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U.S. Securities and Exchange Commission

Testimony Concerning
The Competitive Market Supervision Act of 2001

By Laura S. Unger
Acting Chair, U.S. Securities & Exchange Commission

Before the Committee on Banking, Housing, and Urban Affairs
United States Senate

February 14, 2001

Chairman Gramm, Ranking Member Sarbanes, and Members of the Committee:

I appreciate the opportunity to testify before you today on behalf of the Securities and Exchange Commission ("SEC" or "Commission") regarding S. 143, the proposed "Competitive Market Supervision Act of 2001" (the "CMSA" or the "bill").

The CMSA addresses two issues of great importance to the Commission. First, the bill aims to improve the current system of SEC fee collections. The Congressional Budget Office ("CBO") estimates that fees required to be collected by the SEC from all sources will total over $2.47 billion in fiscal 2001.1 This represents more than five times the SEC's fiscal 2001 appropriation of $422.8 million.2 The Commission shares the Committee's concerns regarding these excess fee collections.

The CMSA attempts to rectify this situation by significantly reducing fees for investors, market participants, and companies making filings with the Commission, while preserving offsetting collections that will be available to our appropriators to fund the agency in coming years. It also spreads the costs of regulation among those who benefit from the activities of the Commission. We commend Chairman Gramm, Senator Schumer and the bill's other co-sponsors for this effort to achieve significant fee reductions in a comprehensive manner.

Second, the CMSA addresses what is perhaps the greatest challenge facing the Commission today: the SEC's severe difficulties in attracting and retaining a sufficient number of qualified staff. The CMSA addresses the SEC's staffing crisis by giving us the much-needed ability to match the pay and benefits of the federal banking agencies. In the wake of the historic Gramm-Leach-Bliley Act of 1999, pay parity is more imperative than ever. The Commission greatly appreciates the Committee's recognition of the ongoing staffing crisis we currently face. The CMSA, together with authorization and appropriation levels sufficient to make pay parity a reality, should go a long way to ensuring that the Commission can continue to carry out its statutory mandate of protecting investors and maintaining market integrity by remaining an institution that can attract and retain dedicated professionals.

Given the complexity of the issues involved in fee reduction, we will first briefly review the current fee collections required by the federal securities laws and their relationship to the SEC's funding before addressing the specifics of the bill. We will then address our need for pay parity. Although we have several technical concerns with the fee reduction portion of the bill's impact on the stable, long-term funding of the agency, we are confident that we will be able to continue to work together with the Committee to resolve these issues. We look forward to a thorough and inclusive dialogue with you and other interested parties.

Current Fee Collections and SEC Funding Structure

In previous testimony before the Securities Subcommittee, we gave an overview of the history of SEC fees, the fee agreement contained in the National Securities Markets Improvement Act of 1996 ("NSMIA"), the impact of the Budget Enforcement Act on the fee debate, and the SEC's own efforts to reduce fees.3 Today, we would like to focus on the current fee collections situation and its relationship to the SEC's funding structure.

The federal securities laws direct the Commission to collect three different types of fees:

  • Securities registration fees required to be collected under Section 6(b) of the Securities Act of 1933 that are paid when companies register their securities with the Commission ("Section 6(b) fees");

  • Securities transaction fees required to be collected under Section 31 of the Securities Exchange Act of 1934 ("Exchange Act") that are paid when securities are sold on exchanges and in the over-the-counter ("OTC") market ("Section 31 fees");

  • Fees on mergers and tender offers (and other significant transactions) required to be collected under various provisions in Sections 13 and 14 of the Exchange Act that are paid when transaction documents are filed with the Commission.

The majority of the fees collected from these three sources – a large portion of Section 6(b) fees, Section 31 fees on transactions involving exchange-listed securities, and all fees collected on mergers and tender offers – goes to the U.S. Treasury as general revenue. The remaining portion of fee collections – a small portion of Section 6(b) fees and Section 31 fees on Nasdaq transactions – goes to "offsetting collections."

