of states to collect
filing, registration, and licensing fees for federally
registered advisers. It is the Committee's intent that this
subsection be construed as permitting states to receive fees,
consistent with the limitations provided in the Investment
Advisers Act of 1940, no matter how such fees may be
characterized in state law. For example, this subsection shall
not be construed as prohibiting a state from receiving a filing
fee from a federally registered investment adviser even where
such fee is denominated in state law as a ``registration'' fee,
provided that the other limitations imposed on the states by
the Investment Advisers Act of 1940 are observed. That is to
say, a state may continue to receive a ``registration'' fee
even though it cannot continue to require registration.
Section 223 will prohibit states from enforcing their
financial reporting requirements when out-of-state advisers are
in compliance with their home state's laws and have not taken
custody of any assets of a client residing in the other state
within the prior 12 months. Currently, a few states require
investment advisers to supply certain financial information,
even though the advisers have their principal place of business
in another state. Section 223 is consistent with Congress'
intent in NSMIA to reduce reporting burdens on investment
advisers.
Section 223 also creates a new subsection, 222(e) of the
Investment Advisers Act of 1940, that will prohibit states from
imposing certain filing requirements or fee payment
requirements if the state does not accept filings in the new
Investment Adviser Registration Depository (IARD) designated
under Section 224 of this Act. The Committee believes that
universal state participation in IARD will maximize efficiency
of the regulatory system while imposing the least cost upon the
industry. Investors also will benefit from having access to a
complete public disclosure database for both state and
federally registered advisers.
Section 224 embodies the Committee's recognition that in
the last few years the Internet has become an integral part of
the communications infrastructure of the United States and is
regularly used by millions of Americans. In light of this
development, the National Association of Securities Dealers
(NASD) has developed a means to make its Public Disclosure
Program available over the Internet. Currently, investors and
others can only access administrative and disciplinary
information about a registered person or firm over a telephone
hotline. Section 224 creates a legal environment whereby the
NASD can make this information available on its web site by
extending the immunity from liability that is set forth in
Section 15A(i) of the Securities Exchange Act of 1934. Immunity
will now apply to the information disclosed over the Internet,
or any other electronic system that may be developed. In
addition, immunity is provided to national securities exchanges
that provide such information pertaining to its members and
associated persons into the NASD's Public Disclosure Program.
Section 224 also repeals the provision of NSMIA in which
Congress mandated that the SEC provide for the establishment of
a public disclosure program for investment advisers, and it
codifies the provision as part of the Investment Advisers Act
of 1940. In its place, a provision is inserted that permits the
Commission to designate the NASD to carry out its plans to
administer the investment adviser public disclosure program--
known as the Investment Adviser Registration Depository. This
provision also is conformed to the terms of Section 15A(i) of
the Securities Exchange Act of 1934 so that the disclosure
programs for brokers and firms, as well as investment advisers,
will be subject to consistent statutory provisions.
SECTION-BY-SECTION ANALYSIS
Section 1. Short title
Designates this title as the ``Competitive Market
Supervision Act.''
Title I--Fees and Comparability
Section 101. Reduction in registration fees; elimination of
general revenue component
Registration fee rates in Section 6(b) of the Securities
Act of 1933 (15 U.S.C. 77f(b)) are reduced. The general revenue
portion of the registration fee is eliminated. The offsetting
collection rate is set at $67 per $1 million of securities
registered for FY 2001-2006, and at $33 per $1 million for FY
2007 and thereafter.
Section 102. Reduction in merger and tender fees;
reclassification as offsetting collections
Section 102 reduces merger and tender fee rates in Section
13(e)(3) and Section 14(g) of the Securities Exchange Act of
1934 (15 U.S.C. 78m(e)(3) and 78n(g), respectively) from one
fiftieth percent under current law, to $67 per $1 million of
securities involved for the period FY 2001-2006, and reduces
rates further to $33 per $1 million for FY 2007 and thereafter.
All fees are reclassified from general revenues to offsetting
collections.
Section 103. Reduction in transaction fees; elimination of
general revenue component
Under this section, all transactions included in Section 31
of the Securities Exchange Act of 1934 (15 U.S.C. 79z-5) are
consolidated, with the same fee rate applied to each as an
offsetting collection. Transaction fees in any particular
fiscal year will be set in appropriations acts at a rate
estimated to collect the target dollar amount set for that
year. The target dollar amount is calculated to approximate the
amount, when combined with anticipated registration and merger/
tender fees, that will approximately equal the offsetting
collections anticipated to be produced under current law.
Section 104. Adjustment to fee rates
The Commission is given authority to increase or decrease
transaction fee rates after the first half of the fiscal year
if projections show that either the cap or floor for total fee
collections will be breached. To provide a safeguard against
misuse of the authority granted in Section 104, the legislation
requires the agency to report to Congress before it exercises
any authority to adjust fees.
Section 105. Comparability provisions
Section 105(a) amends Section 4(b) of the Securities
Exchange Act of 1934 (15 U.S.C. 78d(b)) to authorize, but not
require, the SEC to compensate its employees according to a
scale outside the Federal Government's General Schedule (GS)
rates. Pursuant to this authority, the SEC may provide
additional compensation and benefits to its employees on the
same comparable basis as do the agencies referred to under
Section 1206(a) of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (12 U.S.C. 1833b). Such agencies
include the federal banking agencies, the National Credit Union
Administration, the Federal Housing Finance Board, and the Farm
Credit Administration. The amendment ensures that reductions,
if any, in base pay for an employee of the SEC represented by a
labor organization with exclusive recognition in accordance
with Chapter 71 of Title 5 of the United States Code, result
from negotiations between such organization and SEC management,
as opposed to by reason of the enactment of this amendment.
