U.S. GOVERNMENT PRINTING OFFICE

70–890 PS WASHINGTON : 2001

SAVING INVESTORS MONEY:

REDUCING EXCESSIVE SEC FEES

HEARING

BEFORE THE

SUBCOMMITTEE ON

CAPITAL MARKETS, INSURANCE AND

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON

FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MARCH 7, 2001

Printed for the use of the Committee on Financial Services

Serial No. 107–3

(

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2550

Mail: Stop SSOP, Washington DC 20402–0001
(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missiouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director
(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND

GOVERNMENT SPONSORED ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman

CHRISTOPHER SHAYS, Connecticut

CHRISTOPHER COX, California

PAUL E. GILLMOR, Ohio

RON PAUL, Texas

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

BOB BARR, Georgia

WALTER B. JONES, North Carolina

STEVEN C. LATOURETTE, Ohio

JOHN B. SHADEGG, Arizona

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

VITO FOSSELLA, New York

JUDY BIGGERT, Illinois

GARY G. MILLER, California

DOUG OSE, California

PATRICK J. TOOMEY, Pennsylvania

MIKE FERGUSON, New Jersey

MELISSA A. HART, Pennsylvania

MIKE ROGERS, Michigan

PAUL E. KANJORSKI, Pennsylvania

GARY L. ACKERMAN, New York

NYDIA M. VELA ́ ZQUEZ, New York

KEN BENTSEN, Texas

MAX SANDLIN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

FRANK R. MASCARA, Pennsylvania

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

BRAD SHERMAN, California

GREGORY W. MEEKS, New York

JAY INSLEE, Washington

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

STEVE ISRAEL, New York

MIKE ROSS, Arizona

(V)

C O N T E N T S

Page

Hearing held on:

March 7, 2001 ................................................................................................... 1

Appendix:

March 7, 2001 ................................................................................................... 47

WITNESSES

WEDNESDAY, MARCH 7, 2001

Gramm, Sen. Phil, a U.S. Senator from the State of Texas ................................. 2

Schumer, Sen. Charles E., a U.S. Senator from the State of New York ............. 13

Evans, Scott C., Executive Vice President, TIAA-CREF Investment

Management, (Teachers Insurance and Annuities Association-College Retirement Equities Fund) ...................................................................................... 35

Quick, Christopher C., CEO, Fleet Meehan Specialist, Inc., on behalf of The

Specialist Association of the New York Stock Exchange .................................. 37

Toes, James A., Director, Merrill Lynch & Co., Inc., on behalf of the Security

Traders Association .............................................................................................. 38

Unger, Hon. Laura S., Acting Chairman, U.S. Securities and Exchange

Commission ........................................................................................................... 23

APPENDIX

Prepared statements:

Baker, Hon. Richard H. ................................................................................... 48

Oxley, Hon. Michael G. .................................................................................... 61

Ackerman, Hon. Gary L. .................................................................................. 50

Crowley, Hon. Joseph ....................................................................................... 52

Jones, Hon. Stephanie T. ................................................................................. 55

Kelly, Hon. Sue W. ........................................................................................... 57

Mascara, Hon. Frank ....................................................................................... 58

Menendez, Hon. Robert .................................................................................... 59

Schumer, Sen. Charles E. ................................................................................ 63

Vela ́zquez, Hon. Nydia M. ............................................................................... 62

Evans, Scott C. ................................................................................................. 83

Quick, Christopher C. ...................................................................................... 87

Toes, James A. .................................................................................................. 93

Unger, Hon. Laura S. ....................................................................................... 66

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul:

‘‘Many Holes Weaken Safety Net for Victims of Failed Brokerages,’’ New

York Times, Sept. 25, 2000 ........................................................................... 97

Evans, Scott C.:

Written response to questions from Chairman Michael G. Oxley ................ 86

Unger, Hon. Laura S.:

Written response to questions from Chairman Michael G. Oxley ................ 81

Securities Industry Association, prepared statement by Thomas J. Cavalier .... 107

Security Traders Association, written response to questions from Chairman

Michael G. Oxley .................................................................................................. 115

State Teachers Retirement System of Ohio, prepared statement ....................... 118

(1)

SAVING INVESTORS MONEY:

REDUCING EXCESSIVE SEC FEES

WEDNESDAY, MARCH 7, 2001

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE

AND GOVERNMENT SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C.

The subcommittee met, pursuant to call, at 9:30 a.m., in room

2128, Rayburn House Office Building, Hon. Richard H. Baker,

[chairman of the subcommittee], presiding.

Present: Chairman Baker; Representatives Shays, Cox, Royce,

Lucas of Oklahoma, Barr, Shadegg, Weldon, Fossella, Miller, Ose,

Ferguson, Hart, Rogers, Kanjorski, Bentsen, Mascara, Jones,

Capuano, Sherman, Meeks, Inslee, Hinojosa, Lucas of Kentucky,

Crowley and Israel.

Also Present: Representatives Oxley and Kelly.

Chairman BAKER. Good morning. I would like to call this hearing

of the Subcommittee on Capital Markets to order and welcome each

of you here this morning.

As an advisory for Members who are present, because of our distinguished first panel of witnesses this morning, I have counseled

with Mr. Kanjorski’s staff and with Chairman Oxley that we would

proceed to receive the testimony of the Senators. Should others

wish to make opening statements, we would proceed to those after

the Senators have concluded their testimony and before the second

panel.

It would be my intent at that point to make brief remarks, recognize Mr. Kanjorski, Chairman Oxley, and Ranking Member

LaFalce, should he participate this morning, and limit our opening

statements for that purpose. As we are all aware, we have 47 Members and even with 3 minutes per Member we would use up most

of the morning telling each other hello.

So I will suggest that if that method is acceptable to all present

we would proceed accordingly.

[The prepared statement of Hon. Richard H. Baker can be found

on page 48 in the appendix.]

At this time, I am particularly pleased to introduce a very good

friend and the leader on financial service modernization in the

Congress and welcome to our first meeting here the Chairman of

our newly organized Financial Services Committee. We now have

much more similar jurisdiction, and I am looking forward to a long

and productive working relationship with you and Members of your

committee. Welcome, Chairman Gramm.
2

STATEMENT OF HON. PHIL GRAMM, A U.S. SENATOR FROM

THE STATE OF TEXAS

Senator GRAMM. Mr. Chairman, thank you very much.

Let me first congratulate you on your chairmanship and Paul on

being the Ranking Member. I want to congratulate you for consolidating financial services jurisdiction in one committee. I can assure

you it will make my life much easier. And let me also say that I

look forward to working with each of you as we try to make financial services cheaper and more available to a larger number of

Americans.

I am happy to have the opportunity today to testify on something

that seems to me not only imminently reasonable but something

that every Member of Congress should be supportive of and that

is our efforts to try to see that we don’t take fees that were established to fund the SEC and allow those fees to become a source of

general revenue in Federal Government.

As you know, Mr. Chairman, today, even though no one intended

it, we collect six times as much in fees on securities transactions,

tender fees and fees on the initial offering of stocks as we need to

fund the Securities and Exchange Commission. The level of this excessive fee is very large, $14 billion over the

next 10 years, if we allow the current law to stand. People who try

to save and invest, accumulate every mutual fund, every retirement program, both public and private, in America, every person

saving for college or for retirement will end up paying billions of

dollars of fees that no one ever intended that they pay and do not

serve the purpose for which the fees were imposed.

To give you an idea of the magnitude of these excessive fees, if

you take the average worker and look at a 45-year retirement program, on average that retirement program would pay about $1,300

of fees above the level necessary to fund the regulation that is required for the markets that they use to operate efficiently.

If that $1,300, instead of being paid in excessive fees, were invested, that would mean that the average investor in a retirement

program, an IRA or 401(k) program over their working life could

expect about $5,800 of additional funds on their retirement, rather

than going to the Federal Government in these excessive fees. So

this is a major issue. I think that you can see what a major issue

it is when you look at the groups that have endorsed the bill in the

Senate. Our bill in the Senate basically sets up a process to assure

that we always have enough money to fund the SEC. It guarantees

that when we are overperforming under our current rate structure

the fees be dropped; if we are underperforming, the fees be raised.

We do it in such a way as to hold the appropriators harmless. And

so the net result is we guarantee a funding source for the purpose

that the fee was initially adopted but for no other purpose.

This effort has been endorsed—and I think you are hearing from

some of these same groups—by TIAA-CREF, which is the Nation’s

largest teacher retirement program. It has been endorsed by the

American Shareholders Association, by the National Treasury Employees Union and by the California Public Employee Retirement

System, among other groups.

I believe that it is very important that we adopt this bill. We

have included in the bill a pay parity provision for the SEC. As I
3

am sure this committee is aware, in the recent past we have become concerned that financial regulators were losing people due to

wage increases in the private sector. We raised salaries for financial regulators such as the Comptroller of the Currency and the

Federal Reserve Bank, but a similar change was not made with regard to the SEC. As you can imagine, the rate of turnover is very

high among professional people.

I think it is fair to say that, whether one believes we need more

regulation or less, that I think there is a very strong consensus

that we need to have the most qualified people, the most able people administering those regulations.

So that is the essence of the Senate bill. We have passed the bill

on a voice vote in the Banking Committee. We are going to be on

campaign finance reform for the next couple of weeks in the Senate. But it would be my goal toward the end of this month or the

beginning of the next month to bring this bill to the floor of the

Senate where I am hopeful that we will be successful.

So I want to commend this subcommittee for holding this hearing. I am very happy to be here. I know you are hearing from a

lot of people, but if anybody has a question I would be very happy

to try to answer it.

Chairman BAKER. Thank you, Senator.

I have been advised that Senator Schumer is on his way. He

should be here in about 10 minutes. What I would suggest is the

subcommittee proceed with a few questions. On the Senator’s arrival, we will recognize him for his statement.

Senator, I have certainly agreed with your view about the need

to reduce unwarranted fees—or let’s just call this a tax. It has no

relation any longer to providing for appropriate level of operation

for the SEC. We should ensure for the appropriate level of operation for the SEC, as your legislation does. But one other point in

discussion of this subject with some Members, there have been

those who question the timing: Why this? Why now?

In looking back over the performance of the markets over the

last year, after the decade of extraordinary growth in 401(k) net

worth to most working families—and I would also quickly point out

that we have investing, at least since 1995, people online engaging

in $8 trades who are not institutional investors investing hundreds

of thousands, but working families investing a hundred at a time,

making provision for their child’s education, maybe to buy their

first home, looking forward to their retirement one day. So this

very much is a consumer-oriented approach.

Unfortunately, given the events in the larger economy over the

last year, many of these working families have seen that portfolio

value drop from 10 percent to maybe a third of value. And if we

are to unleash this billion-and-a-half dollars of unnecessary fee collection, isn’t that a logical thing to do to promote additional economic growth, perhaps aid in a small way in the recovery of those

values of those savings of working families across the country?

Senator GRAMM. Mr. Chairman, let me say it is interesting that

you mentioned about the people trading online at very low commissions, because Island Ecn, which has been a leader in that effort,

which has brought down commissions dramatically, has told our

committee that in analyzing their data that their average customer
4

pays more in fees than Island makes in profit. So this has become

a relevant factor to people who tried.

I would also caution people that when we are talking about big

institutional traders, they may be big and they may be institutional, but basically they are big because they have millions of people’s money. And that money belongs to working men and women

all over America who every day pay these transaction fees; and by

paying these transaction fees their level of investment is lower,

their retirement security is lower, the hurdle they face in saving

enough money to send their children to college is higher. So in the

end, with the biggest institutional investor, with Fidelity, every

penny they are investing belongs to people in your district, in my

State, who are trying to meet some of life’s goals with this investment. And when you are paying six times the fee that is required

to fund the regulation which you benefit from, then you are making

that hurdle higher for people.

