Traders awaiting relief from what many believe are excessive Section 31 transaction fees will probably have to wait a while longer.
"The problem is that the [federal government's] budget process has just started," said James Spellman, spokesman for the Securities Industry Association. "And no one in their wildest dreams could have imagined that the markets would have this level of volume, even just two years ago."
Section 31 fees are levied by the Securities and Exchange Commission at the rate of 1/300th of one percent on the cash value of each stock transaction. On a trade valued at $10,000, for example, that amounts to 33 cents.
Though a small sum, the overall amount collected is not insignificant. Extended to Nasdaq in 1996, the fees alone will raise an estimated $432 million in 1999, well in excess of the SEC's $341 million 1999 budget.
"The fee has turned into a tax on capital, [though it] was originally designed to fund SEC supervisory functions under the federal securities laws," noted Andrew N. Grass, Jr., senior vice president and general counsel for the Security Traders Association.
The Budget
Section 31 fees paid by Nasdaq market makers and exchange specialists are the second-largest collection by the SEC. The SEC's biggest revenue source comes from 6(b) registration statement fees, which will raise an estimated $1.04 billion in 1999. Miscellaneous SEC fees bring in an additional $50 million a year.
"It has now come to a point where they are collecting four times what the SEC's budget is," Grass said. "We believe this money belongs with the investor rather than the government."
So does Senate Banking Committee Chairman Sen. Phil Gramm (R-Texas)."The senator has viewed [Section 31 fees] less as a fee and more as a tax," said a source at Gramm's Capitol Hill office. "And an unfair tax at that."
So does Rep. Michael Forbes (R-N.Y.), who plans to re-introduce legislation to slash the fee to 1/600th of one percent. "It's a hidden tax, the wrong kind of tax, a tax on investment," said Forbes spokesman Tony Howard.
Stated Purpose
For that matter, no one seems to remember any argument in favor of collecting more in Section 31 fees than the government needs for the fee's stated purpose funding supervisory functions of the SEC.
"In the six years I was a reporter up here covering the SEC [for the Wall Street Journal], I never heard a cogent argument for why they should keep the money," said Christi Harlan, communications director at the Senate Banking Committee. "The SEC doesn't want this money either."
Of course, bound to live by the rules Congress sets for it, the SEC can't say that. "We just collect [fees] according to the way that Congress lays it out," said John Heine, a spokesman for the SEC.
Why does the SEC collect fees far in excess of its need? Why does the SEC turn collected fees over to the government's general fund, only to have it budgeted back to the SEC? Heine said, "Congress is the rationale."
Part of the reason the fee hasn't yet been cut may simply be inertia, according to Grass at the STA: "Once the administration has this money coming in, they don't want to give it up." The Senate Banking Committee's Harlan agrees: "Bigpiles of money are really irresistible."
Last session, Forbes' effort to cut Section 31 fees stalled because of well, you know. "You've just got to get [congressional representatives] to pay attention, against all the other draws on their energy," Forbes spokesman Howard said.
This year, prospects for Section 31 relief look better. Howard said that's due in part to the ground prepared by Forbes' legislation last year. Still, committees, such as Appropriations, Ways and Means, and Budget, will want to have their say.
Like last year, trader organizations are this year coalescing around an effort to reduce transaction fees. Spellman said the SIA issued a release after President Clinton's budget message in February, calling attention to the problem but not proposing a solution. "We don't want to step on toes," added Grass at the STA, which led last year's Section 31 coalition of stock exchanges and trade-group members. The lobbying effort so far has been fairly low-key.
As to whether Section 31 fees will actually be cut, observers unanimously declined to speculate. "It's a matter of the decision-making process catching up with reality," Spellman said. "I honestly don't know" whether Section 31 fees will be reduced this session, he said.
The Securities Industry Association began coordinating Year-2000 computer tests last month among brokerage firms and industry utilities. Later next month, the results will be released.
The tests involve more than 400 broker dealers, U.S. stock markets and industry utilities each interacting on computers converted to simulate a full trade and settlement cycle between year's end and the start of 2000.
"The industrywide test is another milestone in the extensive efforts to prepare for 2000," said Donald D. Kittell, executive vice president of the SIA. "This [is] the first time that the securities firms will have the opportunity to test their internal computers' interaction with both the stock markets and the clearing and settlement utilities."
Trading on March 6 simulated Dec. 29, 1999; March 13 for December 30; March 20 for December 31; April 10 for Jan. 3, 2000. Testing for mutual funds will continue on April 17, when January 4 will be simulated, while testing for options expiration will continue on April 24 (when January 22 will be simulated).
Separately, the SIA recently announced the creation of a committee on decimalization chaired by Scott Abbey, chief information officer of brokerage giant PaineWebber. The committee aims to release an implementation plan and outline a schedule this summer for the industrywide switch to decimal-based trading.
The committee has representatives from the equity and options exchanges as well as from SIA member firms. The committee will coordinate the association's operations, technology, trading and other committees for the switch to decimal-based trading.
The Securities and Exchange Commission, the National Association of Securities Dealers and other stock exchanges agree that decimal-based trading should begin next year. The SIA retained SRI Consulting to report on the capacities of systems to handle order execution, market data and clearing. There is concern that trading in decimals may be beyond the capacity of some systems. staff reports