In establishing and adjusting schedules of compensation and
benefits for its employees, Section 105(b) requires the SEC to
inform the heads of the agencies mentioned above and to
maintain comparability with such agencies regarding
compensation and benefits. A technical change is made to strike
from Section 1206(a) the reference to the Thrift Depositor
Protection Oversight Board of the Resolution Trust Corporation,
which was abolished on December 31, 1995. Section 105(c)
provides certain conforming amendments to Title 5 of the United
States Code to reflect changes made under Subsection (a).
Section 106. Authorization for appropriations
Appropriations for the SEC are authorized for $422,800,000
for fiscal year 2001.
Section 107. Effective date
In general, Title I becomes effective on October 1, 2000.
However, the authorities provided by Section 13(e)(3)(D),
Section 14(g)(1)(D), Section 14(g)(3)(D), and Section 31(d) of
the Securities Exchange Act of 1934, as so designated by this
title shall not apply until October 1, 2001.
Title II--Securities Markets Enhancement
Section 201. Short title
Designates this title as the ``Securities Markets
Enhancement Act of 2000.''
Subtitle A--Reducing the Cost of Capital Formation
Section 211. Exempted securities and organizations
Section 211(a) raises the exemption threshold under Section
3(b) of the Securities Act of 1933 (15 U.S.C. 77c(b)).
Currently, the SEC has the ability to exempt certain offerings
from registration, but not exceeding an amount of $5 million.
Section 211(a) raises the maximum size that the SEC can exempt
to $12 million. Section 211(b) amends the Securities Exchange
Act of 1934 (15 U.S.C. 78c(e)(2)) to provide an exception to
individuals from broker-dealer registration who are compensated
in connection with the issuance by charitable organizations of
exempt securities described in Section 3(a)(12)(A)(v) of the
Securities Exchange Act of 1934. Individuals receiving such
compensation do not have to register as a broker-dealer,
provided that the charitable organization, and the individual,
meet the criteria laid out in Section 3(e)(2)(B) of the
Securities Exchange Act of 1934.
Section 212. National market treatment for certain
securities
Section 212 expands the definition of covered securities
under Section 18 of the Securities Act of 1933 (15 U.S.C. 77r)
to include new categories of securities that are offered and
exchanged nationally (and even internationally) or are products
where the underlying security is a covered security. The list
of new covered securities includes certain rights and warrants,
securities of foreign governments, any foreign equity security
that qualifies as a ``margin security'' under the rules and
regulations of the Board of Governors of the Federal Reserve
System, and interests in employee benefit plans. Section 212
also eliminates the ability of states to collect fees on
secondary market transactions involving the securities outlined
in Section 18 as amended by this legislation. Further, Section
212 will allow officers and directors of firms that offer the
securities described in Section 18(b)(4)(D) of the Securities
Act of 1933 (15 U.S.C. 77r(b)(4)(D)) to avoid state
registration and licensing as issuer agents, provided that they
receive no compensation in connection with such offerings.
Subtitle B--Enhancement of Disclosure and Investment Adviser Regulation
Section 221. Ensuring adequate record keeping
Section 221 amends Section 203A(b)(2) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-3a(b)(2)) to reaffirm
Congress' intent when it enacted NSMIA, that nothing was meant
to prohibit states from (1) investigating and bringing
enforcement actions with respect to fraud or deceit against, or
(2) receiving a notice filing, consent to service of process,
and a fee from a federally registered adviser, provided the de
minimis provisions enacted in this legislation are honored.
Section 222. Elimination of barriers to providing services
Section 222 adds a new subsection, Section 203A(e), to the
Investment Advisers Act of 1940 to create de minimis provisions
relating to prohibitions on states from requiring notice
filings, fees, and registrations for all investment advisers.
Section 223. Reducing financial reporting burdens
Currently, a few states require investment advisers to
supply financial information, even though the advisers have
their principal place of business in another state. Section 223
will prohibit states from enforcing these reporting
requirements as long as advisers are in compliance with their
home state's laws and have not taken custody of any assets of
clients residing in the other state in the prior 12 months.
Section 223 also provides an incentive to states to use the new
Investment Adviser Registration Database (IARD) by not allowing
a state to collect fees or require filings from certain
investment advisers unless the state uses the one-stop
electronic filing system currently being designed by the SEC
and the NASAA pursuant to Section 204(b) of the Investment
Advisers Act of 1940.
Section 224. Enhancing transparency of records
Section 224 will foster better disclosure of violations by
broker-dealers and investment advisers by granting immunity
protection to disclosures of such information over the
Internet. Similar disclosures that currently occur over
established telephone hotlines are already granted immunity. In
1996, as part of the NSMIA, Congress mandated that the SEC
provide for the establishment of a public disclosure program
for investment advisers. Section 224 repeals this provision of
NSMIA and codifies it as part of the Investment Advisers Act of
1940 by permitting the SEC to designate an entity, such as the
NASD, to administer the forthcoming IARD program.
REGULATORY IMPACT STATEMENT
In accordance with Paragraph 11(g), rule XXVI of the
Standing Rules of the Senate, the Committee makes the following
statement regarding the regulatory impact of the bill.