I would also say there is one other reason for doing it now, and

that is the very rapid growth of foreign exchanges. And on these

foreign exchanges you don’t have these transaction fees. And what

is happening, just to give you an example, we invented futures. We

had an absolute monopoly on the market. Yet now a larger value

and volume of futures are traded in Germany than traded in the

United States because they have become very competitive. They

have had some regulatory advantages; and they have also had

some advantages, quite frankly, in that they had not built the

structure that we had built in our exchanges. And, as a result, they

are becoming very fierce competitors.

I think there is a competitiveness argument to be made for lowering these fees by making American markets more attractive not

only to American investors but to foreign investors as well.

Chairman BAKER. I just wanted to make clear the point some

would argue this is to benefit Wall Street types. In fact, the whole

mission we are engaged in here is to help working families maintain their money for their own futures; and I think sometimes that

gets lost in this debate.

Senator GRAMM. Well, if I could say, Wall Street types, as you

call them, basically are conduits. But the people who are actually

paying the fees, as is obviously who has endorsed this bill, are people who are in the National Treasury Employees Union, people who

are in the California Public Employee Retirement Program. That is

where the fees are being paid.

Chairman BAKER. Without doubt.

Mr. Chairman, given our new rulings around the House, I have

expired my 5 minutes, and therefore I would recognize Mr. Kanjorski.

Mr. KANJORSKI. Thank you, Mr. Chairman.

Senator, let me put this in perspective. We did make an adjustment in 1996, and it was a very fair adjustment that fees go to

cost. No one, however, could have anticipated the explosion of the

markets in the last 4 years. This is not something that has been

planned or thought about as if by accident or perhaps by good fortune.

Do you feel the same support for this bill would exist if we separated the pay parity piece from the fee reduction?
5

Senator GRAMM. Well, I think you would have obviously the support of the investing community. I think the two go together.

I think what we are trying to do is to set up a reliable system

to guarantee a funding source for the SEC. And I think, while we

are doing that, that guaranteeing that SEC employees are competitively paid and we have got a chance to have effective regulation,

I think the two go together.

I would say that in 1996 when we passed that old law we intended through that law to eliminate excessive fees. And I think

you are right. No one ever decided they wanted to have the excessive fees. It is just that we do have them. The 1996 law we wrote

was a static law which made a one-time adjustment. We thought

that would fix the problem. It didn’t. And the approach we have

taken is to try to set up a system where annually you do an evaluation and adjust the fees.

Mr. KANJORSKI. Although we call this a fee, Chairman Baker has

referred to it perhaps as a tax. I will accept either one as the description. But, if we are going to lose a billion-and-a-half dollars a

year, obtained by charging 33 cents for every $10,000 in trading— which does not seem excessive, about the cost of a call in a telephone booth—how would you make up for the loss of those revenues?

I find it very difficult to ask this question, because you always

have a million ways to make budget cuts. But, in all seriousness,

we are going to lose a billion-and-a-half dollars, Senator. What fees

are we going to increase? What taxes are we going to increase?

Where do you see that billion-and-a-half dollars coming from?

Let me suggest several areas that I look at in analyzing this

issue.

One, the Securities and Exchange Commission does not have

what we call CRA. This money very easily could be a potential way

of funding that type of activity.

Two, there is a decided disadvantage in the United States varying from region to region. We all recognize that one-third of our

economy falls into a classification of a distressed area. In reality,

this fee overcharge, if maintained and used for other purposes,

could clearly fund regional economic development in distressed economic communities, including those in Texas, Mississippi, and

throughout the South.

Or we could use it for environmental cleanup. A billion-and-ahalf dollars would fund a $30 billion environmental cleanup fund

for the country. That would help Pennsylvania in a very big way.

We have a lot of land reclamation needs and polluted water as a

result of past mining practices. And, 1⁄10 of that fund would be

enough to clean up the land in Pennsylvania.

So, while I agree it comes out of a particular category, it does not

seem to be all that penalizing. I am wondering, rather than running on down that road, if it would not be better to hold the fee

adjustment until we see what happens to the overall budget and

revenue picture of the Government.

Senator GRAMM. Well, if I may, let me respond by saying that

basically what you are doing is—I think there are two arguments

I would like to make. One is, the fee was imposed for a specific purpose; and the fee is not now being used for that purpose; and I
6

think there is a certain illegitimacy in taking a fee that was meant

as a user fee and using it for general Government.

The second question is, even if you had decided to do that, you

would have to ask a question: Is America benefited more by expanding economic development programs or funding environmental

cleanup than it would be advantaged by letting literally millions of

families do a better job in building up their retirement and saving

money to send their children to college?

I think that a stronger argument can be made that the American

society would be benefited—not only was a tax collected for this

purpose, but that American society would be benefited more by letting millions of savers and investors keep it than any other purposes that you have mentioned, as meritorious as many of them

are.

Finally, let me say that, as we look at where we are today in the

American economy, it is hard to imagine a better time to adjust

fees to the funding needs of the agency they were meant to fund.

In fact, if you can’t do it today, when could we ever do it? What

circumstance that has ever existed in history would be more advantageous to us for making the adjustment than today?

Chairman BAKER. I am sorry, your time has expired, Paul. I will

come back to you.

Mr. Chairman, Mr. Oxley.

Mr. OXLEY. Thank you, Mr. Chairman.

Welcome, Chairman Gramm; and we look forward to our mutual

relationship in the jurisdiction of the two committees.

I want to thank you for your leadership on this issue and your

leadership in the last Congress getting finally, after all those years,

financial services modernization passed which bears your name

along with Chairman Leach and Chairman Bliley. It was a pleasure to work with you. Many of the folks in this room had a great

deal to do with our success, and I think the fact that the committee

has expanded jurisdiction goes directly to our success in passing

Gramm-Leach-Bliley, and we are excited about that. Obviously, the

next step is to deal with some of the issues that we have before

us, including the rate cut for these fees.

Let me ask you this: You had indicated that you had hoped to

get the bill to the floor late this month or early April. We obviously

would like to keep abreast of that progress from the Senate and

also from our perspective as well. I had some discussions with the

gentleman from New York beside me here, Mr. Fossella, who will

be lead sponsor on the legislation; and we hope to introduce that

bill perhaps as early as next week but certainly the week after. But

I want you to know that we are not slacking off, but we are going

to try to keep pace. We think that the arguments you made make

a great deal of sense and that this is a perfect opportunity to pass

this needed legislation.

I have no particular question but simply wanted to commend you

and also your cosponsor, Chuck Schumer—he is, as you are, a

former Member of this body—for, both of you, for your leadership

and bipartisanship on this very important issue. I yield back.

Senator GRAMM. Thank you, Mr. Chairman. I look forward to

working with you.
7

I think this is something that, obviously, there is a lot of work

to be done. But I think we can do it.

I would like to say this is a fee and not a tax. This is a user fee

which has been not through any effort by Congress to do it, but

simply because the power of the American economy is now used for

a purpose that it was never collected. It is important that we keep

it a fee and not a tax, because by fee it is within your jurisdiction.

If this were a tax, it would be under the jurisdiction of the Ways

and Means Committee.

[The prepared statement of Hon. Michael G. Oxley can be found

on page 61 in the appendix.]

Chairman BAKER. Thank you, Mr. Chairman.

Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman.

Mr. Chairman, always good to see you. I have to say as a fellow

Texan I am proud to see that Wall Street is coming to a Texan to

get help on this matter.

Senator GRAMM. Well, actually, I went to Wall Street to get help

on this matter.

Mr. BENTSEN. Senator, I think you are on the right track on this

bill. But I do have a couple of questions. One is—and also I want

to say I think, if I understand your testimony, the sort of anti-deficiency language, though, in your bill protects the functions of the

Securities and Exchange Commission, which I think we would all

agree for investors’ sake, we would want to make sure that the

SEC is not shortchanged in the process.

You in your bill, as I understand it, you reduce all fees, not just

the Section 31 transactional fees.

Senator GRAMM. That is right.

Mr. BENTSEN. Can you tell us why you chose to not just focus

on the base of consumer side but instead on the registration fees

and merger and acquisition fees?

Second of all, if you could tell us, you mentioned that this the excess fee collection is about $14 billion, I think, over 10 years—

or projected to be that amount as we are looking at—out 10 years

on a lot of issues today. I don’t know and I didn’t look for this, but

I don’t think this is in the President’s budget blueprint. You may

have noticed it. And, if not, have you talked with the Office of Management and Budget and do you have a read from the Administration of how they feel about your legislation?

Senator GRAMM. Well, let me deal with these two points.

First of all, as I looked at the fees, all three fees are ultimately

paid for by the saving and investment community. Probably the

most inefficient fee from an economic point of view is an excessive

fee that is imposed on the issue of a new stock. I mean, that is like

taxing seed corn. That really is a tax that makes it harder for

every small business in America to grow and create jobs and become a bigger business, and I felt there was a very strong argument for that.

In mergers, ultimately, the owner, the seller of the one stock, the

buyer of the other stock is the American public. So while we sort

of think of those things as being big business, from the point of

view of the Treasury Employees Labor Union and their thrift savings plan, which many of us participate in as Federal employees,
8

we are substantial investors in every one of those transactions as

savers and investors. So we decided in the Banking Committee that

the way to do it was to do all three fees equally.

Could you do it any other way? You could probably make an argument either way. My basic belief was that all of these fees ultimately were paid by savers and investors; and, second, that they

were all excessive if—that we were collecting 6 times as much as

we needed.

The second question, I believe the Administration will endorse

this. I am very reluctant to speak for the new Administration, but

I believe in the end that they will be supportive of reducing these

fees.

Mr. BENTSEN. But, at this time, do you know offhand if it is assumed in their budget?

Senator GRAMM. I don’t know whether it is or not.

Mr. BENTSEN. Thank you.

Senator GRAMM. At some point obviously they will be called upon

to say whether they support the repeal of the fees. I believe they

will.

Mr. BENTSEN. Knowing how bashful you are, I am sure you will

find a way to ask them about it.

Senator GRAMM. Well, I have talked to them about it.

Mr. BENTSEN. I am sure you have.

Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Bentsen.

By time of arrival, the next to be recognized is Mr. Fossella.

Mr. FOSSELLA. Thank you, Mr. Chairman; and thank you for

your leadership and, in particular, Mr. Oxley as well. And I welcome you, Chairman Gramm.

Other than to add very briefly that I think you hit the nail on

the head, Chairman Gramm. That is that the moral argument of

this is often ignored and lost, and that is this fee was intended to

fund the SEC. The promise and the commitment through Congress

to the American people and investors was for that very purpose.

And I think trying to work with you and others in the Senate

and people like Mr. Oxley here is all we are trying to do is give

a refund to the American people and the investors that actually

have to pay this fee. We are not saying that we want to underfund

the SEC. To the contrary, the SEC is going to be fully protected

and, thus, investors are going to be protected.

In addition, we ask ourselves a very simple question. Do we believe that this overpayment to the Federal Treasury is better left

in the hands of investors, families across America? I think Mr.

Baker highlighted that. Or do we believe it is better spent here in

Washington?

As I see it, the answer is crystal clear, that if we really want to

keep our economy growing, if we want to make more Americans investors, if we want to remove this unnecessary or excessive fee, we

reduce it in a reasonable way. So I merely take this time to thank

you, as Mr. Oxley does, for your leadership in the Senate. I believe

at the end of the day we will do this and do what is best in the

interest of Americans and the investors that have to pay this fee.

