[Federal Register Volume 69, Number 43 (Thursday, March 4, 2004)]
[Notices]
[Pages 10278-10285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4802]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49332/February 27, 2004]


Order Making Fiscal 2004 Mid-Year Adjustment to the Fee Rates 
Applicable Under Sections 31(b) and (c) of the Securities Exchange Act 
of 1934

I. Background

    Section 31 of the Securities Exchange Act of 1934 (``Exchange 
Act'') requires each national securities exchange and national 
securities association to pay transaction fees to the Commission.\1\ 
Specifically, section 31(b) requires each national securities exchange 
to pay to the Commission fees based on the aggregate dollar amount of 
sales of certain securities transacted on the exchange.\2\ Section 
31(c) requires each national securities association to pay to the 
Commission fees based on the aggregate dollar amount of sales of 
certain securities transacted by or through any member of the 
association other than on an exchange.\3\
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    \1\ 15 U.S.C. 78ee.
    \2\ 15 U.S.C. 78ee(b).
    \3\ 15 U.S.C. 78ee(c).
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    Section 31(j)(1) and (3) require the Commission to make annual 
adjustments to the fee rates applicable under sections 31(b) and (c) 
for each of the fiscal years 2003 through 2011, and one final 
adjustment to fix the fee rates for fiscal year 2012 and beyond.\4\ 
Section 31(j)(2) requires the Commission, in certain circumstances, to 
make a mid-year adjustment to the fee rates in fiscal 2002 through 
fiscal 2011.\5\ The annual and mid-year adjustments are designed to 
adjust the fee rates in a given fiscal year so that, when applied to 
the aggregate dollar volume of sales for the fiscal year, they are 
reasonably likely to produce total fee collections under section 31 
equal to the ``target offsetting collection amount'' specified in 
section 31(l)(1) for that fiscal year.\6\ For fiscal 2004, the target 
offsetting collection amount is $1,028,000,000.\7\
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    \4\ 15 U.S.C. 78ee(j)(1) and (j)(3).
    \5\ 15 U.S.C. 78ee(j)(2).
    \6\ 15 U.S.C. 78ee(l)(1).
    \7\ Id.
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    Congress established the target offsetting collection amounts in 
the Investor and Capital Markets Fee Relief Act (``Fee Relief Act'') by 
applying reducing fee rates to the Congressional Budget Office's 
(``CBO'') January 2001 projections of dollar volume for fiscal years 
2002 through 2011.\8\ In any fiscal

[[Page 10279]]

year through fiscal 2011, the annual, and in certain circumstances, 
mid-year adjustment mechanism will result in additional fee rate 
reductions if the CBO's January 2001 projection of dollar volume for 
the fiscal year proves to be too low, and fee rate increases if the 
CBO's January 2001 projection of dollar volume for the fiscal year 
proves to be too high.
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    \8\ The target offsetting collection amounts for fiscal 2002 
through 2006 were determined by applying a rate of $15 per million 
to the CBO's January 2001 projections of dollar volume for those 
fiscal years. The target offsetting collection amounts for fiscal 
2007 through 2011 were determined by applying a rate of $7 per 
million to the CBO's January 2001 projections of dollar volume for 
those fiscal years. For example, CBO's January 2001 projection of 
dollar volume for fiscal 2004 was $68,500,000,000,000. Applying the 
initial rate under the Fee Relief Act of $15 per million to that 
projection produces the target offsetting collection amount for 
fiscal 2004 of $1,028,000,000.
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II. Determination of the Need for a Mid-Year Adjustment in Fiscal 2004

