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April 30, 2000

Investors Overpay SEC

By Stuart J. Kaswell

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  • Investors Overpay SEC

It's time to lower securities transactions fees. Expanding stock market volume has caused federal coffers to overflow with revenue generated from SEC Section 31 fees. The securities industry believes that Congress should reduce these fees and return the money to the investing public.

The securities industry always has believed that user fees, and not general tax revenues, should pay for the cost of running the Securities and Exchange Commission. Congress has established three basic types of fees. The first is a securities transaction fee - the 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 stocks. The fee is 1/300 of 1 percent 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, these fees amounted to about $1.76 billion.

Congress also sets the SEC's budget. In fiscal year 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 $1.00 they spend 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 there is usually no escape. When brokerage firms charge 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 the fees back to 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 lower them. 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 match. In exchange for that deal, the securities industry actually agreed to expand the fee base. For about sixty years, the securities transaction fee only applied to exchange listed stocks. The over-the-counter market was exempt from the fee, since that market 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.

Then something happened that no one anticipated. Volume on all the stock markets exploded. Average daily volume on the NYSE went from 412.0 million 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 increased. 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]."