And I thank you for your time.

Senator GRAMM. Thank you.
9

Chairman BAKER. Mr. Mascara.

I am sorry. Mr. Crowley is next.

Mr. CROWLEY. Thank you, Mr. Chairman. Senator, welcome; and

thank you for your testimony today.

Let me applaud you on your bill and Senator Schumer’s bill. I

support your measure.

My office has been working with Congressman Towns and with

Congressman Fossella in their markup of their bill. The concern

that I have, the thing that really separates your bill from what I

believe is Mr. Fossella’s bill, is the issue of pay parity for the SEC

workers; and I was wondering if you could enlighten us as to why

you think that is important. I think it is important. But why you

think it is important, why you think it should be included in the

House version of the bill.

Senator GRAMM. Well, first of all, the SEC is losing its most capable people because the differential between their pay at the SEC

and the private sector has gotten so large.

Let me make it clear that the SEC will never be able to compete

on a monetary basis with the private sector, so we don’t have anyone working at the SEC or the Fed that doesn’t want to do that

job. Most people could get more in the private sector. Some are

doing that job to learn skills and become credentialized to ultimately go into the private sector, which I think is a good thing for

both the Government and the private sector.

But we decided in our financial regulators that we wanted to increase pay for highly skilled people to try to make it possible for

the people who wanted to stay at the Fed and the Comptroller

through supervision to have ability to do that. Because the jurisdiction of the committees were different. The Banking Committee provided this pay parity for financial regulators, but a similar bill was

not provided by the Commerce Committee. So, as a result, we have

got employees, financial regulators at the Fed that are making one

salary; and then we have got people who are doing jobs at the SEC

that are at least as challenging, but they are making a lower pay

grade.

So this is, in part, simply good Government policy. It is partly

a matter of equity. Again, nobody intended to give the pay parity

to people at the Fed and these other financial regulators and not

to the SEC. It was one of the by-products of our old jurisdiction

where you had people doing similar type work but under jurisdiction of two different committees.

If you look at the rates at which highly skilled people have left

the SEC, I don’t quite remember that number, but I think that the

turnover rate was something like 9 percent—13 percent last year.

That was much larger than in the financial regulatory agencies,

and I believe pay parity is a reason.

Again, whether you want more regulation or less, we want good

regulation; and you can’t have good regulation without having good

people.

Mr. CROWLEY. Is it your understanding that the industry itself

supports that measure?

Senator GRAMM. I do understand that.
10

Mr. CROWLEY. Do you have any knowledge as to whether or not

the industry itself overall would support including pay parity in

this legislation?

Senator GRAMM. Well, in our bill in the Senate, we had both pay

parity and the fee reduction; and we had broad support for that.

I can’t speak for industry anymore than I can speak for the Administration, but I think at least most people that I know in the securities business they would rather have more competent people regulating them than less competent people.

Mr. CROWLEY. So for the record, Senator, would you like to see

included in the bill pay parity?

Senator GRAMM. I have it in my bill because I thought it fit, and

for the record I would prefer it in the final bill.

Mr. CROWLEY. Thank you. I yield back the balance.

Chairman BAKER. Thank you, Mr. Crowley.

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

Senator, I appreciate you coming to visit with us today. I followed you over here.

Senator GRAMM. Oh, this committee is so big it is hard for an old

person to figure out where people are. OK.

Mr. OSE. It is equally difficult for a young person, I must tell

you.

Senator GRAMM. I had to look four rows up. I tell you it also is

disconcerting to see people sitting on the top row that I hardly

know. I once was over here, but it has been a while, obviously a

while.

Mr. OSE. The only reason I know it is tough for young people is

Vito told me.

On the pay parity question, do you have any numbers to quantify

how much additional funding SEC might need to achieve pay parity?

Senator GRAMM. I don’t have those numbers with me, but I think

the SEC is going to—are you going to testify? Since we have a perfectly capable person who is being paid to do that, I am going to

let her tell you, but they do have the numbers and will provide

them.

Mr. OSE. In terms of the industry itself, many of the intermediaries like Fidelity and others at the end of the day they will

go into the market and sell their excess or buy the short having

reconfigured their interior portfolios. Are fees collected on the interior transactions?

Senator GRAMM. Yes.

Mr. OSE. They are.

The question I have is that if we are collecting one-and-a-quarter

or one-and-a-half billion versus an SEC cost requirement of about

$380 million a year, your proposal, if I read it right, would take

the fee or tax charge, however you want to assess it, from 1⁄300th

of 1 percent to 1⁄500th of 1 percent. But it seems to me, if you do

the math, you ought to go from 1⁄300th to 1⁄900th of 1 percent; and

I am curious why we only go a little bit of the way.

Senator GRAMM. I think part of it was in our 1996 law in these

outyears we are already reducing the rate somewhat. Believe me,

we have spent a lot of time trying to figure out how to do this right
11

since we don’t want it to come back 4 years from now and do it

again.

Second, we have tried to do it so that we don’t disadvantage our

appropriators so that we ended up getting opposition that we don’t

need. I will get somebody to put down on one sheet of paper exactly

how all the numbers work and give them to you.

Mr. OSE. I would appreciate that.

My final question is, if I understand the 1996 legislation, it was

very specific that this fee was designed to cover SEC’s costs. It was

not to cover SEC’s costs and CRA or environmental remediation

and X, Y and Z. Am I correct?

Senator GRAMM. There was no doubt about the fact, A, when the

fee was first imposed and, B, every time we have changed, and including 1996, it has been the clear intent of Congress that the fee

pay for the SEC’s operation under the basic argument that the investing public benefits from the regulatory process and, therefore,

they should pay for it. But no one has ever made an argument that

I am aware of, that the Congress has adopted anyway, that the fee

should become a general revenue source.

I would argue—and I don’t want to drift off into my old days as

an economics professor—but if you were going to define efficiency

of a tax as the most efficient tax is where I take a dollar out of

your pocket, but I don’t change your behavior, so you are a dollar

poorer and the Government is a dollar richer, that would be the

most efficient tax. The most inefficient tax is a tax where I take

a dollar out of your pocket, but in doing so, I change your behavior,

say the death tax, so that you sell your business sooner, you do all

kinds of other non-productive things so that the cost might be $5

or $6 for every dollar we collect.

I would argue that these fees, while they are justified to pay for

the SEC, they are a very inefficient way to raise money. The cost

they impose on society is much higher than the money we get. The

idea of imposing fees on the issue of new stock, a direct tax on sort

of the seed corn of the economy, as a way of funding the Government, it would be almost the worst imaginable tax you could come

up with. Yet, through no intent by anybody, we have come up with

exactly that system; and that is what we are trying to fix.

Chairman BAKER. Your time has expired.

Mr. Israel.

Mr. ISRAEL. No questions.

Chairman BAKER. Mr. Lucas.

Mr. LUCAS OF KENTUCKY. No questions.

Chairman BAKER. Mr. Hinojosa.

Mr. HINOJOSA. Thank you.

Senator GRAMM. We know that name well where I am from.

Mr. HINOJOSA. Thank you, Senator Gramm. It is a pleasure to

see you.

For me, it is a new experience to serve on this Financial Services

Committee. I am going to pass up this opportunity to ask questions. Instead, I think I am going to listen and better understand

your legislation; and from everything I have heard, it seems like

a very prudent thing to do. So, up to this point, I have no objections.

Senator GRAMM. Thank you, dear friend.
12

Chairman BAKER. Thank you very much, sir.

Mr. Ferguson.

Ms. Hart.

Mr. Weldon.

Mr. WELDON. Thank you, Mr. Chairman.

I just want to go on record as being in support of the fee reduction as well as the pay parity. I can readily see how that is important.

Chairman Gramm, I appreciate you coming here and testifying.

There will be arguments made, I think we have had heard some

this morning, about the revenues and what they could be used for,

quote, unquote, and that, of course, all those arguments always assume sort of a zero sum game, that if the Government doesn’t get

the money then the money is essentially lost. I wonder if you could

elaborate on that. As I understand it, economic theory, that if we

don’t take that money in, then that money is going to be out there

in the economy, essentially doing good things, creating jobs and in

the end producing wealth and sending more money back to the

Government.

Senator GRAMM. Well, let me say this, that I think the debate

about Government spending versus taxes is a totally legitimate debate when you are debating the tax bill.

I think on a user fee that the idea that we made a mistake when

we set the fee in not taking into account the kind of economic

growth we have experienced and therefore we have had this windfall at the expense of schoolteachers in California, retired couples

in Florida, struggling parents in New York City, and therefore,

since we have had the windfall that nobody ever intended, that

now it is our money and therefore we are giving up something in

having a fee that fits the purpose that the fee was adopted, I think

that is a debate we ought to be having on the tax cut and not on

this fee issue.

The point is, the fee was put in place to fund the SEC and not

to be a general revenue source. We are collecting six times as much

as we need by the most conservative estimate; and, in doing so, you

basically are affecting every saver and every investor in America.

When you bring together the diverse groups that support this

bill, it is pretty clear that this is basically a grass-roots effort. And

I just—today, with tens of millions of Americans increasingly investing their money in mutual funds and retirement programs,

with—the average American family 3 years ago had more wealth

in its financial assets than it did the equity of its home, it seems

to me that there is hardly anything that is more people oriented

than not penalizing people that are trying to get ahead and save

and invest and become owners of wealth.

In the America of 50 or 100 years ago, only a very small number

of people could ever benefit from the power of compound interest,

and they were so greatly disadvantaged—I mean advantaged as a

result of it. Now ordinary people are getting the opportunity, really

for the first time, to benefit from it; and I don’t think that we

should be continuing excessive fees on them. That is really the argument, I think.

Mr. WELDON. Thank you, Mr. Chairman. I yield back.
13

Senator GRAMM. If it is OK, why don’t I stop and let Senator

Schumer testify?

Chairman BAKER. Mr. Chairman, what I suggest—I understand

Senator Schumer also has some time constraints—that perhaps we

would recognize the Senator for his remarks; and for the Members

we will pick up in the order we left with questions at that point.

So that whoever has been patient and waiting to ask their questions, you’ll ask either Senator at your choice.

Chairman BAKER. It is a pleasure to welcome you back, Senator.

As a former colleague on this committee, we look forward to working with you in our expanded jurisdiction capacity and thank you

for coming.

STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR

FROM THE STATE OF NEW YORK

Senator SCHUMER. Thank you, Mr. Chairman; and I would like

to thank you and Ranking Member Kanjorski for holding this hearing today.

I would like you to know when you come down from New York

to Washington you know that New York is at many disadvantages

here in the Capitol. But this is one place where it is not. I count

five New Yorkers here. And since this bill not only benefits America and New York, the financial capital of the world, we couldn’t

have a better forum to start out.

I would also like to just thank you for getting going early. This

is another one of—you would be surprised, Mr. Chairman. Over in

the Senate there are many—or several ongoing Gramm-Schumer

collaborations, and this is but another.

Chairman BAKER. It is a source of continuing amazement over

here, I would add.

Senator SCHUMER. The Senate changes you in remarkable ways.

But, actually, Phil said this is really a grass-roots bill; and to

prove it he brought me along here. Just kidding.

Anyway, I want to thank you and I want to thank Chairman

Gramm for his leadership on this issue. It is of great importance

to investors across the country, big ones and little ones and every

one in between.

I am pleased to be working with the Senator to be lead Democrat

in the effort to reduce the Section 31 and 6(b) fees in the Senate.

