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U.S. Securities and Exchange Commission

Testimony Concerning
Securities Transaction Fees

Statement of the U.S. Securities and Exchange Commission
Before the House Subcommittee on Finance and Hazardous Materials of the Committee on Commerce

July 27, 1999

Thank you for giving the Securities and Exchange Commission (SEC or Commission) the opportunity to present this statement concerning securities transaction fees. The SEC shares the Subcommittee's concern that fee collections are currently well in excess of initial projections. The existing fee structure, last revised in 1996, was the product of many years of negotiations, involving many players with competing interests. However, tremendous market growth in recent years has pushed fee collections far beyond the levels anticipated during those negotiations. The SEC welcomes an inclusive, reasoned dialogue on fee collections.

History of Fees

Federal securities laws direct the Commission to collect three different types of fees: registration fees, transaction fees, and fees on mergers and tender offers. Securities registration fees (Section 6(b) fees) are paid by corporations and investment companies when they register securities for sale. These were first enacted at a rate of 1/50th of 1 percent under Section 6(b) of the Securities Act of 1933. Starting in 1990, the Section 6(b) fee rate was increased yearly through the appropriations process. The first 1/50th of 1 percent goes directly to the U.S. Treasury and is unavailable for funding the SEC. The amount over the 1/50th of 1 percent (called offsetting collections) can be used to fund the agency through appropriations.

Transaction fees (Section 31 fees) are paid when securities are sold. These were enacted at a rate of 1/300th of 1 percent on exchange-listed securities under Section 31 of the Securities Exchange Act of 1934. Proceeds from this fee are deposited directly in the U.S. Treasury and are not available to fund the agency.

Fees on mergers and tender offers are paid by corporations directly to the U.S. Treasury and also are not available to fund the agency.

The SEC's fee collections have been a subject of concern since 1983, when the Commission first began contributing more to the U.S. Treasury than was required to fund the agency. In 1988, the Securities Subcommittee of the Senate Committee on Banking, Housing, and Urban Affairs requested that the SEC examine its fee collections and funding structure. The report prepared by the SEC in response to this request was the first step in the process that eventually led to the compromise reached in Title IV of the National Securities Markets Improvement Act of 1996 (NSMIA).1

Fee Agreement in NSMIA

Title IV of NSMIA mandates a fee structure that was the result of extensive negotiations between six different Congressional Committees, the Administration, and the SEC.

In general, the NSMIA fee structure was designed to:

  • gradually reduce total fee collections;

  • "level the playing field" by extending Section 31 transaction fees, which had previously only applied to transactions involving exchange- listed securities, to securities subject to "last sale reporting" in the over-the-counter market;

  • gradually reduce the SEC's reliance on fee collections, thereby increasing the amount of new budget authority required to fund the agency through the appropriations process; and

  • provide the SEC with a stable, long-term funding structure.

NSMIA set in motion a gradual reduction in Section 6(b) registration fee rates over a ten-year period intended to more closely align fee collections with the funding needs of the SEC. Specifically, NSMIA authorized the Commission to collect securities registration fees at the rate of 1/50th of 1 percent of the aggregate offering price in fiscal year 2006, declining annually from 1/34th of 1 percent in 1998. In fiscal year 2007, the rate will be further reduced to 1/150th of 1 percent. In addition, NSMIA classified the portion of the Section 6(b) fees in excess of 1/50th of 1 percent (i.e., the portion declining from 1998 to 2006) as offsetting collections that can be used directly to fund Commission operations, subject to prior approval by the Commission's appropriations committees.

NSMIA also provided equity in the application of Section 31 fees by authorizing the SEC to collect these fees on transactions in the over-the-counter (OTC) market involving securities subject to "last sale reporting." Unlike the Section 31 fees imposed on sales of exchange-listed securities, these new OTC fees are classified as offsetting collections and, therefore, can be used to fund Commission operations, subject to approval by the Commission's appropriations committees. Under NSMIA, all Section 31 fees will fall to 1/800th of 1 percent in fiscal year 2007.

Because the fees collected by the SEC are tied -- directly and indirectly -- to market activity, they are nearly impossible to predict accurately. The fee rates established in NSMIA were based on 1996 projections of market activity. However, the tremendous growth in the markets over the past few years has far exceeded the 1996 estimates on which NSMIA was based, resulting in fee collections well in excess of original estimates. Unfortunately, the potential for either excess collections or shortfalls is inherent in activity-based fees.