Title I of the bill dramatically lowers user fees on
securities transactions and registrations, as well as mergers
and tender offerings. The reduction of these fees lowers the
cost of savings and investment for consumers, and reduces fee
burden on businesses that raise capital in the securities
markets. According to the Congressional Budget Office,
beginning in FY 2001, the savings to investors and issuers from
this bill are expected to be $10.4 billion over five years. The
savings are expected to be $19.7 billion over ten years.
Title I also provides the SEC with authority to compensate
its employees according to a scale outside of the Federal
Government's General Schedule rates. This compensation parity
provision will result in no increase in regulatory burden.
Neither does it necessitate any increase in the SEC budget,
since the increase is not mandatory. That is to say, the SEC
would exercise this authority on a discretionary basis within
the context of funds made available to the Commission by
Congress through the normal authorization and appropriations
process.
Title II of the bill makes many significant changes that
lower the impact of regulation and its associated costs on
issuers, broker-dealers, investment advisers, investors, and
other participants in the securities markets.
The bill reduces regulatory burden by providing a greater
opportunity for issuers of securities to avail themselves of
exemptions from registration of their offerings. Greater use of
such exemptions allow issuers to avert the paperwork and legal
costs associated with the registration process.
The legislation will exempt individuals involved in
offering certain qualifying securities on behalf of charitable
organizations from registering as broker-dealers. The
regulatory burden will be reduced for those individuals who
previously had to register and for the charities that rely on
the offering process.
By expanding the definition of covered securities, and thus
allowing a greater number of offerings to qualify for a single
registration (rather than multiple registrations with different
states), the bill streamlines the offering process and eases
regulatory burden on issuers. In addition, the regulatory
burden will be reduced on brokers who participate in secondary
market transactions involving these securities. Under current
law, brokers are required to verify that a given security was
registered in the particular state where the investor resided
before the brokers could consummate a secondary transaction
involving securities affected by this provision. Brokers will
be able to avoid this extra step when engaging in transactions
involving securities that will become covered securities upon
enactment of this bill.
The bill eliminates the authority of states to collect
paperwork and fees on secondary market transactions involving
covered securities. No states currently require such paperwork
or fees, therefore, this provision is viewed to be a technical
correction that will have no regulatory impact but serves
rather to prevent an unneeded regulatory burden from being
added in the future.
The bill preserves the ability of states to collect certain
filings, fees, and documents from investment advisers. This
provision is simply a reaffirmation of current practice and
will not have any regulatory impact.
Directors and officers of issuing firms sometimes assist in
the offering of their firm's securities. This bill will lower
regulatory burden on these individuals by allowing them to
avoid registration as issuer agents, provided that they receive
no compensation particularly related to the offering.
The legislation creates specific guidelines that will allow
investment advisers to avoid filings, fees, registrations, and
the providing of financial information to states where they
have no place of business and only a de minimis number of
clients. This provision significantly lowers regulatory costs
on investment advisers who qualify for such treatment.
The legislation provides a legal environment that will
allow self regulatory organizations (SROs) to provide
disclosures over the Internet to investors about the
administrative and disciplinary backgrounds of broker-dealers,
investment advisers, and other market participants. By
realizing the efficiency of communicating such information
electronically, regulators will avoid certain paperwork, as
well as receive disclosures in a more timely fashion and at
lower cost. Using such an electronic process lowers the burden
on members of SROs and investment advisers who must fund the
disclosure programs, and improves investor access to such
information.
The bill creates a one-stop system to allow investment
advisers to fulfill their registration, filing, and other
regulatory obligations without having to do so state-by-state.
This system will maximize efficiency of the regulatory system
while lowering fees and regulatory cost incurred by the
investment adviser industry.
CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
Senate rule XXVI, Section 11(b) of the Standing Rules of
the Senate, and Section 403 of the Congressional Budget
Impoundment and Control Act, require that each committee report
on a bill containing a statement estimating the cost of the
proposed legislation, which was prepared by the Congressional
Budget Office. The Congressional Budget Office Cost Estimate
and its Estimate of Costs of Private-Sector Mandates, both
dated July 24, 2000, are hereby included in this report.
U.S. Congress,
Congressional Budget Office,
Washington, DC, July 24, 2000.
Hon. Phil Gramm,
Chairman, Committee on Banking, Housing, and Urban Affairs, U.S.
Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 2107, the
Competitive Market Supervision Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Mark Hadley
and Kenneth Johnson.
Sincerely,
Steven Lieberman
(For Dan L. Crippen, Director).
Enclosure.
S. 2107--Competitive Market Supervision Act
Summary: S. 2107 would adjust the fees that the Securities
and Exchange Commission (SEC) is authorized to collect for
registrations, mergers, and transactions of securities. Under
current law, some of those fees are recorded in the budget as
governmental receipts (revenues) and some are recorded as
offsetting collections that are credited against discretionary
appropriations for the SEC. The bill would eliminate SEC fees
that are recorded as revenues and would limit the amount of
fees that can be collected as an offset to discretionary
spending. If implemented, S. 2107 would reduce total SEC fees
from an estimated $2.1 billion in fiscal year 2000 to about
$0.7 billion in 2001.
The bill would authorize the appropriation of $423 million
for the SEC in 2001. Under S. 2107, the SEC would be allowed to
adjust employees' compensation and benefits to make them
comparable to agencies that regulate banking, such as the
Federal Deposit Insurance Corporation (FDIC) and the National
Credit Union Administration. Finally, the bill would exempt
certain market participants and types of securities from state
registration requirements.