Frankly, Mr. Chairman, I have never been more sanguine about

our prospects, and starting this bi-cameral process early in the legislative cycle optimizes our chances for getting this done in Congress.

As everyone here knows, these fees were enacted to fund the

SEC as sort of a user fee. No one had any objection to that and—

like the surcharge on airline tickets. Unfortunately, the fees have

been—basically fallen out of line with the SEC’s budget. Because

of the democratization of the securities market in the 1990’s, the

volume of trading exploded and so has the volume of fees.

I am sure Phil mentioned the numbers. Based on trading volume

40 years ago, Section 31 fees would have been about $3 million. If

fees had only grown with inflation, today they would be $17.7 million. But today they are not $17.7 million, they are $2.3 billion.
14

That is an annual growth rate of 19 percent, and it is 600 percent

of the SEC’s budget.

Now, Congressman Kanjorski and I would probably like to see

the SEC’s budget go up that much, but I know Mr. Chairman and

Chairman Gramm would not like to do that. So we think we ought

to return it to the taxpayers.

The way the law is currently written, the fee collections are used

to fund the SEC; the rest becomes part of the overall Federal budget. Which means inadvertently this body and our body on the other

side have passed a tax on investors that goes to funding all sorts

of other projects and programs. We never intended that, and it is

about time we undid it, and that is why we are here.

S. 143 will rationalize the process by reducing the fee rate, capping the total fees collected; and, at the same time, it guarantees

the funding that the SEC needs to grow in this expanding securities world. Over 10 years it is going to save investors $14 billion.

And since, according to the SEC, investors pay 87 percent of Section 31 fees, all types of investors, from the retiree who owns 50

shares of Cisco to the mutual fund representing all of us with billions in the market, everyone will benefit.

I don’t have to remind this subcommittee nearly 50 percent of

Americans have direct investment in the stock market. The

Gramm-Schumer bill provides relief to every single one of them. So

I would—I think theses issue have been talked about freely. I know

Senator Gramm has given a great opening statement. So I am— instead of taking the committee’s time, I am going to ask that the

rest of my statement be read into the record.

Chairman BAKER. Without objection.

Senator SCHUMER. And I am here available for your questions

until I get a buzz from the Commerce Committee where I have to

go back to.

[The prepared statement of Hon. Charles E. Schumer can be

found on page 63 in the appendix.]

Chairman BAKER. Understanding that, we would quickly recognize Mrs. Jones, who is next in line.

Mrs. JONES. Thank you, Mr. Chairman; and, Senator Gramm,

Senator Schumer, thank you for coming.

I have to add a little humor to this. You see, all these guys just

came on this subcommittee when they don’t have a chance to sit

at the top row. When I started, I was first at the bottom corner

over there. We used to call it the kids table. So they are enjoying

sitting at the top of the row.

I am going to make my question kind of short. I would ask both

of you to address it.

The Section 31 fees are apparently the area in which there has

been the most growth. I think, Senator Schumer, you just said that

87 percent of the Section 31 fees are paid by consumers. Your bill

actually addresses more than Section 31 fees. If in the other areas

the fees have not grown at that magnitude, why is it that you propose that those fees be cut as well?

Senator GRAMM. Well, let me respond by saying that the figure

that Chuck used is the figure where people pay the fee directly.

The fees are paid indirectly by the other 13 percent. We just decided to do them across the board because it was the simplest way
15

to do it. There is nothing magic about it. We have an excess of fees.

We could have rearranged the distribution of it. But we just

thought it was simpler to reduce all the fees across the board and

keep the same relationship among the three fees.

Senator SCHUMER. That is—basically, Phil has summed up the answer. I mean, our job here is to take this extra several $1.8 billion or whatever it ends up being and bring it back to where it

should be to the investor. And if we rearranged all the different fee

amounts based on income—it is a great question, but we thought

it would create more complications and get in the way of our overall goal. But it is not an irrational thing to do. What you suggest

is not an irrational thing to do.

Mrs. JONES. Just as a follow-up, and this is a new area to me

since this is a new responsibility to me, too, the Banking Committee, I am assuming—or I would ask that perhaps whatever you

have been doing on this issue to assess whether or not in the other

areas there has been the significant growth and maybe we might

need some of those dollars for the administration, I have no idea,

but I would appreciate any information, if you don’t do it toward

some, subsequently it would be—— Senator SCHUMER. Congresswoman, my staff informs me—I don’t

know if it is the same exact percentage, but because of IPOs and

everything else there has been the same dramatic growth.

Mrs. JONES. They are trying to tell you something.

Senator SCHUMER. But those may be reduced under the 1996 act,

she reminds me.

Mrs. JONES. Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mrs. Jones.

Next would be Mr. Barr.

Mr. BARR. Thank you, Mr. Chairman. It is a pleasure to have our

two colleagues from the Senate here today.

With regard to the issue of pay parity, I have some real concerns

about sort of getting into that whole issue. Where we would draw

the line with any number of Government agencies and indeed our

military that have a serious problem with pilots leaving, attorneys

leaving and going into private practice, at least in part because of

disparities in pay and it being more lucrative in the private sector,

I don’t know that we could ever or would ever want to try and

reach pay parity, get into a bidding war with private industry.

There is something very special about public service, and certainly

we all understand and the vast majority of Federal employees that

I know and work with are men and women of tremendous honor

and they make very serious sacrifices to serve the public, as all of

us do.

Is an issue of the fee reductions, the fee ratio reductions important enough that we should move forward with it even if we don’t

have the pay parity provision in the legislation?

Senator GRAMM. Let me respond by saying that by pay parity we

mean parity among financial regulators. We have already done it

for the other financial regulators, and so we were simply taking

this opportunity where we were adjusting the fees to bring all salaries of all financial regulators in the system into parity.

I am for it. I am also for fee reduction. So I learned long ago in

our business if somebody is voting with you on one thing, don’t in-
16

sist that as a condition to do that they vote with you on everything,

or else Chuck and I wouldn’t be sitting here together.

But I would ask you to look at this issue. The concern you raise

is clearly a valid concern. We are not talking about parity with the

private sector. Most people who are working for the SEC probably

could make more money in the private sector, but there is no logic

to people at the Federal Reserve Bank doing a similar kind of job

being paid on a different scale, and we find ourselves in that unusual circumstance today.

Senator SCHUMER. The only thing I would say to the Congressman is the parity is aimed at banking regulators who are under

different types of rulings. The job of being an SEC employee is just

as difficult, if not—Chairman Levitt—former Chairman Levitt and

I think Acting Chairperson Unger will be here later to talk about

the difficulty of finding good people in these. And we need them.

The SEC regulation system, where there has been a broad consensus based on disclosure rather than detailed regulation, needs

good people there; and we are really suffering. So this isn’t going

to cost that much. It is not private versus public, which is opening

a whole can of worms but, rather, simply equaling our parity to

those of the banking regulators who run different rules, because

there is different types of agencies.

Mr. BARR. OK. Thank you for the clarification. Thank you, Senators.

Chairman BAKER. Thank you, Mr. Barr.

Mr. Meeks.

Mr. MEEKS. Thank you, Mr. Chairman.

Senator Schumer, let me just ask this very briefly. You know, because of the Gramm-Leach-Bliley law, we have separated the barriers from banking, insurance and securities. My question is this:

Banks still operate on the CRA rules and regulations, and some

have suggested why not take some of the excess fees and apply

them to funds for economic development and environmental restoration, leveling the playing fields with the banks as far as the

CRA requirements. What do you think about that?

Senator SCHUMER. I think it is an interesting idea, though it is

one I would oppose for this reason. The original sort of tradeoff

with the banks, why they are under more severe forms of regulation than say the securities industry, is because they got Federal

insurance; and still, to this day, people go to banks because they

know Uncle Sam is there. Recent history has proven most people

believe it is there, not just for the $100,000, but for the whole ball

of wax, and history has borne that out. Phil and I would probably

disagree whether that was good or bad, but that has never happened.

The whole framework of the securities industry, which is more

entrepreneurial, which is more ‘‘win a lot of money and lose a lot

of money,’’ has never had that Federal insurance. I think it would

be a terrible idea for both the industry and for the country to give

them that Federal insurance. They would certainly demand it if we

extended CRA and other types of things which I have been fully

supportive of.

As you know, in Gramm-Leach-Bliley that was our major sticking point until we came to an agreement on that. And I think it
17

would be a bad idea, because I think it would change the whole entrepreneurial nature of the securities industry.

I support putting in more dollars. I know how good CRA has

been for the community you represent and for hundreds of communities across America and scores across New York, but I don’t think

this would be the right way to do it.

Mr. OSE. Will the gentleman yield for a follow-up?

Mr. MEEKS. I yield.

Mr. OSE. I want to go back. I asked earlier about the pay period

qualification. I scanned Ms. Unger’s testimony. It is about $70 million to achieve pay parity.

If I understand correctly, if we opted to do that, that would take us from about $380 million in SEC costs annually to $450 million,

which would still be roughly 1⁄5th of what the fees are, according

to Senator Schumer’s testimony.

I come back to my point that the underlying legislation authorizing the fee collection only allowed collection for the costs of SEC.

Is that correct?

Senator GRAMM. The way it works is that we look at the adopted

budget of the SEC and we adapt the fee to that. So whatever Congress decides in terms of funding for the SEC, that will—with a delayed process will determine what the fee will be.

Now, as you know, when we grant pay increases in the Federal

Government, sometimes we absorb the pay increase and sometimes

we fully fund it without absorption, and sometimes we have a degree of absorption and a degree of funding.

The decision about funding the SEC will be made by the Appropriations Committee, and they will make a decision—assuming

that we grant pay parity, they will make a decision as to whether

any of it should be absorbed, all of it should be absorbed, part of

it should be absorbed. But there will be no problem in terms of the

fee, because the fee will be adjusted; and we maintain a cushion

in the way we have set it, in any case, for a fairly short period of

time. So we try to come up with a dynamic way of doing it so we

are sure, no matter what happens to volumes, that we do not end

up with this excessive collection of fees.

Mr. OSE. If I understand the math of the proposed flexibility, instead of being four or five times what is necessary, we get down

to one-and-a-half to two times what SEC costs are on an annual

basis.

Is that about right?

Senator GRAMM. We have a cushion in the bill of some 40 percent

or something like that.

Mr. OSE. I thank the gentleman.

Chairman BAKER. Our next Member would be Mr. Fossella.

Mr. Cox.

Mr. COX. Yes, thank you. I want to thank my Senate colleagues

and betters for attending today and providing your testimony.

Even though, Senator Gramm, I missed your testimony, I—— Senator GRAMM. I could give it again.

Mr. COX. You will be providing it.

Obviously, the central question for us is whether or not to conform our House legislation to what you have provided. I know we

will hear from Chairman Unger that she supports our doing that,
18

and I wonder if you can think of any good reason that we should

not.

This is not a trick question.

Senator GRAMM. Again, I stated earlier in responding to Congressman Barr that we decided to do it this way because it made

sense to us.

Mr. COX. I ask you this question not so much because the answer

appears obvious, but because if we were to move to conference, presumably the whole thing would be conferencible and we could do

it there.

Is there any reason to think that moving a bill quickly through

the committee, as it has been presented to us, might get this enacted into law faster?

Senator GRAMM. That is a decision you’ve got to make. We made

the decision to do it together because we thought it made sense, obviously, because it is in our bill, if we get to conference, and I believe we will, it will be conferencible.

But however you want to do it, again, if somebody is for part of

something, I am not going to say, don’t be with me on part of it

because you are not with me on the rest of it.

Mr. COX. Did you—— Senator SCHUMER. Which he doesn’t always say on everything.