    Under Section 31(j)(2) of the Exchange Act, the Commission must 
make a mid-year adjustment to the fee rates under sections 31(b) and 
(c) in fiscal year 2004 if it determines, based on the actual aggregate 
dollar volume of sales during the first five months of the fiscal year, 
that the baseline estimate ($25,918,721,642,549) is reasonably likely 
to be 10% (or more) greater or less than the actual aggregate dollar 
volume of sales for fiscal 2004.\9\ To make this determination, the 
Commission must estimate the actual aggregate dollar volume of sales 
for fiscal 2004.
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    \9\ The amount $25,918,721,642,549 is the baseline estimate of 
the aggregate dollar amount of sales for fiscal year 2004 calculated 
by the Commission in its Order Making Fiscal 2004 Annual Adjustments 
to the Fee Rates Applicable Under section 6(b) of the Securities Act 
of 1933 and sections 13(e), 14(g), 31(b) and 31(c) of the Securities 
Exchange Act of 1934, Rel. Nos. 33-8225 and 34-47768 (April 30, 
2003), 68 FR 24027 (May 6, 2003).
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    Based on data provided by the national securities exchanges and the 
national securities association that are subject to section 31,\10\ the 
actual aggregate dollar volume of sales during the first four months of 
fiscal 2004 was $8,654,590,961,387.\11\ Using these data and a 
methodology for estimating the aggregate dollar amount of sales for the 
remainder of fiscal 2004 (developed after consultation with the CBO and 
the OMB),\12\ the Commission estimates that the aggregate dollar amount 
of sales for the remainder of fiscal 2004 to be $22,548,401,329,881. 
Thus, the Commission estimates that the actual aggregate dollar volume 
of sales for all of fiscal 2004 will be $31,202,992,291,268.
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    \10\ Each exchange is required to file a monthly report on Form 
R-31 containing dollar volume data on sales of securities subject to 
section 31 on the exchange. The report is due by the end of the 
month following the month for which the exchange provides dollar 
volume data. The NASD Inc. (``NASD'') provides data separately.
    \11\ Although section 31(j)(2) indicates that the Commission 
should determine the actual aggregate dollar volume of sales for 
fiscal 2004 ``based on the actual aggregate dollar volume of sales 
during the first 5 months of such fiscal year,'' data are only 
available for the first four months of the fiscal year as of the 
date the Commission is required to issue this order, i.e., March 1, 
2004. Dollar volume data on sales of securities subject to section 
31 for February 2004 will not be available from the exchanges and 
the NASD for several weeks.
    \12\ See Appendix A.
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    Because the baseline estimate of $25,918,721,642,549 is more than 
10% less than the $31,202,992,291,268 estimated actual aggregate dollar 
volume of sales for fiscal 2004, section 31(j)(2) of the Exchange Act 
requires the Commission to issue an order adjusting the fee rates under 
sections 31(b) and (c).