CBO estimates that implementing S. 2107 in 2001 would
increase net SEC spending, relative to 2000 spending. For 2001,
the bill would authorize an increase of $40 million in the
gross SEC appropriation, relative to 2000, but it also would
limit the amount of fees that would be credited against gross
SEC spending will total $864 million. Without any limitation,
we expect those fee collections would grow to $988 million in
2001. Under S. 2107, however, we estimate that SEC fees that
are credited against gross agency spending would be limited to
$677 million. CBO estimates that net SEC spending would
increase by $275 million from 2000 to 2001, assuming
appropriation of the amount authorized by the bill for 2001.
(Estimated budgetary effects of S. 2107 after 2001 would depend
on gross appropriations provided to the SEC. This bill would
not authorize such spending beyond 2001.)
Finally, CBO estimates that enactment of S. 2107 would
reduce governmental receipts by $1.3 billion in 2001 and by
$7.9 billion over the 2001-2005 period. Because S. 2107 would
reduce governmental receipts, pay-as-you-go procedures would
apply.
S. 2107 contains intergovernmental mandates as defined in
the Unfunded Mandates Reform Act (UMRA) because it would
preempt several states' securities laws. While data are very
limited, CBO estimates that complying with these mandates would
not exceed the threshold established by that act ($55 million
in 2000, adjusted annually for inflation). S. 2107 would impose
private-sector mandates on the national securities exchanges,
national securities associations, and investment advisors. CBO
estimates that the direct costs of these mandates would be
below the annual threshold established by UMRA for private-
sector mandates ($109 million in 2000, adjusted for inflation).
Estimated cost to the Federal Government: The estimated
budgetary impact of S. 2107 on revenues is shown in Table 1.
The effect of the bill on spending subject to appropriation
after 2001 would depend on the gross amounts appropriated to
the SEC. The costs of this legislation fall within budget
function 370 (commerce and housing credit).
Basis of estimate
CBO estimates that implementing S. 2107 would increase net
SEC spending from 2000 to 2001 by $275 million, assuming
appropriation of the bill's authorized amount. We estimate that
enactment of the bill would reduce revenues by $1.3 billion in
2001 and by $7.9 billion over the 2001-2005 period by
eliminating SEC fees that are currently recorded in the budget
as revenues.
Spending subject to appropriation
S. 2107 would authorize the appropriation of $423 million
in 2001 for the SEC, and would reduce the amount of fees the
agency is authorized to charge, subject to appropriation
action. In addition, the bill would establish upper and lower
limits on the total amount of fees the SEC could collect each
year to offset its appropriated spending.
TABLE 1.--ESTIMATED BUDGETARY EFFECTS OF S. 2107
----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-----------------------------------------------------------
2000 2001 2002 2003 2004 2005
----------------------------------------------------------------------------------------------------------------
SPENDING SUBJECT TO APPROPRIATION \1\
SEC spending under current law:
Estimated budget authority \2\.................. -496 0 0 0 0 0
Estimated outlays............................... -515 111 0 0 0 0
Proposed Changes:
Gross SEC spending:
Authorization Level......................... 0 423 0 0 0 0
Estimated outlays........................... 0 326 93 0 0 0
Offsetting collections:
Estimated authorization level............... 0 -677 0 0 0 0
Estimated outlays........................... 0 -677 0 0 0 0
Net SEC spending:
Estimated authorization level............... 0 -254 0 0 0 0
Estimated outlays........................... 0 -351 93 0 0 0
SEC Spending under S. 2107:
Estimated authorization level \3\............... -496 -254 0 0 0 0
Estimated outlays............................... -515 -240 93 0 0 0
CHANGES IN REVENUES
Estimated revenues.................................. 0 -1,306 -1,420 -1,545 -1,717 -1,910
----------------------------------------------------------------------------------------------------------------
\1\ After 2001, the impact on discretionary spending or the changes in SEC for rates that would be made by S.
2107 would depend on the gross appropriation provided for the agency. This bill only authorizes such funding
for 2001.
\2\ The 2000 level is the estimated net amount appropriated for that year, the gross SEC appropriationf or 2000
was $383 million.
Changes in Gross Spending.--S. 2107 would authorize a gross
SEC appropriation for 2001 that is $40 million more than the
2000 level. Based on historical spending patterns of the
agency, CBO estimates implementing this provision would cost
about $420 million over the 2001-2002 period.
Changes in Offsetting Collections.--The bill would reduce
offsetting collections by reducing the current statutory rates
on all three types of SEC fees: registration fees, merger and
tender fees, and transaction fees. The bill also would
establish an upper and lower limit on the total amount of
offsetting collections the SEC may collect in any year.
Based on historical information from the securities
industry and the likelihood that offsetting collections would
exceed the upper limit that would be established by the bill,
CBO estimates that the lower fee rates authorized by S. 2107
would reduce offsetting collections relative to CBO's baseline
by about $311 million in 2001 and by $2.5 billion over the
2001-2005 period, subject to future appropriation action. Table
2 compares CBO's baseline estimates of SEC fee collections with
our estimates of fee collections under S. 2107.