The distinction between the general revenue portion and the offsetting collections portion of fee collections is central to understanding the SEC's funding structure. Because our appropriators use offsetting collections to fund SEC operations, offsetting collections are crucial to full and stable long-term funding for the SEC. The SEC has not received an appropriation from the general revenue portion of fee collections, which CBO projects to be more than $1.5 billion in fiscal 2002,4 for the last five years.

Although some anticipated that NSMIA would lead to gradual increases in general revenue funding for the SEC, this has not occurred.5 Because the tremendous growth in transaction volume and market capitalization we have witnessed in the last few years has far exceeded the 1996 estimates on which NSMIA was based, current fee collections are well in excess of original estimates.

The following chart shows current CBO estimates of SEC fee collections broken down between those that go directly to general revenue and those that go to offsetting collections:

Estimated SEC Fee Collections6
(by fiscal year, in millions)

  2001 2002 2003 2004 2005 2006 2007

General Revenue:
   Section 6(b) 804 820 836 873 935 999 357
   Section 31 571 638 672 779 885 998 463
   Mergers and Tender Offers 84 89 93 97 99 100 101
Total General Revenue 1461 1547 1601 1749 1919 2097 921
Offsetting Collections:
   Section 6(b) 220 160 117 39 23 0 0
   Section 31 797 989 1215 1505 1827 2191 1110
Total Offsetting Collections 1017 1149 1332 1544 1850 2191 1110

As the chart illustrates, total fee collections are currently projected to increase through fiscal 2006, and then fall sharply in fiscal 2007. This is because under current law both the general revenue portion of Section 6(b) fees and all Section 31 fees will be reduced dramatically in fiscal 2007 - the Section 6(b) fee rate will be reduced from the current $200 per million of the aggregate offering price of the securities to $67 per million and the Section 31 fee rates will be reduced from their current 1/300th of 1 percent of sales to 1/800th of 1 percent. In addition, the offsetting collections portion of Section 6(b) fees are gradually being eliminated over a multi-year period ending in fiscal 2006.

"Competitive Market Supervision Act of 2001"

The proposed "Competitive Market Supervision Act of 2001" achieves meaningful reductions in fee rates in a comprehensive manner. It significantly reduces the burden of excess fees not only on investors and the nation's securities markets, but also on the capital-raising process. By targeting all three types of SEC fees for reduction, the bill spreads the benefits of fee reduction among all those who pay for the costs of regulation. Specifically, the bill would further reduce the Section 6(b) fee rate on the registration of securities from the scheduled reductions under current law. In fiscal 2002, the Section 6(b) fee rate would be reduced by 73% – from the current $250 per million to $67 per million. The bill would reduce this rate by another 50% in fiscal 2007 – to $33 per million.

The bill imposes similar rate reductions on the fees associated with merger and tender offers. Specifically, the fee rate on mergers and tender offers would be reduced by 67% in fiscal 2002 - from the current $200 per million to $67 per million. The bill also reduces this rate by another 50% in fiscal 2007 - to $33 per million. The collections resulting from the Section 6(b) fees and the fees on mergers and tender offers are reclassified as offsetting collections that would be available to the SEC's appropriators to fund the Commission.

The bill proposes a more complex approach to reducing Section 31 transaction fees. The bill puts in place a mechanism by which the Congress would set the Section 31 fee rate on a yearly basis. The rate would be determined by taking a fixed dollar amount specified in the bill for that year and dividing it by the estimated dollar volumes of transactions on the exchanges and in the over-the-counter market for that year. The fixed dollar amount for each year is calculated by taking the total amount of offsetting collections available to the Commission's appropriators under CBO's December 1999 baseline and subtracting the anticipated Section 6(b) and merger and tender offer fee collections for that year under the reduced rates discussed above.

In fiscal 2002, this mechanism could result in a Section 31 fee rate of approximately $14 per million – less than half the current rate of 1/300th of 1 percent (or $33 per million). Moreover, by resetting the Section 31 fee rate on a yearly basis, the bill should avoid the potential for excess collections or shortfalls inherent in an activity-based fee. Instead, this approach should cause the amount of total fees collected to approximate those in the CBO's December 1999 baseline projection of offsetting collections through fiscal 2010.7 The bill also designates all of the fees collected under this mechanism as offsetting collections.