Mr. COX. Did you address in your earlier presentation—I apologize if you did—what you expect the Senate timing to be?

Senator GRAMM. I said we passed it out of committee on a voice

vote. We have legislation pretty well stacked up until the last week

of this month. My objective is going to be to try to get this bill on

the floor of the Senate either the last week of this month or the

first week or two of next month.

So we are going to try to move forward, and we are working hard

on it. There is a strong grass-roots base of support.

The number of beneficiaries of this bill is very, very large. My

guess is with direct investors, with IRAs and 401(k)s, we probably

have, counting family members, some 200 million beneficiaries. So

it is hard to imagine a bill that will touch more lives.

Granted, it is just a little bit here, a little bit there. But as I said,

on a retirement program, we are talking about $1,300 of excessive

fees. If you could invest those fees instead of having them taken

away and be $5,800, there are not many retirees that could not

find a use for $5,800.

Mr. COX. This has been essentially a love fest today, with minor

exceptions at the margin. We are obviously all in agreement here

on the merits of fee reduction and rationalization. The only question, it seems to me, that is before us is to what extent we try and

conform ourselves to your overall approach with respect to the pay

structure at the Securities and Exchange Commission.

I would certainly urge our subcommittee to do whatever we can

to do this as quickly as possible so we can have legislation before

the President as soon as possible.

I yield to my colleague.

Mr. KANJORSKI. Thank you, Mr. Chairman.

First——

Mr. COX. In fact, even though I was not here for your earlier

comments, I understand it is not entirely a love fest.
19

Mr. KANJORSKI. May I make a point? First of all, Senator Schumer, you indicated that we have no insurance policy for investors.

In fact, we have the Securities Investor Protection Corporation.

I would like to offer for the record an article in the New York

Times Business Section of September 25, 2000. It is a rather detailed article and one story involves a case in Pennsylvania. Someone invested $100,000 in bonds, and the bonds were fraudulently

purchased and absconded by the investor and it took them 4 years

to get their money back. It shows the inadequacy of the fund as

to how it is operating.

We need to address this issue. These funds could go to correct

these sorts of excesses and failures that are out there. They could

protect the American investors we all talk about protecting—not

the Wall Street brokers, but ordinary investors in our districts.

This is the fund that should do it.

Mr. Chairman, I ask to submit that article for the record.

Chairman BAKER. Without objection, we will put this in the

record.

[The information referred to can be found on page 97 in the

appendix.]

Senator SCHUMER. Congressman.

Mr. KANJORSKI. Yes.

Senator SCHUMER. I think the best way to protect investors is to

give the SEC the funds it needs. They will admit to you that they

don’t have those now, and our bill helps do that. Of course, SIPC

is not a grand scheme of Federal insurance the way we have it

for——

Mr. KANJORSKI. You mean on the SEC pay scale, bringing it up

to parity with other financial regulators.

Senator SCHUMER. And let them hire the people we need.

Chairman BAKER. We have a couple more Members.

Let me announce this: We have a vote on the floor. I would intend to stay another 10 minutes, with your cooperation. I have two

Members who have been here most of the morning. I know they

would like to ask of the Senators before they leave.

Mr. COX. In the interest of moving along, Mr. Chairman, I yield

back the balance of my time.

Chairman BAKER. It has been expired a little while back.

We have two Members—excuse me, three. We have Mr. Shadegg;

Mr. Rogers; Mr. Sherman, who just stepped out; and Mrs. Kelly,

who is not a Member but has been patiently participating this

morning. If we can, I would like to get those three Members in before the clock runs, starting first with Mr. Shadegg.

Mr. SHADEGG. Thank you, Mr. Chairman. I will be brief.

I simply—I guess to join the love fest want to say that on behalf

of the interests in my district who have looked at this legislation

and have let me know their sentiments, including, at least the figure I have is some 80 million families that invest, I think this is

legislation that is well overdue. I commend you on your efforts and

I appreciate you for taking your time to come here this morning.

I yield back the balance of my time.

Chairman BAKER. Thank you, Mr. Shadegg.

Our next Member is Mr. Rogers.

Mr. ROGERS. Mr. Chairman, I will yield my time.
20

Chairman BAKER. Mrs. Kelly.

Mrs. KELLY. Thank you, Mr. Chairman.

I thank both of you Senators for coming over this morning. I appreciate your letting me speak here at the committee today.

I simply want to ask, you have something in your bill that I don’t

think I have heard discussed. What is the advantage of reducing

the other fees that are in the bill, the mergers and tenders fee and

the registration fees? I wonder if you could just speak quickly to

that.

Senator GRAMM. We made a decision that all three fees have

grown exponentially and that we wanted to keep them at their

same relative rate; so reducing one, we would reduce the other.

I would say the same argument applies; to the degree that we

incur costs at the SEC in overseeing the issuing of new stock, we

should collect the amount of fees we need to oversee the issuing of

new stock and not more. The same is true with mergers and tender

offers. The fee should reflect the cost of overseeing, supervising,

and making decisions in those areas.

I would say also that every one of these fees is ultimately paid

for by investors, and so I think all the same arguments apply. I

don’t think there is one fee that is more consumer-oriented than

the other.

I would have to say, from a philosophical point of view, which

has nothing to do with the fee and its use, I find the fee on the

issue of new stocks probably the most inefficient economically, because it imposes a fee on a transaction that is so critical to the

American economy, and that is the issue of new stock and really

the birth of new public companies.

But we decided not to get into all of that. I think Chuck said it

well: We were not trying to create problems, we were trying to

solve problems, and keeping all three of them proportional was a

way of doing that.

Mrs. KELLY. I thank you.

My office just did a little quick calculation. We found that if you

had a long-term investor that went into the market with $1,000 in

a mutual fund with the returns matching the Standard & Poors

500 in 1950, it would be now worth about half-a-million dollars; but

if you figure in a compounded 2 percent, which is conservative, fee,

it is only worth $230,000. That is a big cut.

I think that these fees really—I agree with you, I think we

should maybe take a look at the whole gamut of them.

Thank you very much. I yield back.

Chairman BAKER. Thank you, Mrs. Kelly.

Mr. Kanjorski wants one more round before we recess.

Mr. KANJORSKI. It is tough to get into a discussion when Senator

Gramm and Senator Schumer are on the same side. I do not know

where we go. We have the whole gamut covered.

Senator GRAMM. When you are outside our spectrum, you are

pretty far out there on the wings.

Mr. KANJORSKI. You have made a very strong argument here for

equity and fairness, and that appeals to me. Certainly these fees

were intended to cover the costs of regulatory transactions, but it

remains a question as to whether or not we can get these fees into

balance.
21

But if you are going to carry that principle over, Senator Gramm, I am still worried about losing $1.5 billion to the Treasury. How

are we going to make it up? If you are going to say that we do not

have to make it up, then we have a problem.

Mr. Schumer, you should take up on this issue. We have a lot

of trust funds in the United States Government that we have been

robbing and not using because we need those trust funds to cover

the budget. When is their day of fairness?

Let me give you one example, and I ask your assistance on it. We have almost $2 billion in the Abandoned Mine Land Fund. It

has been used to run every other agency of the Government of the

United States for the last 6 years without any major portion of the

fund going back to reclaim land. That is what the fees paid by the

coal operators were to be used for—to make up for past bad practices that affect human life and put it at risk.

Do you not think before we give the money back or reduce this

fund that we should make whole these other funds, and make sure

that the funds that they are no longer being used for general

Treasury purposes—which it not what they were created for?

Where is the equity here?

Senator GRAMM. Let me respond by saying that we really have

already started doing that. I worked with Senator Byrd on trying

to fix the problem we had with the Highway Trust Fund, where 26

cents out of every dollar of gasoline taxes was not going to road

construction, was not going to mass transit. We fixed that. As a result, every penny of it goes for those purposes.

I believe that we should—with user fees and trust funds, that we

need to basically have them go for the purposes they are created

for. This is the one that is under our jurisdiction. It is not a trust

fund; it is simply a funding source.

We have already done it for the biggest trust fund, which was

the Highway Trust Fund. I think this is a major step toward doing

what you are talking about.

Mr. KANJORSKI. So I could anticipate the support of Senator

Gramm and Senator Schumer in the Senate when we try and make

whole the Abandoned Mine Land Fund? That it is the right thing

to do. These $1.2 billion should be paid out to fix this land trust

fund.

Senator SCHUMER. Let me say it is a little bit of a different argument in this sense: This is not a trust fund. In other words, there

is not a whole lot of money sitting here. You can argue—if you

have a trust fund, where it sits there, you can argue it either

way—either spend the money on the intended purpose or return

the money to the taxpayers.

Mr. KANJORSKI. But the reason we have not been able to fix this

is that if you spend the money on its intended purpose, there is a

shortfall of revenue in the overall Federal budget. This legislation

is going to exacerbate that problem. We are going to lose $1.5 billion a year of revenue that is now going to the United States, so

that is less of an opportunity to pledge our money to these funds.

But you are certainly right. I agree with you completely.

Senator GRAMM. These fellows don’t own this.

Senator SCHUMER. Right. But it is fundamentally not an honest

way, and I don’t mean dishonest in terms of crooked, but in terms
22

of telling people what they are paying; when you pass a law to do

one thing, like the nickel gasoline tax, and then it does another,

and you at least have to pay, you know—and that is not fair,

which—the fund you are mentioning, it is the same thing.

Mr. KANJORSKI. But we do not have the revenues to pay out that

fund money. The fact is, I am perfectly agreeable to go along with

you and be fair on this type of fee arrangement. What I am asking

for is an equitable commitment from two extremely effective Senators to help us be true to the purposes of these other funds and

to make sure the revenues are there, from whatever fair source

they come from, to pay out as intended by the Congress for the last

20 or 25 years.

Senator SCHUMER. I would be very sympathetic to that argument.

Senator GRAMM. I would have to say that I think trust funds

should be used for the purposes they have been collected. Trust

funds are a little bit different. But within that caveat, I think either you ought to lower the fee and collect less, or you ought to use

the money for the purpose that it was collected.

What we are trying to do here is lower the fee.

Chairman BAKER. If I may interrupt, we are down to about 3

minutes on the floor.

I especially want to extend my appreciation to both the Senators

for being here on our first full hearing of this new subcommittee.

I think you set a high standard of bipartisan cooperation for us to

emulate. I appreciate your bold leadership.

And, Senator Gramm, for the record, some may have indicated

you didn’t go far enough in cutting taxes. I want to clear the

record. This subcommittee will never accuse Senator Gramm of not

being aggressive enough. Thank you.

We will stand in recess pending the second panel. We are going

to go right over and vote and come right back. We will have limited

opening statements, as promised to Members.

I would expect to reconvene in about 15 minutes.

[Recess.]

Chairman BAKER. I would like to reconvene our hearing of the

Capital Markets Subcommittee.

Upon consultation with Mr. Kanjorski, we determined that we

would both submit statements for the record, as well as make it

permissible for all Members who choose to submit an opening

statement to do so at any time.

I am pleased to welcome our next witness, our entire second

panel, and welcome you here. I know certainly of your experience

on Capitol Hill and your longstanding service within the SEC, and

in your capacity as acting director, we look forward to your insightful knowledge on this subject, as well as others, over the coming

months and years, I’m sure.

So we extend our welcome to you, Ms. Unger.
23

STATEMENT OF HON. LAURA S. UNGER, ACTING CHAIR, U.S.

SECURITIES AND EXCHANGE COMMISSION

Ms. UNGER. Thank you very much, Chairman Baker, and thank

you, Ranking Member Kanjorski, and—is there any other Member

up there—other Members as they come in.