TABLE 2.--ESTIMATED OFFSETTING COLLECTIONS FROM SEC FEES, RELATIVE TO CBO BASELINE ESTIMATES
----------------------------------------------------------------------------------------------------------------
Outlays in millions of dollars by fiscal year--
-----------------------------------------------------------
2000 2001 2002 2003 2004 2005
----------------------------------------------------------------------------------------------------------------
CBO baseline estimates of SEC offsetting collections -864 -988 -1,154 -1,360 -1,582 -1,919
Estimated reduction in fees authorized by S. 2107... 0 311 388 479 591 723
Estimated SEC offsetting collections under S. 2107.. -864 -677 -766 -881 -991 -1,196
----------------------------------------------------------------------------------------------------------------
Registration fees.--Under current law, the SEC collects a
fee on the registration of securities. The current registration
fee is $200 per $1 million of the maximum aggregate price for
securities that are proposed to be offered during the 2000-2006
period. After 2006, the fee drops to $67 per $1 million of the
maximum aggregate price for securities that are proposed to be
offered. These fees are recorded as governmental receipts
(revenues). Current law also requires, subject to
appropriation, that the SEC charge an additional registration
fee of $50 per $1 million of the maximum aggregate price for
securities that are proposed to be offered in 2001. Under
current law, this added registration fee gradually declines
after 2001, until it ends at the end of 2005. These additional
fees are recorded as offsetting collections.
S. 2107 would eliminate all registration fees that are
recorded as governmental receipts and would set fees that are
recorded as offsetting collections at $67 per $1 million of the
maximum aggregate price for securities that are proposed to be
offered during the 2001-2006 period. The bill also would change
the registration fees for 2007 and thereafter to $33 per $1
million of the maximum aggregate price for securities that are
proposed to be offered. CBO estimates that under the bill the
SEC would collect $229 million in registration fees in 2001,
subject to appropriation action.
Merger and tender fees.--Under current law, the SEC charges
a merger fee equal to $200 per $1 million of the value of
securities proposed to be purchased as part of a merger. These
current fees are also recorded revenues. S. 2107 would
eliminate those merger fees and establish new merger fees to be
recorded as offsetting collections at the rate of $67 per $1
million of the aggregate value of securities proposed to be
purchased during the 2001-2006 period. The bill also would
establish merger fees for 2007 and thereafter at the rate of
$33 per $1 million of the aggregate value of securities
proposed to be purchased as part of a merger. CBO estimates
that under S. 2107 the SEC would collect about $46 million in
merger fees in 2001, subject to appropriation.
Transaction fees.--Under current law, the SEC collects 1/
300th of a percent of the aggregate dollars traded through
national securities exchanges, national securities
associations, brokers, and dealers. The fee rate will decline
to 1/800th of a percent for 2007 and thereafter. Fees collected
from national securities associations are recorded as
offsetting collections. (Fees from other sources are recorded
as revenues.)
Under the bill, all transactions fees would be recorded as
offsetting collections. Furthermore, the bill would require the
SEC to set the transaction fee rate at the beginning of each
fiscal year so that transaction fee collections in a given
fiscal year will equal a specified amount. For 2001, this
amount would be $413 million. By comparison, under our baseline
assumptions, CBO estimates the SEC will collect $817 million of
offsetting collections from transaction fees in 2001.
S. 2107 would require that the SEC adjust the transaction
fee rate during the year so that total SEC fee collections
(including fees for registrations, mergers, and transactions)
would not fall below a specified floor amount of collections,
nor exceed a specified ceiling amount of collections. The bill
would set the floor amount equal to the amount appropriated to
the SEC for fiscal year 2001, and adjust it annually for
changes in inflation thereafter, or at the amount authorized to
be appropriated for the SEC in a given year, whichever is
greater. The bill would set the ceiling amount equal to the
most recent CBO baseline for total SEC collections, plus 5
percent above this level, for fiscal years 2001 through 2010.
The bill would set the ceiling equal to the amount authorized
to be appropriated for the SEC, plus an additional 5 percent,
for fiscal years 2011 and thereafter.
By changing the fee rates paid for registrations, mergers,
and transactions, the bill would reduce total offsetting
collections from the CBO baseline estimates of $988 million to
about $688 million in 2001. Offsetting collections, however,
could be higher or lower depending on the volume of each of
those activities. By limiting the total amount the SEC could
collect through a floor and ceiling, the bill would eliminate
the possibility that offsetting collections could be less than
$423 million or more than $1,037 million in 2001. Based on the
historical growth of SEC fees, CBO does not expect fees would
be less than the floor in any year. Based on the likelihood
that SEC fees under the bill would be greater than the ceiling
in 2001, CBO estimates these provisions would cost about $11
million in that year. CBO estimates the ceiling provisions
would reduce expected fees by about $90 million over the 2001-
2005 period.
Revenues
S. 2107 would eliminate all registration, merger and
tender, and transaction fees that are currently recorded as
revenues. CBO estimates that S. 2107 would reduce revenues by
$7.9 billion over the 2001-2005 period and by $14.4 billion
over the 2001-2010 period.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act sets up pay-as-you-go procedures
for legislation affecting direct spending or receipts. The net
changes in governmental receipts that are subject to pay-as-
you-go procedures are shown in Table 3. For the purposes of
enforcing pay-as-you-go procedures, only the effects in the
current year, the budget year, and the succeeding four years
are counted.
TABLE 3.--ESTIMATED IMPACT OF S. 2107 ON DIRECT SPENDING AND RECEIPTS
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays..................................... Not applicable
Changes in receipts.................................... 0 -1,306 -1,420 -1,545 -1,717 -1,910 -2,108 -1,000 -1,026 -1,129 -1,241
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimated impact on state, local, and tribal governments:
S. 2107 would preempt state laws to prohibit states from
imposing certain filing and fee requirements on specified
securities and securities providers. Such preemptions would be
mandates as defined in UMRA. Because states vary significantly
in filing requirements, fee structures, and scope of
regulation, CBO cannot determine precisely the total revenue
loss they would experience as a result of this bill. However,
based on information provided by groups representing securities
administrators, securities attorneys, and a sample of states
most likely to be affected, we estimate that those losses would
not exceed the threshold established by UMRA ($55 million in
2000, adjusted annually for inflation).