The CMSA reduces fees by eliminating the general revenue portion of collections, which currently accounts for the majority of all SEC fees and is estimated to reach more than $1.5 billion in fiscal 2002,8 and redefining the make-up of offsetting collections. Going forward, all Section 31 fees, all Section 6(b) fees and, for the first time, merger and tender offer fees are shifted to offsetting collections. Because our appropriators fund agency operations out of offsetting collections, these changes ensure that the costs of federal securities regulation are shared more evenly. These changes also should help to preserve the ability of our appropriators to fund SEC operations out of offsetting collections, and, therefore, increase the likelihood that the SEC will receive adequate funding in the future.9 We appreciate your efforts to take into account SEC funding issues when crafting this bill. By taking this approach, your bill facilitates the Commission's continuing efforts to protect investors and promote the integrity and efficiency of the nation's securities markets.

The bill also eliminates the possibility of drastic excess collections or shortfalls in one year by setting an overall fee cap and floor and by creating a mechanism to make intra-year adjustments in the Section 31 fee rate to steer collections to a level between the cap and floor. The Commission believes the concept of a cap and floor on fee collections provides a workable way of avoiding the shortcomings of previous attempts at fee reductions. The Commission does have some concerns with the way the floor is set in the bill's current version. The Commission believes a change to the way the floor is set will allow the floor to continue to approximate the minimum necessary for the Commission to operate. Revising the floor should also prevent future CBO projections of offsetting collections from being skewed downward, which would have the effect of reducing the amounts actually available to our appropriators to fund the agency.

In addition, as a practical matter, the feasibility of this bill's approach depends on the Commission receiving an up-front appropriation each year that would be reduced by offsetting collections as they are collected. The Commission would need such an up-front appropriation purely for cash-flow reasons; it will not "cost" anything in terms of general revenue. It is our understanding that most government agencies receive such an up-front appropriation and, until the last few years, the Commission received one as well. Although we do not believe that this ultimately will be a problem, the need for an up-front appropriation underscores the need for an inclusive dialogue on these complex issues.

Finally, we note that the bill should be modified to reflect Congress's recent adoption of the Commodity Futures Modernization Act of 2000 ("CFMA"). As the Committee is aware, the CFMA for the first time allows the trading of a new class of securities - futures contracts on single stocks and narrowly-based stock indices. The CFMA provides for "assessments" on these security futures products comparable to the Section 31 transaction fees payable on stock option transactions. We would be pleased to work with the Committee's staff in making the technical changes necessary to include these CFMA assessments in the bill's fee reductions, as well as to avoid any unintended negative impact on the bill's funding structure.

Pay Parity With Banking Regulators

The second issue that the CMSA addresses is the Commission's severe difficulties in attracting and retaining a sufficient number of qualified staff. At present, the Commission is unable to pay its accountants, attorneys and examiners what their counterparts at the federal banking agencies earn. Since all of the federal banking regulators are not subject to the government-wide pay schedule, they are able to provide their staffs with appreciably more in compensation and benefits than we can.

This disparity is a significant drain on morale. It is difficult to explain to SEC staff why they should not be paid at comparable levels, especially when they are conducting similar oversight, regulatory, and examination activities. It is one thing for staff to make salary comparisons with the private sector, but quite another for them to see their government counterparts making anywhere from 24 to 39 percent more than they are.

This is particularly true in the wake of the landmark Gramm-Leach-Bliley Act of 1999 ("GLBA"). As this Committee is well aware, the GLBA demands that the Commission undertake additional examinations and inspections of highly complex financial services firms both to fulfill our own oversight responsibilities and to provide the Federal Reserve and other banking agencies with the information and analyses needed to fulfill their missions. Moreover, by allowing securities firms, banks, and insurance companies to affiliate with one another, the GLBA requires increased coordination of activities among all the financial regulators. Even more so than in the past, Commission staff will work side-by-side with their counterparts from the banking regulatory agencies, including the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. However, we cannot match the salaries that these regulators pay.

The Commission has already seen several staff leave to take positions with these agencies, primarily because of pay. Unless we are put on equal footing, this trend will continue and most likely intensify. Given the complexities of our markets and the new business affiliations we are likely to see, the SEC does not believe it is at all beneficial to have the financial regulators poaching from one another based on pay. Instead, we should be working together from the same starting point.