Chairman BAKER. They are on their way. They weren’t as committed to getting here as Mr. Kanjorski and I, but they are on their

way.

Ms. UNGER. Thank you for the opportunity to testify here on behalf of the SEC regarding fee collections required by the Federal

securities laws.

I am also honored to be the first SEC Chairman to appear before

the Capital Markets Subcommittee of the newly created House Financial Services Committee.

Today the subcommittee examines an issue of considerable importance, as you have heard, to our capital markets, the current

fees the SEC is required to collect. Registration fees, transaction

fees, and merger and tender offer fees impose excessive costs on investors, public companies, and securities firms. Although Congress

first imposed those fees as a means of recovering the cost of securities regulation, the Congressional Budget Office today estimates

that fee collections this fiscal year will total almost $2.5 billion,

which is an amount more than five times the SEC’s current budget.

The Commission shares the committee’s concerns regarding these

excess collections and believes that there is an opportunity for Congress to significantly reduce these fees.

Crafting a successful fee reduction is technically complex and it

affects a number of interested parties. Because these fees are the

source of the SEC’s funding, it is also critically important to the

Commission that the fees be reduced in a way that is consistent

with full and stable long-term funding for the agency. A stable

source of long-term funding will ensure that the SEC continues to

effectively perform its statutory mission of protecting investors and

maintaining market integrity.

I want to briefly mention four elements that the Commission believes are essential to any successful fee reduction, all of which is

explained in greater detail in the written testimony.

First, any bill should take into account the difficulty of predicting

future market conditions. The NSMIA example that you talked

about a little bit today, or that the Senators talked about a little

bit today, shows that simply reducing the fees and the fee rates

will reduce collections only if our markets do not exceed current

projections. Fees should be reduced in a way that leads to more

stable and predictable fee collections in the future.

Second, any bill should reduce fees in a manner that spreads the

cost of regulation among those who benefit from the activities of

the Commission. By targeting all three types of fees the Commission collects, Congress can reduce costs not only to investors and

other market participants, but also on the capital-raising process.

Third, any bill must be administratively workable for both the

industry and Government. The current fee collection system involves a large number of parties, all of whom will have to be able

to work with any fee rate reduction mechanism in the future.
24

Fourth, and above all to the agency, we believe that any fee reduction bill must be consistent with full and stable long-term funding for the agency.

This involves two prongs. The first is preserving the ability of

our appropriators to fund SEC operations out of offsetting collections, and the second is ensuring that the agency continues to be

able to attract and retain qualified staff.

The Senate fee reduction bill that Senators Gramm and Schumer

described to you ensures that the currently projected offsetting collections will be available to our appropriators to fund the agency

in future years. The Senate bill also addresses the SEC’s current

staffing crisis by giving the Commission the much-needed ability to

match the pay and benefits of our sister regulators at the banking

agencies.

For fiscal year 2000, the attorneys, accountants, and examiners

at the banking agencies made 24 to 39 percent more than their

counterparts at the SEC. You can imagine the effect that this has

had on our staff’s morale, not to mention their pocketbooks.

The pay discrepancy between us and the banking regulators is

particularly illogical in the wake of the historic Gramm-Leach-Bliley Act. Gramm-Leach-Bliley requires increased coordination

among financial regulators as they undertake examinations of increasingly complex financial services firms.

More than ever before, Commission staff members are working

side by side with their banking counterparts and performing similar regulatory functions while making substantially less. The Commission must be able to attract and retain a high caliber of staff

to tackle some of the most complex and difficult issues it has ever

considered.

No segment of American business has been more transformed by

the rapid pace of technological change in recent years than the securities industry. No less important, our markets today are increasingly global, a trend that most expect to accelerate in the coming

years.

The demographics of our markets have radically changed as we

have become a Nation of investors. Twenty years ago, only 5.6 percent of Americans owned mutual funds. Today some 88 million

shareholders representing 51 percent of U.S. households hold $7.4

trillion of mutual funds. This exceeds by about $4 trillion the

amount on deposit at commercial banks. All of these developments

raise complex and critically important challenges that the SEC

must be prepared to meet.

At such a critical time in our market’s development, the Commission simply cannot afford to suffer a prolonged staffing crisis.

Alarmingly, our attrition rate is nearly double the Government average. Over the last 2 years we have lost 30 percent of our attorneys, accountants, and examiners, including a number of our most

experienced and skilled professionals who have left to take betterpaying jobs. If this trend continues, the Commission’s mission of

protecting investors and maintaining the integrity of the market

will be seriously threatened.

We would prefer to lift Title V restrictions before a crisis arises,

as it did for the banking agencies in 1989.
25

In conclusion, I want to commend the subcommittee for conducting this hearing. We look forward to working with you and

other interested parties on this issue.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Laura S. Unger can be found

on page 66 in the appendix.]

Chairman BAKER. Thank you, Ms. Unger. We certainly appreciate your appearance here this morning.

My first question goes to the methodology preferred by the Commission with regard to fee reduction itself. I understand there are

at least a couple of different approaches. One is perhaps a little

more difficult for the Commission to calculate in a timely manner,

meaning less than 6 months, when a certain trigger might be initiated for fee reductions; the other of which may set sort of a cap

approach, where it is a fixed amount.

Do you have a recommendation to the subcommittee as to which

or what manner of adjustment to the fee reduction in order to ensure funding of the SEC operations would be preferable?

Ms. UNGER. I think that Congress attempted in NSMIA to fix the

fee schedule and bring it closer in line with the cost of regulation.

The lesson I learned was that the fee schedule needs more flexibility. The Senate bills’ floor and ceiling provision takes into account market growth and the impact that it would have on the

amount of fees the Commission receives that eventually go into the

appropriations pot of money.

The floor and ceiling approach is a difficult but possibly workable

solution. Right now, the staff is in the process of meeting with the

industry to find out from the people who would actually have to implement this system. First, how workable it would be, since they

would be the ones collecting the fees. If that is going to be problematic for them, and if there is some type of recommendation they can

make what has been introduced in the Senate, we would be happy

to work with the Senate staff on making those recommended

changes.

Chairman BAKER. Well, just my initial observation without getting into the detail, it appears on the face of it that the Chairman

Oxley approach offers some benefits that Senator Gramm’s approach does not with regard to complexity of calculations and certainty of funding. But perhaps I will follow that up with a more

detailed written analysis and get your opinion on that.

Ms. UNGER. We would like simple and certain.

Chairman BAKER. And I am sure, the funding.

I noted with some interest the fact that now 51 percent of U.S.

households now engage in some mutual fund investment activity.

Do you have any indication—I notice when the New York and

American Exchanges close, the number of shares traded during a

particular day, that does not really represent the number of transactions. On a daily basis, what would be the scope of responsibility

for the SEC’s supervision related to the number of transactions

today, say, versus a decade ago?

Ms. UNGER. I have those numbers; not quite a decade ago, but

I will give you what I have.

For 2001, the combined NYSE and NASDAQ average daily share

volume is 3.5 billion shares a day. In 1996, that same calculation
26

was 955 million shares a day. The average daily dollar volume for

that same period for 2001 is $123 billion per day. For 1996 it was

only $29 billion per day.

Chairman BAKER. What is of obvious concern to me is the individual who trades directly. It is difficult enough in understanding

broker language and reading the disclosures they are required by

law to provide the investor, but where the investor is acting directly online, the ability to have the transparency to understand

the risk one is assuming—and I think perhaps in the last few years

investors almost felt guilty in admitting they were not in the market, and a lot of people chased the opportunity without truly understanding the risk they were encountering.

To that end, I think having adequate staffing within your agency

is extremely important, not only on the enforcement side, but even

on the education side; and providing additional transparency of the

market to the investors so they understand the true risk they face.

But I don’t want to go over my time, because I know there are

other Members who do have significant interest.

At this time I recognize Mr. Kanjorski.

Mr. KANJORSKI. Thank you very much, Mr. Chairman.

Ms. Unger, I called the attention of Mr. Gramm and Mr. Schumer to the article that appeared in the New York Times Business

Section on September 25, 2000, talking about the inadequacies of

the Securities Investor Protection Corporation and the act establishing that entity by Congress.

Have you had a chance to look into that problem, and if you have

not, will you take the opportunity to do so? Because there are funds

here that could flow to the benefit of investors that seem to be delayed in their recoveries or contested on their recoveries, to their

great loss.

It seems to me that the very limited coverage given by that act

could be expanded to more closely parallel, as appropriate, the positions of the FDIC.

Ms. UNGER. Actually, our Office of Compliance Inspections and

Examinations, which we call OCIE, is looking into a couple of

claims that have been made, I would say, in the last year or so,

and some of the experiences we have had with those claims in connection with SIPC.

So my understanding is that they will be bringing to the Commission soon their findings and perhaps some recommendations in

connection with that whole process.

Mr. KANJORSKI. The article seems to point out that the legal fees

and the trustees’ fees exceed the payments made to the investors,

and inordinate defenses are put up to inhibit the investors from receiving compensation back, as was originally intended by Congress.

If you could you go over the article and do a study, I would appreciate it. It seems to me that before we correct this fee schedule,

we should see if we are adequately protecting investors from any

fraud and abuse occurring in the securities industry, and we should

first try and utilize these funds to make that whole.

Ms. UNGER. I will take a look at the article and talk with the

staff people who are working on that.

Mr. KANJORSKI. One other thing. As I understand it, the SEC

handles the civilian side of enforcement, but if there is fraud or
27

abuse or some other activity in the securities industry that causes

referral to the Justice Department, that expense is not borne by

this fee effort.

It would seem to me that we should not only look at civil costs

involved in the administration of the Securities and Exchange

Commission, but also the costs incurred by the United States Government when referrals are made to the Justice Department.

If these funds only pay for the salary and operational costs of the

SEC, it means that general taxpayers are paying for the administration of the criminal justice system in the securities industry.

That would not seem to represent a fairness to me.

Ms. UNGER. Actually, the fees that were discussed, the Section

31 fees and Section 6(b) fees, are statutorily set fees that the appropriators changed and continue to change every year. The articulated rationale for the fees is to recover the cost to the Government

of securities regulation.

We have civil authority, and we have administrative authority.

We do bring actions involving fraud and violations of the Federal

securities laws.

It just so happens that in New York, the Southern District and

the U.S. attorneys have taken an active interest in white collar

crime. We often coordinate with those agencies. We give them documents; we lend them personnel. So, in fact, we are sort of subsidizing that actively; and there is or has been some actual funneling of our money to those to combat criminal violations.

Mr. KANJORSKI. But would it not be wise for us to do an analysis

or study of just what the costs are to the Justice Department of administering the criminal administration of justice in securities

fraud?

I do not think in the Boesky case the SEC paid all the costs of

that case. Obviously, the Justice Department out of their budget

paid some of that cost, and their budget comes from the general tax

revenues of the United States, not from these fees.

It would seem to me if we want to really get accurate here and

do what Senator Gramm talked about, that is, use the fee to really

pay for the regulation and enforcement—and when I say ‘‘enforcement,’’ it is both civil and criminal in the securities industry—we

should allocate a portion of these fees to be returned to the Treasury to help offset the general tax revenues costs that are going to

the Justice Department to administer the criminal laws in the securities industry.

Ms. UNGER. I will just make one final point on your issue. That

is, what we are only talking about is fees right now on the capitalraising and transaction costs. We also get a large sum of money in

terms of disgorgement in our enforcement actions. Last year that

number was $19 million. That does go into the General Treasury

Fund.

Mr. KANJORSKI. $19 million?

Ms. UNGER. $19 million.

