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March 1, 2002

The Other Tax Cut

By David E. Franasiak

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It was called a signal victory for investors, saving them $14 billion in the next decade.

The Investor and Capital Markets Fee Relief Act, H.R.1088, signed into law by President Bush, will reduce taxes on security trading and capital. The new law currently cuts Section 31(a) fees - which are used to fund the SEC's budget, but have been generating a windfall for our masters on the Potomac - by some 30 percent. Market makers and specialists will accumulate $1.5 billion in savings over five years. The saving will add up to some $3.7 billion over a decade.

With the enactment of the bill, securities traders and leaders in the community shed their image of hurting investors. That was the legacy of the settlement between the U.S. Department of Justice and market makers in the Nasdaq price-collusion case.

It was a difficult fight. Eight committees in Congress were involved in the legislation. Many cooks, many pots, each committee had an angle.

One problem for the Section 31(a) tax cutters was bringing together diverse industry groups. The fees were directly felt among security and options traders. Nasdaq traders, on the other hand, while directly impacted, were still reacting to the Justice Department settlement. Stock exchanges, for their part, collected the fees and sent the money each month to the U.S. Treasury. Finally, the Securities and Exchange Commission was ambivalent; it did not want to anger Congress and jeopardize the agency's budget.

A successful campaign would have to be well-funded. The STA had to be ready for a long struggle.

In 1998 the effort to reform the transaction fees began with Senator Phil Gramm (R-TX.). Representatives Jerry Solomon (R-N.Y.), Vito Fossella (R-N.Y.) and Bob Menendez (D-N.J.). They advocated a cap on 31(a) fees, a reduction of around 15 percent. Republican appropriators balked at Senator Gramm's efforts to cap the fees. House Commerce Committee Chairman Tom Bliley (R-VA.) was not convinced that he needed to reopen the issue. The House bill bounced around right up to the final days of the session. While the campaign failed, it created momentum, momentum which continued to build through 1999.

An important hearing was held the following year and it featured a significant debate. On one side were Representatives Fossella and Menendez who supported a cap. On the other were supporters of a rate cut, Representatives Rick Lazio (R-N.Y.) and Ed Towns (D-N.Y.). In a strange sort of way this split actually helped the case for fee reduction. That's because members co-sponsored one bill or both, resulting in twice as many supporters for reducing fees, regardless of the means. Representative Mike Oxley (R-OH.), a leading proponent, gained the support of House Republican leaders.

With the help of the STA, Senators Gramm and Schumer (D-N.Y.) in 2000 developed a framework that united the industry, blending a cap and a rate cut. And they attracted the support of the SEC by including in their plan a pay parity provision for agency staffers. Representative Oxley, the new chairman of the House Financial Services Committee, further lowered Section 31(a) fees. His bill, H.R. 1088, which ultimately passed, cut fees by 50 percent. That was about twice as big as all previous attempts to cut the Section 31(a) tax.