Pay parity will help resolve the Commission's staffing crisis. Since 1996, our attrition rate has been increasing, particularly among our more senior professionals. Over the last two fiscal years, the Commission has lost 30% of its attorneys, accountants, and examiners. These losses are adversely affecting the Commission's continuing efforts to protect investors and promote the integrity and efficiency of the nation's securities markets. The Commission is losing staff before they become fully productive because we cannot pay them enough. In a world where first-year associates are making six-figure salaries in Washington, D.C. law firms, the salaries the SEC can provide are simply not competitive to attract and retain a sufficient number of talented professionals to reduce high turnover and fill open positions. We recognize that the SEC cannot completely match the higher salaries offered by brokerages, law firms, self-regulatory organizations, and other securities-related businesses. Something needs to be done, however, to close the pay gap and reduce the turnover problems we face.


The lack of pay parity creates enormous difficulties in recruiting attorneys and accountants. We have used recruitment bonuses where possible, but have not met with much success. A typical first-year associate in a top-tier New York or Washington, D.C. law firm makes double, if not more, than a comparable staff attorney at the SEC. The costs of three years of law school leave most graduates entering the job market with significant amounts of student loan debt. It is not difficult to understand why the private sector looks so appealing.

Our problem is even worse for accountants, who need to be experienced when they walk in the door. Experienced accountants are difficult to find and expensive to hire because their ability to analyze complex financial statements is highly prized. We do not have the luxury, if you can call it that, of being able to take someone directly out of school. The Commission has attempted to ameliorate this problem by developing an "in-service" placement program that allows certain Securities Compliance Examiners to be reassigned as accountants if they meet specific criteria, but even this effort has fallen short. In fact, in fiscal 1999 only 46 percent of our available positions for accountants were filled. This hiring rate is not sustainable. The Commission needs the ability not only to keep staff longer, but also to bring them to the Commission in the first place.

Retention Efforts

The SEC has also lost far too many of its most talented and experienced staff. Over the past several years the Commission has explored virtually every available approach to keeping staff longer. In 1992, we petitioned and received from the Office of Personnel Management ("OPM") the authority to pay the majority of our attorneys and accountants approximately 10 percent above their base pay. While special pay was a step in the right direction, it proved to be a short-term solution. This is because staff that receive special pay do not receive the government-wide locality increase each year, which means that their special pay becomes less valuable over time and hence becomes less effective as a retention tool. Our appropriation last year included funds to reinstate special pay rates for certain employees.10 While this should help, based on our experience, we know this is at most a temporary and partial remedy to the SEC's staffing crisis.

The Commission has also used retention allowances and economist special pay to help alleviate our retention problem. While these tools have proved somewhat effective when targeted to specific staff and situations, we believe they are incapable of providing the broad relief that we need to combat the Commission's losses and treat all staff fairly.

The Agency and Its Staff

Our inability to attract qualified staff and the current level of turnover is threatening our ability to oversee the nation's securities markets and to respond in a timely manner to the changing events and innovations in our markets by:

  • hampering our ability to bring cases to trial and disrupting the continuity we need when pursuing cases;

  • hindering us from responding to changing markets in a timely fashion, including through targeted de-regulatory efforts;

  • limiting our institutional memory, which is a crucial component of our long-term effectiveness as a regulator; and

  • lowering employee morale, which in turn reinforces the staffing crisis.

SEC staff work hard to handle the Commission's increasing, and increasingly complex, workload. The time that our managers and senior staff have to devote to this workload is, however, reduced by the time it takes to recruit and train new staff. The SEC conservatively estimates that it takes approximately two years for new staff to become fully productive. During this period, new staff is somewhat of a drag on the efficiency of the agency because they are still moving up the learning curve. If these staff leave just as they become fully productive to the agency, we do not break even on our investment in training them. That is a loss not only for us, but also for the investing public and our markets.