Estimated impact on the private sector: S. 2107 would
require each national securities exchange and national
securities association to file monthly with the SEC an estimate
of fees that they are required to pay. The bill would also
impose requirements on a registered securities association and
investment advisors by requiring electronic access to
disciplinary and other information. Based on information from
government and industry sources, CBO estimates that the direct
costs of the mandates would be below the annual threshold
established by UMRA for private-sector mandates ($109 million
in 2000, adjusted for inflation).
Estimate prepared by: Federal costs: Mark Hadley and
Kenneth Johnson; revenues: Hester Grippando and Erin Whitaker;
impact on State, local, and tribal governments: Shelly
Finlayson; impact on the private sector: Jean Wooster.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis; Roberton Williams, Deputy
Assistant Director Tax Analysis.
CHANGES IN EXISTING LAW
In the opinion of the Committee, it is necessary to
dispense with the requirement of Section 12 of rule XXVI of the
Standing Rules of the Senate in order to expedite the business
of the Senate.
ADDITIONAL VIEWS OF SENATOR SHELBY
Last year, this Committee tore down the legal barriers
separating banking, securities and insurance and passed into
law the Gramm-Leach-Bliley Act. As hard as I tried, I could not
convince the Committee to adopt strong privacy provisions to
provide individuals any real ability to control the use of
their most personal financial and medical information. At that
time, I was essentially told that ``this is not the time, or
the place.''
During the markup of S. 2107, I offered an amendment which
would have disallowed financial institutions from purchasing or
selling Social Security numbers and would have expanded the
definition of the term ``nonpublic personal information'' in
the Gramm-Leach-Bliley Act to include Social Security numbers.
Again, I was told this is not the time or the place and that my
amendment may have ``unintended consequences.'' On this basis,
my amendment was voted down by a vote of 10 to 10.
While opponents of my amendment talked about unintended
consequences of adopting the amendment, I would like to discuss
the unintended consequences of not adopting my amendment and
instead choosing the status quo.
According to a New York Times article on April 3rd of this
year, ``Law enforcement authorities are becoming increasingly
worried about a sudden, sharp rise in the incidence of identity
theft, the outright pilfering of peoples personal information
for use in obtaining credit cards, loans and other goods.'' The
article goes onto say that the ``Social Security Administration
reported that they had received more than 30,000 complaints
about the misuse of Social Security numbers last year, most of
which had to do with identity theft.''
Ironically, on the very same day of the markup, the
Washington Post featured an article on the front page of the
Business section that read, ``ID Theft Becoming Public Fear No.
1.'' The article reported that ``Consumers are besieging
federal agencies with complaints about fraudulent loans taken
out in their names, misuse of Social Security numbers and
falsified credit card accounts.''
Identity theft is real. At the markup, I told the story of
Mr. Bob Hartle, a factory worker in Arizona. One day, much to
Mr. Hartle's dismay, he found out that an individual had
obtained his personal information and used that information to
steal his identity, apply for credit cards and open accounts.
That individual ran up over $100,000 in credit card debt under
Mr. Hartle's name, purchased motorcycles, even a home, filed
for bankruptcy, obtained a drivers license, and was even fired
from his job--all in Mr. Hartle's name. Mr. Hartle spent
$15,000 and moved to Phoenix just to track down the thief.
The thief was ultimately prosecuted for fraud, but only
after the criminal had obtained four life insurance policies in
Hartle's name and had even assumed his status as a Vietnam
veteran.
In addition, I shared the story of Amy Boyer, a girl whose
social security number was bought on the Internet for $45 and
was subsequently murdered by a stalker.
The economic toll of identity theft is not insignificant.
In 1997, the Secret Service made nearly 9,500 arrests amounting
to $745 million in losses to individuals and financial
institutions. Indeed, ninety-five percent of financial crimes
arrests involve identity theft.
While financial institutions have used the Social Security
number as an identifier, the sale and purchase of these numbers
facilitates criminal activity and can result in significant
invasions of individual privacy. These are the unintended
consequences of having no federal law that prohibits the buying
and selling of Social Security numbers. I would argue these
unintended consequences far outweigh any inconvenience my
amendment would cause financial institutions.
What gives companies the right to buy and sell your Social
Security number, anyway? The Social Security number was created
by the federal government in 1936 as a means of tracking
workers earnings and eligibility for Social Security benefits.
There was never any intention or consideration for financial
institutions to use a person's Social Security number as a
universal access number.
However, the financial services industry has come to use
and depend on an individual's private Social Security number,
both as an identifier and in order to conduct transactions.
Indeed, banks use the last four digits of the Social Security
number as the default PIN number for ATM cards and for
telephone banking access. It has been reported that many
insurance companies use an individual's Social Security number
as the account number which is printed on the member card that
individuals carry in their wallet. Again, no federal law
prohibits the buying and selling of individual Social Security
numbers.
Last year, a reputable Fortune 500 company, U.S. Bancorp,
sold account information--including Social Security numbers--of
one million of its customers to MemberWorks, a telemarketer of
membership programs that offer discounts on such things as
travel to health care services. Now some may believe we stopped
such activity by including a provision, Section 502 (d), in the
Gramm-Leach-Bliley Act limiting the ability of institutions to
share account information with telemarketers.
That provision, however, does not stop a financial
institution from buying and selling individual Social Security
numbers. Indeed, it is even legal to sell an individual's birth
date, and mother's maiden name. If you have those three things,
you have the keys to the kingdom--not to mention any and every
account that individual has.
