[Federal Register Volume 70, Number 42 (Friday, March 4, 2005)]
[Notices]
[Pages 10695-10700]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-4214]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51277/February 28, 2005]
Order Making Fiscal 2005 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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Sections 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 2005, the target
offsetting collection amount is $1,220,000,000.\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 reduced 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 10696]]
year through fiscal 2011, the annual, and in certain circumstances,
mid-year adjustment mechanisms 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 2005 was $81,300,000,000,000. Applying the
initial rate under the Fee Relief Act of $15 per million to that
projection produces the target offsetting collection amount for
fiscal 2005 of $1,220,000,000.
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II. Determination of the Need for a Mid-Year Adjustment in Fiscal 2005
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 2005 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 ($37,902,443,515,254) is reasonably likely
to be 10% (or more) greater or less than the actual aggregate dollar
volume of sales for fiscal 2005.\9\ To make this determination, the
Commission must estimate the actual aggregate dollar volume of sales
for fiscal 2005.
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\9\ The amount $37,902,443,515,254 is the baseline estimate of
the aggregate dollar amount of sales for fiscal year 2005 calculated
by the Commission in its Order Making Fiscal 2005 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. No. 33-8418 (April 30, 2004), 69 FR 25632
(May 7, 2004).
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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 2005 was $10,211,172,018,628.\11\ Using these data and a
methodology for estimating the aggregate dollar amount of sales for the
remainder of fiscal 2005 (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 2005 to be $24,166,536,269,237.
Thus, the Commission estimates that the actual aggregate dollar volume
of sales for all of fiscal 2005 will be $34,377,708,287,865.
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\10\ The NASD, Inc. (``NASD'') and each exchange is required to
file a monthly report on Form R31 containing dollar volume data on
sales of securities subject to Section 31. The report is due on the
10th business day following the month for which the exchange or
association provides dollar volume data.
\11\ Although Section 31(j)(2) indicates that the Commission
should determine the actual aggregate dollar volume of sales for
fiscal 2005 ``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,
2005. Dollar volume data on sales of securities subject to Section
31 for February 2005 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 $37,902,443,515,254 is more than
10% greater than the $34,377,708,287,865 estimated actual aggregate
dollar volume of sales for fiscal 2005, 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 2005. 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 2005], 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 [$1,220,000,000].'' \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 2005
from $1,220,000,000, which is the target offsetting collection amount
for fiscal 2005. 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 2005 until March 15, the
Commission will not ``collect'' any fees in the first five months of
fiscal 2005. 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 [$1,220,000,000],'' 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 $438,149,779 in fees
for the period prior to the effective date of the mid-year adjustment
\14\ and $20,973 in assessments on round turn transactions in security
futures products during all of fiscal 2005. Using the methodology
referenced in Part II above, the Commission estimates that the
aggregate dollar volume of sales for the remainder of fiscal 2005
following the effective date of the new rate will be
$18,708,485,344,202. Based on these estimates, the uniform adjusted
rate is $41.80 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 $23.40
per million to the aggregate dollar volume of sales of securities
subject to Section 31 through January 6, 2005, and a rate of $32.90
for the period from January 7, 2005 to March 31, 2005. Because the
Commission's regular appropriation for fiscal year 2005 was not
enacted prior to the end of fiscal year 2004, Exchange Act Section
31(k), the ``Lapse of Appropriation'' provision, required that the
fee rate in use at the end of fiscal year 2004, $23.40 per million,
remain in effect until 30 days after the appropriation was enacted.
See also Order Making Fiscal 2005 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. No. 33-8418 (April 30, 2004), 69 FR 25632
(May 7, 2004). The Commission's regular appropriation for fiscal
year 2005 was enacted on December 8, 2004, and the $32.90 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: ($1,220,000,000-
$438,149,779-$20,973)/$18,708,485,344,202 = $0.0000417901.
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 $41.80 per million.
