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February 1, 2001

SEC Cash Crisis As Nasdaq Privatizes

By William Hoffman

Stock Market Registration Spurs Transaction Reform Measure

The Securities and Exchange Commission could run low on money later this year. That's because the Nasdaq Stock Market's expected registration as an exchange under the 1934 Securities Exchange Act will change the way the SEC collects its fees.

"It's a serious issue," said Stuart J. Kaswell, senior vice president and general counsel for the Securities Industry Association, in Washington, D.C. "But it's a bookkeeping issue. It's not a public policy issue."

However, federal budget negotiators may make it a public policy issue, since they rely on Nasdaq's portion of Section 31 fees for readily available funds once private placement is complete. Nasdaq's portion of those fees would be set aside for once-a-year budget negotiations.

Unusual System

The so-called "Nasdaq problem" stems from the peculiar way Section 31 fees are collected from investors, funneled through exchanges, deposited with the federal government, and finally appropriated to the SEC. An SEC spokesperson declined comment on this issue.

Section 31 transaction fees come in two varieties, noted a congressional lobbyist for the securities industry who requested anonymity.

Offsetting fee collections are made available immediately to congressional appropriators for whatever purposes they deem necessary. By contrast, exchange-traded stock fees - from New York Stock Exchange and other officially registered exchanges - are accumulated for annual appropriations during the congressional budget process. Section 31 fees are charged at 1/300th of one percent of the value of each stock sale.

Most offsetting fees are collected from trades on the Nasdaq market. Once Nasdaq registers as an exchange, readily-available offsetting funds will be switched to "sequestered accounts" of exchange-traded fees available only during annual budget negotiations.

Thus, the lobbyist estimated approximately half of the anticipated $790 million in Section 31 fees collected in 2000 will become unavailable to congressional appropriators outside the annual budget process. That means trouble for the SEC, this source said, because appropriators won't want to cut departmental budgets that rely on offsetting fee accounts to cover expenses at the SEC.

(Overall SEC fee collections, which include registration charges, raised about $2 billion in 2000 - more than five times the size of last year's SEC budget of $377 million.)

Senate Banking Committee Chairman Phil Gramm (R-Texas) tried to fix the revenue problem in broad-based securities reform legislation last session. Appropriators late last year also tried to fashion a fix. Both attempts failed.

Reform Legislation

Banking Committee spokesperson Christi Harlan said Gramm and others are reintroducing securities reform legislation. "Under the plan we have for reducing [Section 31] fees, it takes care of any revenue loss from Nasdaq's going public," she said.

The securities industry lobbyist said Congress will face the issue as soon as Nasdaq files to become an exchange, though the fiscal impact may not be felt until President George W. Bush negotiates his first budget later this year. The lobbyist was optimistic about chances for a long-term fix.

"Everybody who was an advocate last year will be an advocate [of reform] this year," this source said. Reducing Section 31 transaction fees will likely be part and parcel of that solution, the source added: "I don't think you fix one without fixing the other."