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April 1, 2002

Section 31 Fee Reform Disappointment

By Gregory Bresiger

Section 31(a) tax reform, signed into law earlier this year with much fanfare and excitement, has been a bit of a disappointment. Some market makers have been privately complaining to Traders Magazine that the cut in the bothersome transaction tax was not nearly as big as they expected.

The head of a prominent market making firm, who would not comment publicly, complained that, "Originally the reduction looked as though it was going to be 50 percent. Just recently the reduction has been restated and is now projected to be somewhere in the vicinity of 18 percent. The cut is not nearly what we thought it would be."

Some others familiar with the projected reductions contend that in the long term they will be higher than 18 percent. However, there is debate about the actual rates over the next six months to a year.

Hard Times

STA President John Giesea agreed that the rate cut was less than expected. At the Los Angeles Conference of the Security Traders Association he told of the STA's disappointment. In an interview earlier, Giesea said there was not much discussion about the formula to calculate the fee which would increase the rates as volume dipped. He noted that if a firm is depending on a lowered rate to remain profitable, then it really shows how hard times are on a firm.

The market making official said that the numbers have taken many in the brokerage community "by surprise." He said the problem is that, because the volume of trading has been declining, the rate reduction has been less than originally expected when trading volumes were larger.

The fee is designed to generate enough money to pay for the costs of regulation. For several years the fee was generating far more than those costs of regulation, which is why trading industry officials complained that the fee had mutated into a backdoor tax that was unfair to investors and the trading community.

Still, the STA is hoping for an improvement. Giesea told attendees at the Los Angeles conference that a further cut in the Section 31(a) rate may happen soon. He is encouraged by the view of STA lobbyist, attorney David Franasiak, echoing his comment.

The rate cut - in compliance with the legislation, HR 1088, signed into law by President Bush - had resulted in a reduction of 18.5 percent to $27.125 per million.

However, Franasiak in a memo wrote that, "Sources within the Administration suggest that there may be an additional decrease in the rate to around $26 per million before the end of the fiscal year, possibly covering the last two months of the fiscal year (August and September), i.e. before the fiscal year 2003 becomes effective."

He noted that, at this point, next year the SEC is projecting that the rate in fiscal year 2003 will be some $23 per million. Before the legislative reform the tax had been as high as $33 per million.

What Goes Up, Must Come Down?

The current estimated rate of reductions in Section 31(a) fees is not what industry officials had expected. Here's how STA lobbyist, David Franasiak of William & Jensen, envisages where the rate will go:

* In fiscal year 2002, ending Sept. 30, 2002, a blended rate of $27.125 per million.

* In calendar year 2002, a blended rate of $24.575 per million.

* In fiscal 2003, beginning Oct. 1, 2003 (and subject to a possible readjustment in

March 2003), a rate of around $23 per million.

Section 31 Rate Before Passage of HR 1088$33.33 per million

From April 1, 2002 to Sept. 31, 2002$30.10 per million (possible cut in August and

September 2002)

From Oct. 1, 2002 to Sept. 31, 2003approx. $23.00 per million, subject to a potential

mid-year review in March 2003, effective April 1, 2003

-with staff reports