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February 1, 2002

Fee Reform Overcomes Last Minute Threat

By Gregory Bresiger

Senator Hillary Rodham Clinton (D- N.Y.) delayed the passage of Section 31(a) tax reform, which recently cleared its final hurdle in the Senate and was signed into law by President George W. Bush.

Clinton placed a hold on the reform bill to call attention to a tax relief bill that was pending in the Senate, according to a spokeswoman. However, she later lifted the legislative hold and the spokeswoman says the Senator, who ultimately voted for the tax reform, "strongly supported" the Section 31(a) bill, HR 1088.

The spokeswoman for Clinton said the senator took the hold off the Section 31(a)bill after calls from the securities industry and unions. But she added that the hold helped the passage of a bill to extend tax relief to the victims of the World Trade Center attack.

U.S. Treasury

Section 31(a), a part of the securities law that dates back to the 1930s, was designed to fund the costs of securities regulations. But it has been putting much more in the coffers of the United States Treasury than needed [see chart].

Reform of the transaction tax was possible this session of Congress, despite failing in the previous two Congresses. This time supporters of the tax cut were able to generate bi-partisan support by hammering the theme that most households in America now hold stock.

For example, about half of American households with income of between $35,000 and $50,000 owned mutual funds in the year 2000, according to the SIA. That's about twice the number of households that had funds in 1988.

Supporters of Section 31(a) reform probably won their battle this time because they argued that middle-class people are more likely to be hurt by the tax than the securities firms that sell them financial products. For example, former SEC Chairman Arthur Levitt, in testimony before Congress in February 2000, estimated that investors paid 82 percent of the Nasdaq securities fees, while market makers paid 18 percent. The story was about the same on the Big Board. At the NYSE, Levitt estimated that investors paid 87 percent of the fees, while market makers paid 13 percent.

But for trading firms the Section 31(a) reduction does amount to a significant saving. One dealer, Bernard L. Madoff Investment Securities, will likely save between $1 million and $3 million annually, according to Mark Madoff, director of listed trading for the New York-based firm.

The signing of the reform bill by President Bush in the White House was attended recently by Capitol Hill heavyweights and industry leaders, including John Giesea, president and chief executive of the Security Traders Association.