Mr. KANJORSKI. That is hardly enough to pay for some of these

extremely expensive cases.

Ms. UNGER. In the case of Boesky, the number we collected

against him in the most recent action was $30 million. Then prior
28

to that I think it was in the area of $100 million. That all does go

into the General Treasury Fund.

Mr. KANJORSKI. Has anybody made a study, however, of what

the costs are on criminal enforcement of securities laws or other

criminal activities that emanate from the securities industry?

Ms. UNGER. I am not aware of that.

Mr. KANJORSKI. Would it not be wise to analyze whether a portion of these funds should be directed that way, or at least not cut?

While the benefit here goes to the investor, there is a cost to the

average American taxpayer who is not a securities investor for carrying out the criminal justice system through the Department of

Justice, as opposed to the SEC.

Chairman BAKER. Let me jump in here. We will be able to come

back to you, Mr. Kanjorski, but we have a couple of Members that

I need to get in. Then we will come back.

Mr. Fossella.

Mr. FOSSELLA. No, sir.

Chairman BAKER. Mr. Royce.

Mr. ROYCE. Thank you, Mr. Chairman.

I wanted to ask the Chair, if I could, if Ms. Unger could explain—we heard the Chairman of the Fed explain that the economy

was flat, that arguably we are maybe growing at 1 percent.

Could you describe how cutting excess SEC user fees might help

stimulate capital formation and how it might encourage a more

perfect market, perhaps, by reducing transaction costs to come in

and out of the market?

We were talking about the negative savings rates in the country.

Could you tell us a little bit about how this might have a positive

impact?

Ms. UNGER. As was noted earlier, the proposal does, or the legislation does cut three different kinds of fees: the registration fees,

merger and tender offer fees, and the transaction fees.

I can talk about each one of those, and Senator Gramm so eloquently said how important it was not to have a tax on capital formation and not to have unnecessary fees associated with that,

which has been the case.

I can tell you the amount of fees we have collected over the years

for each of those fee categories, depending on the marketplace, of

course, and it does fluctuate; and the reason I think that they want

the bill to include all three kinds of fees is to have some diversification and stability in the fee collections, depending on the marketplace.

As to the transaction fees, one thing that had not really been discussed is that of the full amount of the fee collected, about 85 percent of it is paid by the investor. If the securities industry reduces

the fees accordingly, that amount is money that will be going back

to investors.

It is interesting that you should raise the question of what stimulates the economy, because in the context of all these tax cuts, I

have been asking people, what would you do if you had a $1,000

tax cut? Would you spend it, save it, or invest it? And everybody

says, spend it or invest it.

So I think that is what we are hoping for, when people have a

little extra money, that they spend it or they invest it. That is
29

where the money will probably go. If you look at the fees in and

of themselves, they are not huge, but when we look at the aggregate amount of the fees, it is huge.

Mr. ROYCE. Given the aggregate amount of the fees, is it more

likely people would look differently at how quickly they enter or

exit the market if they perceived that the cost of doing so, the

transaction cost, was reduced?

Ms. UNGER. I am not sure I understand the question.

Mr. ROYCE. I am just looking at it from the standpoint of reducing the cost to the potential investor.

Ms. UNGER. For people who move quickly, maybe intraday or

short-term investors, you might say, I think those are maybe a different category of investors.

I think when we talk about the number of Americans or the

American households that own mutual funds, we are talking about

a longer-term investor. It is probably difficult to predict exactly

what the impact will be of the fee reduction in terms of people’s

behavior in the marketplace, but I feel pretty confident that it will

have some type of impact on their behavior.

Mr. ROYCE. Thank you, Chairwoman Unger.

Chairman BAKER. Thank you, Mr. Royce.

Mr. Kanjorski, want to take another swing?

Mr. KANJORSKI. On that issue, it is not quite fair to talk about

the investors, particularly these mutual find investors, receiving all

this money back, is it? What portion of the investors are actually

mutual funds?

Ms. UNGER. What portion?

Mr. KANJORSKI. When you talk about 50 percent of the American

households now having stock holdings, what portion of that 50 percent are with mutual funds?

Ms. UNGER. Fifty percent of households own mutual funds. I

think it is 88 million Americans.

Mr. KANJORSKI. Eighty-eight million?

Ms. UNGER. Right.

Mr. KANJORSKI. What would be the average per year contribution to the mutual fund? I do not think it would exceed $10,000, would

it?

Ms. UNGER. How much does each family invest per year?

Mr. KANJORSKI. It does not exceed $10,000. That would be a

pretty big investment for the average family.

Ms. UNGER. I think there is probably a broad range in that number.

Mr. KANJORSKI. What I am getting at is that we are talking here

about how much money we are going to save for these investors

and how we are going to stimulate the market. If there are 83 million participants, and the large percentage of them invest under

$10,000 in a mutual fund, they are going to save all of 33 cents

a year. As someone said the other day, it is not quite the cost of

a Coca-Cola.

This is not a fee reduction that is going to stimulate this economy, or have a major effect on returning money to average investors or average people. The largest portion of these funds will come

from the high-investment community in a much disproportionate

rate to the general population, would you not agree?
30

Ms. UNGER. I think the best argument for this legislation is that

the statute that provides for recovery of the cost of regulation is

bringing in far in excess of the cost of regulation.

You heard the numbers today.

Mr. KANJORSKI. No, I agree.

Ms. UNGER. We are talking about five times the amount of the

budget.

Mr. KANJORSKI. Ms. Unger, I agree. But in reality, if we reduce funds coming to the Treasury of $1.5 billion a year, that shortfall

is going to have to be made up by other means, and potentially

from the general revenues, paid for by the general taxes of the 50

percent of the people who are not invested in the securities industry. It is just a matter of proportion, you know, who best can afford

to pay at this point, and what are the benefits that flow. If we had to make up the $1.5 billion from all people in the

United States across the board, would that be quite fair?

Ms. UNGER. I don’t see why any investor should have to pay beyond the cost of regulation. If you are going to say the money is

not paying for the cost of regulation—— Mr. KANJORSKI. We are going to lose $1.5 billion. If we reduce the fee to actual costs, we are going to lose $1.5 billion in actual

revenue, are we not?

Ms. UNGER. Money that never belonged in the general revenue.

Mr. KANJORSKI. Yes, but we are spending that money. It is allocated in the President’s budget.

Ms. UNGER. I would love to have somebody else give me money

that I could spend freely, but that is not what the statute was intended to provide. The statute was intended to provide an offsetting collection for the cost of the SEC’s budget for regulation.

Mr. KANJORSKI. Of course you are aware that last year we attempted to repeal the Spanish-American War luxury tax on telephones in this country. Many people have been paying that tax for

100 years. It is not quite allocated proportionately across the system. First of all, the tax does not go to telephone regulation, and

it does not go to the Spanish-American War. It goes to general revenues. We have a lot of fees and taxes that do not have attribution

in this country.

Ms. UNGER. I should also clarify that the legislation doesn’t provide for the precise amount of fees to cover the exact amount of the

budget. There is still some excess that will go into the general revenue.

Mr. KANJORSKI. I understand that. But all morning Senator

Gramm, in particular, was talking about how this is really important to the small investors of America. I think in response to the

last question, you indicated this is going to be a stimulus because

people are either going to invest this 33 cents a year, or go out and

have a binge spending it and bring back our economy.

In reality, it is almost a nuisance fee or insignificant matter to

the people that are investors, because they generally come from the

upper 50th percentile of the American population, not the lower 50

percent?

Ms. UNGER. This sounds like a discussion that I probably don’t

want to get too much deeper into because it involves ideological differences.
31

Mr. KANJORSKI. Should we not be looking at some of the allocations across the country of who pays for what in the system and

where we derive funds from?

What you are doing here is getting very close to the concept that

everything should pay its own costs. That is almost a flat tax concept, in a way, in that you only want to take enough money out

of the system to pay for the individual fees or operations of Government.

But there are some of us who are wealthier, who get greater benefits from Government, and these are just merely ways we keep it

up.

Obviously, if I am a billionaire in this country, the Defense Department protects my $1 billion of wealth, as opposed to my neighbor who has nothing. The Defense Department protects much less

of his wealth; it protects his person, but not his wealth.

These are just ways of getting revenue, albeit not anticipated, because we thought in 1996 we had corrected it. But I am not going

into that issue, I am going to the issue of making up the lost revenues.

Chairman BAKER. If I could, I will get you to give a brief response, Ms. Unger, because we have exhausted our time again.

Mr. KANJORSKI. I want a philosophical response.

Ms. UNGER. I think what you are saying is, if you invest in the

securities markets, you are going to have to pay for some other programs because they need money, and if you can afford to invest in

the securities markets, you can afford to pay for part of these programs.

Mr. KANJORSKI. And you say, no, that is not true?

Ms. UNGER. I think there is a serious equity argument.

Chairman BAKER. A subject for this panel to consider over

lengthy discussions.

Ms. UNGER. I think so.

Chairman BAKER. Mr. Fossella.

Mr. FOSSELLA. Just for the record, I would get back to what I see

is the core issue here, and this is the moral argument.

Let us suppose that Congress in its infinite wisdom established

by statute a fee of $1 for everybody who wanted to use a pencil,

and there was an agency that regulated the use of pencils to make

sure everybody was using them adequately and appropriately, and

at some point in the future we stopped making pencils and producing pencils, but there was still money coming into this newly

created entity to the tune of, let’s say, $1 trillion.

Do we at that point in time say, you know what, we don’t need

this agency anymore, and we don’t need this funding anymore, because nobody is using pencils anymore? And I think if we approach

it from that point of view, as opposed to, well, we had all this

money coming in that we can use for other purposes, so let’s continue using it for these other purposes, I think that would be a silly

way of looking at it.

So if we can just apply a little focus and what are perhaps the

benefits of sending that money back to the investors who ultimately absorb the fee, and what they will do with the money, I

think that is a positive thing. It depends on your view of how that
32

money is actually allocated and the formation of capital and how

it flows and how liquid the market is.

But the true focus and purpose of this bill is merely to say, do

you know what, these things are getting a little out of control, we

are getting a little bit too much money. We have the acting Chair

of the SEC before us saying, Congress should do something about

it. I think if anything—if there is a signal that is clearer than that,

I don’t know if there is one, but I think it is refreshing that we

have somebody from a Federal agency before Congress saying, stop

this flow of funding to our agency and give it back to the folks who

would otherwise pay this fee.

With that, I yield back.

Chairman BAKER. Thank you, Mr. Fossella.

Mr. Bentsen, did you have a question?

Mr. BENTSEN. Yes. Thank you, Mr. Chairman.

I apologize for being late, and having to leave the HHS Secretary

over in another committee.

The question I had, I had asked Senator Gramm about the Senate bill in two areas, one that I have very much of a concern about,

but I think is OK, but I would like to get your comment. That is

sort of the anti-deficiency provision that is in there with respect to

the Commission’s functions.

He seems to feel that his bill is structured in such a way that

the Commission would not—would hopefully not ever be underfunded to meet its needs if there was a fluctuation in the collection

of fees, probably due to market functions. I think that is something

that our committee should take into consideration as we prepare a

House bill.

The second thing is, his bill, as I mentioned, would reduce not

just Section 31 fees, but fees on registration, as well as mergers

and acquisitions. He makes the point that all these fees flow

through to the consumer one way or the other.

Does the Commission feel there is that equitable dispersion of

fees—or do you have a position on that, or do you believe that it

is really Section 31 fees that affect the investor and the investor

class, if you will, more so than others?