III. Calculation of the Uniform Adjusted Rate

    Section 31(j)(2) specifies the method for determining the mid-year 
adjustment for fiscal 2004. Specifically, the Commission must adjust 
the rates under sections 31(b) and (c) to a ``uniform adjusted rate 
that, when applied to the revised estimate of the aggregate dollar 
amount of sales for the remainder of [fiscal 2004], is reasonably 
likely to produce aggregate fee collections under section 31 (including 
fees collected during such 5-month period and assessments collected 
under [section 31(d)]) that are equal to [$1,028,000,000].''\13\ In 
other words, the uniform adjusted rate is determined by subtracting 
fees collected prior to the effective date of the new rate and 
assessments collected under section 31(d) during all of fiscal 2004 
from $1,028,000,000, which is the target offsetting collection amount 
for fiscal 2004. That difference is then divided by the revised 
estimate of the aggregate dollar volume of sales for the remainder of 
the fiscal year following the effective date of the new rate.
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    \13\ 15 U.S.C. 78ee(j)(2). The term ``fees collected'' is not 
defined in section 31. Because national securities exchanges and 
national securities associations are not required to pay the first 
installment of section 31 fees for fiscal 2004 until March 15, the 
Commission will not ``collect'' any fees in the first five months of 
fiscal 2004. See 15 U.S.C. 78ee(e) However, the Commission believes 
that, for purposes of calculating the mid-year adjustment, Congress 
by stating in section 31(j)(2) that the ``uniform adjusted rate * * 
* is reasonably likely to produce aggregate fee collections under 
Section 31 * * * that are equal to [$1,028,000,000],'' intended the 
Commission to include the fees that the Commission will collect 
based on transactions in the six months before the effective date of 
the mid-year adjustment.
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    The Commission estimates that it will collect $622,904,612 in fees 
for the period prior to the effective date of the mid-year 
adjustment\14\ and $23,900 in assessments on round turn transactions in 
security futures products during all of fiscal 2004. Using the 
methodology referenced in part II above, the Commission estimates that 
the aggregate dollar volume of sales for the remainder of fiscal 2004 
following the effective date of the new rate will be 
$17,307,204,075,317. Based on these estimates, the uniform adjusted 
rate is $23.40 per million of the aggregate dollar amount of sales of 
securities.\15\
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    \14\ This calculation is based on applying a fee rate of $46.80 
per million to the projected aggregate dollar volume of sales of 
securities subject to section 31 through February 21, 2004, and a 
rate of $39.00 for the period from February 22, 2004, to March 31, 
2004. Because the Commission's regular appropriation for fiscal year 
2004 was not enacted prior to the end of fiscal year 2003, Exchange 
Act section 31(k), the ``Lapse of Appropriation'' provision, 
required that the fee rate in use at the end of fiscal year 2003, 
$46.80 per million, remain in effect until 30 days after the 
appropriation was enacted. See also Order Making Fiscal 2004 Annual 
Adjustments to the Fee Rates Applicable Under section 6(b) of the 
Securities Act of 1933 and sections 13(e), 14(g), 31(b) and 31(c) of 
the Securities Exchange Act of 1934, Rel. Nos. 33-8225 and 34-47768 
(April 30, 2003), 68 FR 24027 (May 6, 2003). The Commission's 
regular appropriation for fiscal year 2004 was enacted on January 
23, 2004, and the $39.00 per million rate went into effect 30 days 
later, by operation of the statute. See Exchange Act section 
31(j)(4)(A)(ii).
    \15\ The calculation is as follows: ($1,028,000,000-
$622,904,612-$23,900)/$17,307,204,075,317=$0.0000234047. Consistent 
with the system requirements of the exchanges and the NASD, the 
Commission rounds this result to the seventh decimal point, yielding 
a rate of $23.40 per million.
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    This fee rate is substantially lower than the current fee rate of 
$39.00 per million, but it is still higher than the fee rate in effect 
upon to the enactment of the Fee Relief Act. The fee rate remains above 
the initial fee rate as a direct consequence of the decline in the 
aggregate dollar amount of sales of securities in fiscal 2004 compared 
to the CBO's January 2001 projection of the aggregate dollar amount of 
sales for fiscal 2004. The aggregate dollar amount of sales of 
securities subject to section 31 fees is illustrated in Appendix A.

IV. Effective Date of the Uniform Adjusted Rate

    Section 31(j)(4)(B) of the Exchange Act provides that a mid-year 
adjustment shall take effect on April 1 of the fiscal year in which 
such rate applies. Therefore, the exchanges and the national securities 
association that are subject to section 31 fees must pay fees under 
sections 31(b) and (c) at the uniform adjusted rate of $23.40 per 
million for sales of securities transacted on April 1, 2004, and 
thereafter until the

[[Page 10280]]

annual adjustment for fiscal 2005 is effective.\16\
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    \16\ Section 31(j)(1) and section 31(g) of the Exchange Act 
require the Commission to issue an order no later than April 30, 
2004, adjusting the fee rates applicable under sections 31(b) and 
(c) for fiscal 2005. These fee rates for fiscal 2005 will be 
effective on the later of October 1, 2004, or thirty days after the 
enactment of the Commission's regular appropriation for fiscal 2005.
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V. Conclusion

    Accordingly, pursuant to section 31 of the Exchange Act, \17\ it is 
hereby ordered that each of the fee rates under sections 31(b) and (c) 
of the Exchange Act shall be $23.40 per $1,000,000 of the aggregate 
dollar amount of sales of securities subject to these sections 
effective April 1, 2004.
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    \17\ 15 U.S.C. 78ee.

    By the Commission.
J. Lynn Taylor,
Assistant Secretary.

