It's time to reduce securities transaction fees. Expanding stock market volume has caused federal coffers to overflow with revenue generated by Section 31 fees to the Securities and Exchange Commission. The securities industry believes that Congress should reduce these fees and return the money to the investing public.
The industry always has believed that user fees, and not general tax revenues, should pay for the cost of running the SEC. Congress has established three basic types of fee. The first is a securities transaction fee - Section 31 fees. By statute, the SEC collects a fee for every share of stock sold on exchanges, including the New York Stock Exchange, and on Nasdaq National Market System stocks. The fee is 1/300 of 1% of the value of the shares sold.
It doesn't sound like much, but in 1999 it added up to about $668 million. Congress also imposes two other types of fees: registration fees, imposed on issuers for registering securities; and merger and acquisition fees. In 1999, all of these fees added up to about $1.76 billion.
Congress also sets the SEC's budget. In fiscal 1999, it appropriated about $340 million to fund the agency. If you've followed the math, you now see the rub. Congress imposes fees of about $5.17 for every $1 it costs to run the SEC, and the excess goes into the U.S. Treasury.
Investors are vastly overpaying for the cost of running the SEC, and they are the ones who end up paying, one way or another. When brokerage firms charge you for selling shares, they just add on the SEC fee. Brokerage firms themselves do pay some portion of the fees, but inevitably the firms pass this cost back to their customers. The industry spends millions just doing the paperwork.
How did we get in this mess? Several years ago, Congress looked at SEC fees, and in 1996, it set up a thoughtful plan to reduce the fees over a long period. It was a conservative schedule, designed to ensure that the revenues collected would slowly fall while allowing for reasonable growth in the SEC budget. Over time, revenues collected and the SEC's budget were supposed to line up. In exchange for that deal, the securities industry actually agreed to expand the fee base. For about 60 years, the securities transaction fee only applied to exchange-listed stocks. The over-the-counter market was exempt since it was not well organized. But as the OTC market matured into Nasdaq, it was only reasonable to put the markets on essentially the same footing. So the industry agreed to broaden the fee's application.
Then something happened that no one anticipated. Trading volume on all stock markets exploded. Average daily volume on the NYSE went from 412.0 million shares in 1996 to 808.9 million in 1999. Imposing the fee on Nasdaq increased revenue enormously, and volume exploded there as well, going from 543.7 million shares per day in 1996 to 1,081.8 million shares per day. And since the fee is assessed on the value of the shares, and stock prices generally have moved up, the amount of the fees also rose from this cause. For instance, in 1999 alone, the value of the shares traded on the NYSE and on Nasdaq increased 52%. The SEC itself said that "tremendous market growth in recent years has pushed fee collection far beyond the levels anticipated" when Congress changed the law.
There is a straightforward solution to this problem. Reduce or cap the amount of the transaction fee on investors to bring it more in line with the cost of running the SEC. This change also will help keep U.S. securities markets competitive with foreign markets.
Admittedly, there are some challenges to solving this problem. First, responsibility for SEC fees is divided among various congressional committees. Second, there is legitimate concern about ensuring that the SEC has a reliable source of revenue if the market takes a turn for the worst. But charging investors multiple times for the same service is unconscionable.
It's simply time to roll up our sleeves and get the job done.
Sen. Phil Gramm, R-Tex., chairman of the Senate Banking Committee, has introduced a bill, co-sponsored by Sen. Charles Schumer, D-N.Y., which would reduce fees. SEC Chairman Arthur Levitt has indicated that this legislation "largely meets many of the [SEC's] concerns regarding fee collections ." A House finance subcommittee led by Rep. Mike Oxley, R-Ohio, has approved a bill, introduced by Reps. Rick Lazio, R-N.Y., and Ed Towns, D-N.Y., and amended by Rep. Vito Fossella, R-N.Y., that seeks to achieve the same goals.
Let's perfect and reconcile these bills. By working together, we can make sure the SEC has the money it needs to protect investors, and Congress can return the balance to the investing public, where it belongs. Mr. Kaswell is senior vice president and general counsel of the Securities Industry Association.