While it is true identity theft is against the law, the
sponsor of the law, Senator Jon Kyl admitted just one day
before our markup that, ``Almost two years after the passage of
the Act (Identity Theft and Assumption Deterrence Act of 1998,
P.L. No. 105-318 (1998)), identity theft unfortunately
continues to grow. * * *'' There is no question that this
increase in criminal activity is due to the proliferation of
using Social Security numbers at financial institutions.
In addition, my amendment included Social Security numbers
as nonpublic personal information for the purpose of the Gramm-
Leach-Bliley Act, thereby subjecting the sharing of Social
Security numbers to the privacy protections in that Act.
Current regulations say that Social Security numbers are not
considered nonpublic personal information if the number is
``publicly available,'' as in bankruptcy filings, etc.
I just cannot find a reason as to why Congress should aid
and abet criminals in attaining individual Social Security
numbers by having a law on the books that treats Social
Security numbers as ``public information.'' Indeed, no American
would agree the public good is being served by making their
personal Social Security number available for anyone who wants
to see it.
Last year, during the debate on financial modernization,
the financial industry argued they needed the ability to share
information among affiliates. To be clear, my amendment would
not have limited a financial institution's ability to share an
individual's Social Security number among affiliates.
I believe the time to protect Social Security numbers is
now. The evolution of technology is making the collection,
aggregation, and dissemination of vast amounts of personal
information easier and cheaper. The longer we wait to act on
this very important issue--an issue that is supported by a vast
majority of Americans--the more the American people lose
confidence in the U.S. Congress and our ability to lead.
I am disappointed the Committee did not concur with me on
the urgency of this issue. I hope we can add significant
privacy protections on S. 2107 before this legislation is
passed into law.
Richard Shelby.
ADDITIONAL VIEWS OF SENATORS SARBANES, DODD, KERRY, AND REED
We support the provisions in S. 2107 that permit the
Securities and Exchange Commission (SEC) to compensate
employees in a manner comparable to that of employees at the
other Federal financial regulators. We also support amendments
to the Federal securities laws that remove unnecessary
restrictions and requirements and make the markets more
efficient.
However, we share the Administration's ``deep concerns''
that reducing the registration and transaction fees collected
by the SEC will come at the expense of other Administration
priorities, including ``strengthening Social Security and
Medicare, providing tax relief to middle-income families,
funding critical initiatives, and paying off the debt by
2013.''
We are also concerned that, as OMB points out in its letter
to the Committee, this legislation ``is subject to the pay-as-
you-go requirements of the Omnibus Budget Reconciliation Act of
1990'' and ``the absence of any offsets could cause a
significant sequester of mandatory programs.'' A copy of OMB
Director Jacob J. Lew's letter to the Committee is included
below.
We note also that the SEC fees would be reduced in a period
when the securities industry and securities investors have been
enjoying great economic prosperity. According to the Securities
Industry Association, ``The securities industry posted record
results in almost every financial parameter during the first
quarter of 2000. Pretax profits reached a new record $8.2
billion, a 20% increase over the previous quarter's then record
$6.8 billion profit and an 82% increase from year earlier
levels.'' New York Stock Exchange members in 1999 earned a
record $461 million in profits, up over 50% from 1998 profits.
We believe that the overall impact on individual investors
and public companies of the proposed fee reduction would be
negligible because the amount of the SEC fee charged on each
transaction or offering is small. When an investor sells stock,
he or she is charged a Section 31 transaction fee amounting to
1/300 of 1%. This means, by way of example, that an investor
who sells stock worth $3,000 pays a fee of about 10 cents; when
$15,000 is sold, the fee is about 50 cents. When a company
registers stock to be sold, it pays a Section 6(b) registration
fee of 1/50 of 1%. By way of example, a company that registers
$10 million of stock pays $400. The SEC fees already are
scheduled to decline in 2007, as a result of the National
Securities Markets Improvement Act.
From these examples, it appears that few if anyone is
deterred from making an investment in a stock because of the
fees incurred and, similarly, companies are not deterred from
selling stock because of the size of the SEC fee.
For these reasons and, more importantly, because we do not
know the budget implications, we express reservations about
those provisions in this legislation which would reduce the
registration and transaction fees collected by the SEC.
Paul Sarbanes.
Christopher J. Dodd.
John F. Kerry.
Jack Reed.
------
Executive Office of the President,
Office of Management and Budget,
Washington, DC, June 15, 2000.
Hon. Paul S. Sarbanes,
Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
Dear Senator Sarbanes: I am writing to express the
Administration's deep concerns with S. 2107, the ``Competitive
Market Supervision Act,'' which would substantially reduce the
registration and transaction fees collected by the Securities
and Exchange Commission (SEC).
The President has proposed a balanced and responsible
framework for maintaining fiscal discipline. Any additional
reduction in SEC fees will necessarily come at the expense of
strengthening Social Security and Medicare, providing tax
relief to middle-income families, funding critical initiatives,
and paying off the debt by 2013. This proposal was not included
in the Administration's FY 2001 budget and we are concerned
over the many bills introduced in Congress that would affect
governmental revenues.
In 1996, Congress and the President collaborated on
legislation--the National Securities Markets Improvement Act
(NSMIA)--that established a calendar for reducing SEC fee
rates. This legislation also required that approximately two-
thirds of the total fee collections be deposited as general
revenue of the Treasury and one-third as offsetting collections
of the SEC. The Administration continues to support the
declining fee rates agreed to in the NSMIA legislation.
