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July 31, 1998

Lawmakers Pushing for Further Relief:Two 31(a) Bills Floating as NASD Polishes Off Special Rule E

By Jeffrey L. Winograd

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  • Lawmakers Pushing for Further Relief:Two 31(a) Bills Floating as NASD Polishes Off Special Rule E

Pressure is building in the current session of Congress for legislation that would bring widespread relief from unpopular transaction fees on Nasdaq trades.

The spotlight on equity-transaction fees is largely the outcome of intense lobbying by a coalition of exchanges and trade groups, led by the Security Traders Association.

The fees on Nasdaq and listed trades, enacted under Section 31 of the Securities Exchange Act of 1934, amount to 1/300th of one percent on individual equity transactions. That means, in effect, that a riskless principal trade on Nasdaq is subject to double counting because a market marker may buy a stock and quickly resell it on an agency basis.

By one estimate, the fee collections resulted in the Securities and Exchange Commission accumulating in excess of 300 percent of its budget over the past two years. The Congressional Budget Office, meanwhile, estimates that the agency will collect more than $550 million this year levied under Section 31(a) of the act (based on current trade-volume projections).

With the National Association of Securities Dealers favoring a reduction in the amount levied on riskless principal trades, Congress is currently mulling two separate bills that would go even further.

One bill, introduced by Rep. Gerald Solomon (R-N.Y.) and Rep. Robert Menendez (D-N.J.), the Savings and Investment Relief Act of 1998, would cap annual collections of transaction fees assessed on Nasdaq and exchange-listed stocks. A similar cap would be applied to fees collected on off-exchange trades of last-sale-reported securities.

For fiscal year 1999, fee collections on trades and registrations would be limited to $150 million, while fees for off-exchange trades would be held to $120 million under the bill. Future caps would be adjusted for inflation.

Under the bill, fee collections for the SEC would "simply shut off" when the agency had met its annual requirements, Solomon explained. Each national securities exchange and securities association would be required to enact rules to comply with the legislation.

Solomon's support is viewed as significant, because he chairs the House Rules Committee, a post that gives him considerable law-making powers. "He did not introduce [the bill] just for show," Justin Daly, Solomon's counsel, told Traders Magazine. The initial response to the bill was better than expected, Daly added.

Solomon, himself a former Wall Street executive, makes no bones about his attitude to the transaction fees. He is particularly incensed about 31(a) fees on Nasdaq, telling the House they are "ridiculous," having been transformed from a user fee to a "huge general tax."

The bill is "intended to bring total SEC fee collections, which had already grown to significantly exceed the commission's budget, more in line with its costs," he reminded his House colleagues. The 31(a) fees on Nasdaq were authorized under the National Securities Markets Improvement Act of 1996.

Solomon stressed that flexibility is the hallmark of his bill. If the SEC does not collect enough revenue to cover its annual budget, the House and the Senate Appropriations Committee can temporarily raise the fee limitations through an appropriation act.

The Solomon bill has been referred to the House Commerce Subcommittee on Finance and Hazardous Materials. At press time, the panel, which is chaired by Rep. Michael Oxley (R-Ohio), had not scheduled a hearing on the bill.