While the NSMIA fee structure has eliminated the funding uncertainties and crisis situations that surrounded the agency's funding from the late 1980s to the mid-1990s, it has not reduced total collections due to unexpectedly strong market activity.

Budget Enforcement Act

The rules enacted as part of the Budget Enforcement Act (BEA) have restricted efforts to undertake a comprehensive fee reduction. The BEA splits our fee collections into two different categories: mandatory and discretionary. Under the BEA, any fees in existence prior to 1990 are deemed mandatory and are deposited directly into the General Fund of the U.S. Treasury; they are unavailable for SEC use. The SEC's fees that fall into this category are:

  • the first 1/50th of 1 percent of Section 6(b) registration fees;

  • Section 31 fees on transactions involving exchange-listed securities; and

  • fees on mergers and tender offers.

These fees, which account for nearly 70 percent of total SEC collections, are estimated by the Congressional Budget Office (CBO) to exceed $1.1 billion in fiscal year 2000. Because these collections currently are protected by the BEA rules, they cannot be reduced without a corresponding increase in revenues or decrease in federal spending elsewhere. According to CBO's estimates, to fully repeal these fees, other collections flowing to the Treasury's General Fund would have to increase by $9.6 billion over the next seven years, or spending from the General Fund would have to be reduced by the same amount.

The remaining 30 percent of SEC collections are unaffected by the requirements of the BEA. These "discretionary" fees, available for use by our appropriators under NSMIA, are the fees previously identified as our offsetting collections. Specifically, they are:

  • Section 6(b) registration fees collected above 1/50th of 1 percent; and

  • Section 31 fees on transactions in securities subject to "last sale reporting" in the over- the-counter market.

The following chart shows the current CBO estimates of total fee collections broken down between mandatory and discretionary under the BEA.

($ in millions)
Mandatory Discretionary Total
2000$ 1,155$ 501$ 1,656
2001$ 1,206$ 498$ 1,704
2002$ 1,260$ 503$ 1,763
2003$ 1,314$ 516$ 1,830
2004$ 1,422$ 508$ 1,930
2005$ 1,544$ 552$ 2,096
2006$ 1,675$ 601$ 2,276
2007$ 783$ 285$ 1,068

As the chart illustrates, total fee collections are projected to increase through fiscal year 2006, and then fall sharply in 2007 when the final NSMIA fee reductions go into effect.

Fee Reductions

The Commission recognizes the magnitude of this issue, and has tried to reduce fees, where possible, when it is within its authority to do so. The Commission has taken two specific actions to reduce fees and administrative burdens. In 1996, fees for filing certain disclosure documents were eliminated, saving public companies an estimated $8 to $12 million per year. While this is a small amount relative to the size of the industry, it is significant in reducing the administrative burden on registrants, as well as the SEC. In addition, the Commission responded to industry concerns that there was a double counting of transactions in the over-the-counter market imposing an unfair burden on certain market participants. The Commission encouraged and actively supported changes in industry practices to eliminate this problem and approved NASD rule proposals to implement this change in March 1999.


Today, we are faced with fee collections well above the levels anticipated in NSMIA. As stated earlier, CBO's estimates for fiscal year 2000 fee collections are $1.66 billion. Not only is that amount far greater than our funding requirements for fiscal year 2000, but 70 percent of that figure is unavailable to fund the agency because of the restrictions imposed by the BEA rules.

However, we are still faced with many of the same issues that required years of Congressional negotiation and that resulted in the compromise embodied in NSMIA. Any alternative funding mechanism must:

  • provide full funding for the SEC;

  • spread the costs of regulation among those who benefit;

  • consider the effect of market conditions on collections; and

  • address the competing interests of all parties.

The SEC welcomes the opportunity to discuss this issue and appreciates the help and support of all the interested parties in ensuring that the SEC remains adequately funded regardless of the funding approach taken.


1Report submitted in response to the request of the Securities Subcommittee of the Senate Committee on Banking, Housing and Urban Affairs (S. Rpt. 100-105), December 20, 1988.