Appendix A

A. Baseline Estimate of the Aggregate Dollar Amount of Sales.

     First, calculate the average daily dollar amount of sales (ADS) 
for each month in the sample (January 1994-January 2004). The data 
obtained from the exchanges and NASD are presented in Table A. The 
monthly aggregate dollar amount of sales (exchange plus Nasdaq) is 
contained in column E.
     Next, calculate the change in the natural logarithm of ADS from 
month-to-month. The average monthly change in the logarithm of ADS 
over the entire sample is 0.015 and the standard deviation 0.118. 
Assume the monthly percentage change in ADS follows a random walk. 
The expected monthly percentage growth rate of ADS is 2.2 percent.
     Now, use the expected monthly percentage growth rate to 
forecast total dollar volume. For example, one can use the ADS for 
January 2004 ($120,604,513,953) to forecast ADS for February 2004 
($123,288,117,886 = $120,604,513,953 x 1.022).\1\ Multiply by the 
number of trading days in February 2004 (19) to obtain a forecast of 
the total dollar volume forecast for the month ($2,342,474,239,842). 
Repeat the method to generate forecasts for subsequent months.
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    \1\ The value 1.022 has been rounded. All computations are done 
with the unrounded value.
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     The forecasts for total dollar volume are in column I of Table 
A. The following is a more formal (mathematical) description of the 
procedure:
     1. Divide each month's total dollar volume (column E) by the 
number of trading days in that month (column B) to obtain the 
average daily dollar volume (ADS, column F).
     2. For each month t, calculate the change in ADS from the 
previous month as [Delta]t = log (ADSt/
ADSt -1), where log (x) denotes the natural logarithm of 
x.
     3. Calculate the mean and standard deviation of the series 
{[Delta]1, [Delta]2, * * *, 
[Delta]120{time} . These are given by [mu] = 0.015 and 
[sigma] = 0.118, respectively.
     4. Assume that the natural logarithm of ADS follows a random 
walk, so that [Delta]s and [Delta]t are 
statistically independent for any two months s and t.
     5. Under the assumption that [Delta]t is normally 
distributed, the expected value of ADSt/ADSt-1 
is given by exp ([mu] + [sigma]2/2), or on average 
ADSt = 1.022 x ADS t - 1.
     6. For February 2004, this gives a forecast ADS of 1.022 x 
$120,604,513,953 = $123,288,117,886. Multiply this figure by the 19 
trading days in February 2004 to obtain a total dollar volume 
forecast of $2,342,474,239,842.
     7. For March 2004, multiply the February 2004 ADS forecast by 
1.022 to obtain a forecast ADS of $126,031,435,423. Multiply this 
figure by the 23 trading days in March 2004 to obtain a total dollar 
volume forecast of $2,898,723,014,722.
     8. Repeat this procedure for subsequent months.

B. Using the Forecasts From A to Calculate the New Fee Rate

     1. Using the data from Table A, determine the actual and 
projected aggregate dollar volume of sales between 10/1/03 and 2/21/
04 to be $10,380,624,611,797. (Allocate the projected aggregate 
dollar volume in February 2004 based on the number of trading days 
in the periods--14 trading days during 2/1/04 and 2/21/04, and 5 
trading days during 2/22/04 and 2/29/04.) Multiply this amount by 
the fee rate of $46.80 per million dollars in sales during this 
period and get an estimate of $485,813,231 in actual and projected 
fees collected during 10/1/03 and 2/21/04. Determine the projected 
aggregate dollar volume of sales between 2/22/04 and 3/31/04 to be 
$3,515,163,604,154. Multiply this amount by the fee rate of $39.00 
per million dollars in sales during this period and get an estimate 
of $137,091,381 in projected fees collected during 2/22/04 and 3/31/
04.
     2. Estimate the amount of assessments on securities futures 
products collected during 10/1/03 and 9/30/04 to be $23,900 by 
summing the amounts collected through January of $7,700 with 
projections of a 2.2% monthly increase in subsequent months.
     3. Using the data from Table A, determine the projected 
aggregate dollar volume of sales between 4/1/04 and 9/30/04 to be 
$17,307,204,075,317.
     4. The rate necessary to collect the target $1,028,000,000 in 
fee revenues is then calculated as: ($1,028,000,000 - $485,813,231 - 
$137,091,381 - $23,900) / $17,307,204,075,317 = .000023405.
     5. Consistent with the system requirements of the exchanges and 
the NASD, round the rate to the seventh decimal point, yielding a 
rate of .0000234 (or $23.40 per million).

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[FR Doc. 04-4802 Filed 3-3-04; 8:45 am]
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