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The Commission recognizes that this fee rate is higher than the
current fee rate of $32.90 per million. However, the new fee rate is
established by the statutory mid-year adjustment mechanism and is a
direct consequence of more recent information on the dollar amount of
sales of securities. 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 $41.80 per
million for sales of securities transacted on April 1, 2005, and
thereafter until the 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,
2005, adjusting the fee rates applicable under Sections 31(b) and
(c) for fiscal 2006. These fee rates for fiscal 2006 will be
effective on the later of October 1, 2005 or thirty days after the
enactment of the Commission's regular appropriation for fiscal 2006.
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[[Page 10697]]
V. Conclusion
Accordingly, pursuant to Section 31 of the Exchange Act,\17\
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\17\ 15 U.S.C. 78ee.
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It is hereby ordered that each of the fee rates under Sections
31(b) and (c) of the Exchange Act shall be $41.80 per $1,000,000 of the
aggregate dollar amount of sales of securities subject to these
sections effective April 1, 2005.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
BILLING CODE 8010-01-P
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 1995-January 2005). The data
obtained from the exchanges and NASD are presented in Table A. The
monthly aggregate dollar amount of sales from all exchanges and the
NASD is contained in column C.
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 0.016 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 2.4 percent.
Now, use the expected monthly percentage growth rate to forecast
total dollar volume. For example, one can use the ADS for January
2005 ($128,432,971,367) to forecast ADS for February 2005
($131,460,417,421 = $128,432,971,367 x 1.024).\18\ Multiply by the
number of trading days in February 2005 (19) to obtain a forecast of
the total dollar volume for the month ($2,497,747,931,005). Repeat
the method to generate forecasts for subsequent months.
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\18\ The value 1.024 has been rounded. All computations are done
with the unrounded value.
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The forecasts for total dollar volume are in column G of Table
A. The following is a more formal (mathematical) description of the
procedure:
1. Divide each month's total dollar volume (column C) by the
number of trading days in that month (column B) to obtain the
average daily dollar volume (ADS, column D).
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] = 0.016 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 = 1.024 x ADSt-1.
6. For February 2005, this gives a forecast ADS of 1.024 x
$128,432,971,367 = $131,460,417,421. Multiply this figure by the 19
trading days in February 2005 to obtain a total dollar volume
forecast of $2,497,747,931,005.
7. For March 2005, multiply the February 2005 ADS forecast by
1.024 to obtain a forecast ADS of $134,559,227,001. Multiply this
figure by the 22 trading days in March 2005 to obtain a total dollar
volume forecast of $2,960,302,994,030.
8. Repeat this procedure for subsequent months.
B. Using the Forecasts From A To Calculate the New Fee Rate
1. Determine the aggregate dollar volume of sales between 10/1/
04 and 1/6/05 to be $8,143,963,787,852. Multiply this amount by the
fee rate of $23.40 per million dollars in sales during this period
and get $190,568,753 in actual fees collected during 10/1/04 and 1/
6/05. Determine the actual and projected aggregate dollar volume of
sales between 1/7/05 and 3/31/05 to be $7,525,259,155,811. Multiply
this amount by the fee rate of $32.90 per million dollars in sales
during this period and get an estimate of $247,581,026 in actual and
projected fees collected during 1/7/05 and 3/31/05.
2. Estimate the amount of assessments on security futures
products collected during 10/1/04 and 9/30/05 to be $20,973 by
summing the amounts collected through January of $5,845 with
projections of a 2.4% monthly increase in subsequent months.
3. Determine the projected aggregate dollar volume of sales
between 4/1/05 and 9/30/05 to be $18,708,485,344,202.
4. The rate necessary to collect the target $1,220,000,000 in
fee revenues is then calculated as: ($1,220,000,000 - $190,568,753 -
$247,581,026 - $20,973) / $18,708,485,344,202 = .000041790.
5. Consistent with the system requirements of the exchanges and
the NASD, round the rate to the seventh decimal point, yielding a
rate of .0000418 (or $41.80 per million).
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[FR Doc. 05-4214 Filed 3-3-05; 8:45 am]
BILLING CODE 8010-01-C