The SEC should be a place where highly motivated people come to hone their skills and perform public service, both before entering the private sector and after a stint in the private sector. Such career paths speak highly of the Commission's professionalism and the industry's regard for the agency and its staff. However, the Commission should be able to keep staff for a minimum of three to five years. The SEC can ill afford to have its future walk out the door. We need to ensure that the Commission has the staffing resources to meet the regulatory challenges that lie ahead as technology in general, and the Internet in particular, continue to re-shape our markets.

The Need for Commensurate Authorization

Resolving the Commission's staffing crisis requires the statutory changes contained in the CMSA that would allow the agency to pay its employees outside of the government-wide pay scale, and it also requires Commission authorization and appropriation at a level that allows the agency to implement pay parity. Without the authorization to be appropriated sufficient funds to implement pay parity, having the authority to provide our employees with pay parity will do little to address the staffing crisis we face. By our estimates, implementing pay parity with the banking regulators, as the CMSA proposes, would require a net funding increase of approximately $70.9 million in fiscal 2002, with yearly adjustments for inflation thereafter.11 Although this is a significant amount of money, it is crucial for the Commission to have the resources it needs to fulfill its mission. The most vital resource we have, ultimately, is our highly professional and well-regarded staff. This is the one area we can least afford to jeopardize.


The proposed "Competitive Market Supervision Act of 2001" addresses two important challenges to the Commission's continuing efforts to protect investors and promote the integrity and efficiency of the nation's securities markets. First, the bill achieves significant reductions in excess fee collections, while preserving offsetting collections that can be used to continue to fund SEC operations. While the Commission does have technical concerns with the bill, as noted above, we hope that we can continue to work with the Committee and its staff to iron these out. Second, the bill addresses the SEC's serious staffing crisis by providing the SEC pay parity with federal banking regulators. We appreciate your recognition of these challenges and commend the comprehensive manner in which you address them. We look forward to continuing a thorough and inclusive dialogue with you and other interested parties on this bill.

1CBO January 2001 Baseline.
2Pub. L. No. 106-553, 114 Stat. 2762 (2000).
3See Testimony of Arthur Levitt, Chairman, U.S. Securities and Exchange Commission, Concerning Fee Collections, Before the Subcomm. on Securities, Senate Comm. on Banking, Housing, and Urban Affairs (Mar. 24, 1999).
4CBO January 2001 Baseline.

NSMIA contemplated that the increases would be gradual because of the practical realities of the budget process - it is difficult to maintain full and stable funding for the SEC in the context of a sudden shift to general revenue.

6 The numbers in this chart are based on the CBO January 2001 Baseline.
7The bill currently uses CBO's baseline projections from December 1999. We understand from the Senate Banking Committee staff that these numbers will be updated with CBO's most recent ten-year projections. We encourage this amendment as it will lessen the possibility of shortfalls in offsetting collections in fiscal 2007 and after fiscal 2010.
8While we understand that there are rather complex Pay-As-You-Go ("PAYGO") budget scoring rules that may affect the ability of Congress to reduce the general revenue portion of fee collections, the Commission believes that it would be difficult to achieve truly meaningful reductions in fees, as well as to provide full and stable long-term funding for the SEC, without addressing the general revenue portion of fee collections. We take no position on the larger tax policy issues raised by the bill.
9We are concerned, however, with the long-term impact on our funding of the fixed dollar cap on Section 31 fee collections, as well as the overall fee cap and floor, after fiscal 2010. By freezing the transaction fee cap after fiscal 2010, the bill does not allow offsetting collections to continue to grow in tandem with the Commission's budget needs. In addition, it is unclear how the overall fee cap and floor, which are both based on the Commission's authorization level, would work in years after 2010. Historically, this level has not been set, if at all, until the latter part of the appropriations process. This creates a potential timing problem because, under the bill, the authorization would in fact be needed at the beginning of the legislative process to allow CBO to estimate available collections. We hope to continue working with the Committee on these issues and believe they can be addressed without undermining the stated benefits of the bill.
10We submitted our special pay justification package for certain attorneys, accountants, and examiners to OPM on December 21, 2000 and are waiting their approval of our proposed special pay rates.
11This assumes full-funding of special pay and no new staff in fiscal 2002.


Modified: 02/14/2001