Proposals to further reduce these fees should be considered in
the context of overall fiscal policy that balances the
importance of debt reduction and competing priorities such as
strengthening Social Security and Medicare, providing tax
relief to middle-income families, and other critical
initiatives called for in the President's FY 2001 budget
request.
Finally, please note that S. 2107 would affect receipts;
therefore, it is subject to the pay-as-you-go requirements of
the Omnibus Budget Reconciliation Act of 1990. OMB's
preliminary estimate is that the bill would reduce general
revenue by approximately $1.3 billion per year; the absence of
any offsets could cause a significant sequester of mandatory
programs.
Sincerely,
Jacob J. Lew, Director.
ADDITIONAL VIEWS OF SENATORS BRYAN, SARBANES, DODD, KERRY, REED, AND
EDWARDS
During last year's consideration of the Financial Services
Modernization Act, repeated assurances were given to members of
the Senate Banking Committee that the issue of financial
privacy would be considered and examined by the committee at a
reasonable date. With just a few short weeks remaining in the
second session of the 106th Congress, it appears that the
committee has failed to address this important issue at all,
and it would be reasonable to assume that we will continue to
be inundated with media reports of privacy intrusions and
unauthorized information-sharing.
It has been suggested that pursuing privacy legislation
would be an unnecessary and even hazardous exercise in light of
last year's passage of the landmark Financial Services
Modernization Act. Opponents of privacy legislation argue that
the provisions in the Gramm-Leach-Bliley bill addressing
consumer privacy should be provided sufficient time to take
effect before we discuss or consider additional legislative
measures.
This argument, however, wrongly assumes that the G-L-B
privacy provisions are likely to play a meaningful role in
protecting consumer privacy. They will not. The minimal
requirements that were included in G-L-B merely require
financial institutions to disclose their privacy policies to
their customers and to provide timely notification when
information is being shared. Moreover, while the legislation
did require these institutions to provide their customers the
ability to ``opt-out'' of information-sharing agreements with
third parties, an exception was provided for institutions and
third parties that enter into ``Joint Marketing Agreements.''
Every major consumer organization has concluded that this
watered-down restriction is virtually meaningless, and that the
``Joint Marketing Agreement'' exception is the proverbial
loophole that is so enormous it has swallowed the rule.
In short, although we support disclosure and believe that
financial institutions have a responsibility to keep their
customers informed of how and when their information is shared
or sold, such provisions can hardly be referred to as privacy
``protections.''
It has also been argued that further legislation is not
necessary because the financial institutions are voluntarily
adopting privacy policies. First, it should be noted that most
of these policies provide consumers very little protection.
Most only notify consumers when their information is being
shared, and only a few banks provide their customers the
opportunity to ``opt-out'' of information-sharing agreements.
Virtually no major institutions have adopted the more extensive
privacy protection; that is, the requirement that the bank
obtain the express permission of their customers prior to the
sharing or sale of information--so-called ``opt-in.''
Second, even when banks do have voluntary policies in
place, how are consumers to know that such policies are being
adhered to? Consider the case of Chase Manhattan, the third
largest bank in the country and one of our Nation's most
revered and storied financial institutions. The Attorney
General of the State of New York found that Chase Manhattan was
violating its own publicly-stated privacy policy, sharing
confidential customer account information--without any
notification to their customers--to a third-party telemarketing
outfit. Eventually, Chase Manhattan avoided litigation on this
matter by entering into a consent agreement with the Attorney
General that established a tough, enforceable privacy policy
for millions of Chase Manhattan customers across the country.
Given the volume of anecdotal evidence, the numerous cases
of banks sharing or selling confidential customer information,
the investigations concluded by the State Attorneys General in
New York and Minnesota, and perhaps most important, the clear,
unequivocal support of the American people for strong privacy
legislation, we are disappointed that the committee has missed
an opportunity to address the issue of privacy in a meaningful
way.
Opponents of privacy legislation are clinging to the
misguided notion that the marketplace will fall apart if
financial institutions are barred from selling or sharing the
most confidential information of their customers without
seeking permission first.
But consider that two of the most successful banks in
America, Chase Manhattan and U.S. Bancorp, already provide
strong privacy protections to their customers pursuant to
consent agreements they have entered into. Their ability to
compete in the financial marketplace has hardly been
diminished. Moreover, American banks operating in the European
Community are required to seek their customers' permission
prior to sharing their financial information. And yet their
overseas operations continue to thrive. One must ask, why
shouldn't the American customers of an American bank have the
same rights and legal protections as the European customers of
that same American bank?
Support for strong privacy legislation cuts across all
partisan and ideological lines. Two of the leading privacy
advocates in the Congress, our colleague Senator Richard Shelby
(R-AL) and Rep. Joe Barton (R-TX), are also two of the more
conservative members. Groups ranging from the ACLU and
Consumers Union to the Eagle Forum and the Free Congress
Foundation have formed a coalition in support of meaningful
privacy legislation.
Momentum for privacy reform will continue to grow, and
though it appears unlikely that any substantive legislation can
pass before the adjournment of this Congress, the 107th
Congress will surely be compelled to address this issue. It is
our hope that the Senate Banking Committee will reverse course
next year, and identify financial privacy as a top priority in
2001. If so, the Senate Banking Committee will have an
opportunity to address perhaps the most critical issue facing
American consumers today. We hope that opportunity is not lost.
Richard H. Bryan.
Paul S. Sarbanes.
Christopher J. Dodd.
John F. Kerry.
Jack Reed.
John Edwards.