You could make an argument—I have no axe to grind here, I am

trying to get a feel for it. You could, though, make an argument

that the registration fees are part of the soft costs of a transaction,

and thus not necessarily passed on to the investor as much as the

underwriter or the issuer itself, or the borrower.

Of course, Senator Gramm being the classical economist that he

is, would argue that all those fees get washed out at the bottom

anyway. But I would like to hear your comments on both those

items.

Ms. UNGER. For the second part of what you asked, that is, reducing all three types of fees that we collect, as I mentioned to the

Ranking Member, the fees were set by statute, and the appropriators have changed that statutory level over time in order to make

up for these excess funds that have been going to fund other programs.

The Section 6(b) fees were really the fees that were hit first in

terms of changing the statutory amount. That was the initial area

where the appropriators made the adjustment.
33

The Section 31 fees initially only applied to New York Stock Exchange transactions for listed securities. Congress in 1996 applied

those Section 31 fees to include over-the-counter transactions, or

the NASDAQ securities market.

So you have an evolving source of these funds over the years. Depending on the vigorousness of the IPO market, we bring in a lot

of Section 6(b) fees in one year. Depending on the vigorousness of

the trading market, we perhaps bring in a lot of Section 31 fees in

a particular year. I actually have a chart here, with numbers going

back to 1980, describing how much the fees generated and the fees

level for each year.

Back in 1980, when the registration fees were then set at 1⁄50th

of 1 percent, we received $33 million in fees. For 1998, which must

have been a particularly good year for IPOs, we received $1.34 billion. So there is a huge difference depending on where the

strengths of the economy are.

So I think it does make sense that we support changing or adjusting all of the fees commensurately so that we can have an

across-the-board cut in the fees.

The Section 6(b) fees impact the cost of raising capital. It is just

another line item for what it costs to go into the market and raise

capital.

Mr. BENTSEN. Should we be concerned at all that there sometimes is greater fluctuation in the issuance market than there is

in the public markets? For instance, steel flow is down now, or has

been for the last 6 months, and presumed to be down for the next

6 months or whatever?

Ms. UNGER. Yes.

Mr. BENTSEN. Is there enough disparity there that you would be

concerned about the deficiency offsets that any fee reduction formula should take that into consideration, or is it such a minor deviation that it really would be more trouble than it is worth?

Ms. UNGER. Well, CBO makes the projections of what our fee

revenue will be, for, I think, 3 fiscal years going forward. Those

fees then become the basis for determining what the appropriate

level of fees for each of those categories should be; and then there

are a floor and ceiling built in in case those numbers are not met

in terms of the amount of offsetting collections that will be available for our budget.

Mr. BENTSEN. Thank you.

Chairman BAKER. Your time has expired, Mr. Bentsen.

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

I am a little bit curious about something, Ms. Unger. That is,

typically the fee schedules are implemented by regulation and rule

for such things. In other words, we give an agency direction, and

then they come out with rules in the Federal Register, what have

you.

Yet, I am told that this underlying legislation in 1996 specifies 1⁄300ths of 1 percent in the fee area. Is that correct?

Ms. UNGER. Yes. It does set a specific amount, but going back

again to the statute, in Section 6(b) and Section 31 is where you

will find a specific fractional amount to arrive at what the fees

should be.
34

Mr. OSE. So you have no latitude at SEC as to what the fee— at this point should—— Ms. UNGER. No, but you do.

Mr. OSE. We do, but you don’t?

Ms. UNGER. Congress does.

Mr. OSE. Now, the reason I ask that is that it would seem to me

that in that same area, the very same underlying legislation, either

the 1996 or the previous, there is a very specific connection between the very specific fee and what it is to be used for—that is,

SEC costs. It is not—it doesn’t say SEC costs and X, Y, and Z; it

says, SEC costs.

Is that correct?

Ms. UNGER. You will find those fees—the statutes that I refer to

are part of the Federal securities laws and specifically designed to

recover the cost to the Government of securities regulation.

Mr. OSE. I am kind of curious how it is we got ourselves in a position where, in effect, we have passed a tax law here, and we are

collecting taxes and using it for some purpose that is not authorized under the—are we violating the law here?

Mr. BAKER. Oh, certainly not.

Ms. UNGER. Can you say not? Going back to 1983, people here

have noticed that we have been bringing in excess fee collections

and have been looking at that as a way to fund other programs.

We are a part of the Commerce-State-Justice budget because we

are a law enforcement agency, and so our allocation comes out of

that pot of money. So it is sometimes difficult for the appropriators

to not take some of the money, but it has gotten so disproportionate.

Mr. OSE. All right. Let me go on to my next question. To the extent that we have imposed fees or taxes in excess of what is authorized in the underlying legislation, that is on the order of 3 or

4, 5 times, as I understand it, what the underlying legislation says

we need to cover. In other words, we are collecting $2-, $21⁄4 billion.

The underlying costs is $370-$380 million. Have I got the basic

magnitudes correct?

Ms. UNGER. Well the statutory level for Section 6(b) fees was 1⁄50th of 1 percent, and it has been raised as high as 1⁄29th of 1 percent in certain years. Right now it is about at 1⁄40th of 1 percent.

Mr. OSE. I am talking about the aggregate number of dollars

being collected, though.

Ms. UNGER. Right. Actually I do—the numbers as to what we collected last year from each of those fees. Is that what you are talking about?

Mr. OSE. In total?

Ms. UNGER. We got $2.27 billion in fees; $78 million came from

the merger tender offer fees. $1 billion, $103 million came from

Section 6(b) fees, and $1 billion, $90 million came from Section 31

transactions.

Mr. OSE. And this compares with a projected SEC cost of $377—— Ms. UNGER. About $378 million.

Mr. OSE. $378 million. I just can’t—— Ms. UNGER. Well, for this fiscal year it is $423-$422 and change.

Mr. OSE. It is $377-$423.
35

Ms. UNGER. Still a small number when you compare it to $2.27

billion.

Mr. OSE. I just keep coming back to this question. We have very

specific authorization for a fee schedule tied to a very specific purpose, and yet we are collecting far in excess of that and using it

for who knows what, and I don’t quite understand why that is occurring.

Thank you, Mr. Chairman.

Chairman BAKER. You have a difficult life ahead of you looking

for logic in Congress, Mr. Ose. I would want to extend my appreciation to you for your courtesies and your patience in answering our

questions today. We look forward to working with you in the coming years ahead. Your testimony, as all other witnesses’, will be

made part of the official record and I would like to advise all witnesses that we will keep the subcommittee record open for approximately 30 days for Members who may wish to have some followup questions in writing and to include your responses into that

record.

I would suggest to our third panel that we will have another vote

somewhere around the noon hour. If you gentlemen would like to

come forward and try to get your statements in within a roughly

5-minute period each, we could hear all of your testimony before

we go into that vote, perhaps ask questions and try not to detain

you further.

So, with your cooperation, we will initiate this last panel. While

you are getting situated, I will proceed with the appropriate introductions. We have three gentlemen who will be heard in this panel.

The first is Mr. Scott Evans who is the Executive Vice President

of the Teachers Insurance and Annuities Association, which should

not be lost on Members; this is an extremely important organization, but in size has about $165 billion in equity assets for retirement purposes.

Our second to be heard from today is Mr. Christopher Quick who

is the CEO of Fleet Meehan Specialist, who—I have a piece of

paper on right here—is the Nation’s largest financial services firm,

specialist firm with assets in excess of $181 billion.

And our third witness is Mr. James Toes who has been involved

in the NASDAQ market activities for some 15 years and currently

is a trading manager at Merrill Lynch, which needs no further explanation.

With that I would like to call on Mr. Evans to start us off.

STATEMENT OF SCOTT C. EVANS, EXECUTIVE VICE

PRESIDENT, TIAA-CREF INVESTMENT MANAGEMENT

Mr. EVANS. Thank you, Chairman Baker, Ranking Member Kanjorski and Members of the subcommittee. My name is Scott Evans,

and I am the Executive Vice President of Equity Investments at

TIAA-CREF. I appreciate the opportunity to appear before you

today to express our support for the proposed improvements to the

current system of SEC fee collections. We would also like to express our support for an improvement in compensation levels for

the SEC staff.

TIAA-CREF, along with other financial organizations and associations, has written to Members of the Senate to urge their sup-
36

port of Senate bill S. 143 that would remedy the current fee inequity. I want to commend the full committee for making the reduction of fees charged to securities market participants a priority

for the 107th Congress, and the subcommittee for acting on that

priority by holding this hearing. In addition, we encourage the

House to introduce a companion bill as soon as possible.

With $285 billion in assets under management, TIAA-CREF is a

leading financial services organization, a major institutional investor and one of the world’s largest retirement systems, with 2.3 million participants at more than 11,000 educational institutions. We

offer our participants a broad array of retirement investment options through the college retirement equities fund, or CREF, which

is regulated by the SEC as a 40 Act company, and also the TIAA

Real Estate, Account, an SEC registrant. The TIAA-CREF group of

companies also offers mutual funds and non-qualified personal annuities to the general public. In addition, we manage tuition saving

programs in 12 States, and in total we hold equity shares of more

than 3,000 U.S. companies on behalf of our clients.

Last year, TIAA-CREF paid over $1.1 million in SEC fees assessed on securities transactions. In addition, we have paid more

than $3.6 million to register securities issued by the TIAA-CREF

group of companies over the past 5 years. These fees represent a

tax to our clients, reducing the funds available to them to meet

their savings and investment goals. Moreover, the amount assessed

is disproportionate to the SEC’s spending needs. In fiscal 2001 the

SEC is expected to collect $2.47 billion in fees from participants in

the securities markets, more than 5 times the $423 million that is

appropriated for the SEC’s operating needs.

While we support the notion that market participants should

fund SEC operations through user fees, the current fee levels are

no longer appropriate. Congress enacted the existing structure several years ago when market activity was at much lower levels. The

situation is very different today, with Americans participating

much more actively in the securities markets. Given this greater

level of activity, it is time to modify the SEC’s fee structure in

order to collect revenues that are more appropriate to the Agency’s

operating costs. We therefore endorse the effort underway in Congress to reduce the various user fees, including registration, transaction and merger and tender fees, to a level that is more in line

with the SEC’s funding needs.

Additionally, we support acting Chair of the Securities and Exchange Commission Unger’s continued commitment to correcting

the existing staffing crisis at the SEC. The legislation before Congress would help achieve this goal by improving the SEC’s ability

to match the pay and benefits offered by the Federal banking agencies. It is important that the SEC be able to attract and retain

qualified individuals in order to carry out the SEC’s important

oversight responsibility for the securities markets and to provide

for investor protection and education. We know from our experience

working with the SEC staff that the continuity of personnel is critically important to the efficient functioning of this Agency. The legislation pending before Congress would help accomplish those

goals.
37

In closing, I would like to thank the subcommittee again for its

commitment to reducing excessive fees at the SEC and to providing

the funding necessary to enable the SEC to compete for qualified

staff. It has been a privilege to speak with you today and I would

be happy later to take questions.

[The prepared statement of Scott C. Evans can be found on page

83 in the appendix.]

Chairman BAKER. An excellent free market example of being on

schedule. Thank you.

Mr. Quick.

STATEMENT OF CHRISTOPHER C. QUICK, CHIEF EXECUTIVE

OFFICER, FLEET MEEHAN SPECIALIST, INC., ON BEHALF OF

THE SPECIALIST ASSOCIATION OF THE NEW YORK STOCK

EXCHANGE

Mr. QUICK. Thank you Chairman Baker, Ranking Member Kanjorski. I am Christopher Quick, CEO of Fleet Meehan Specialist,

and a member of the board of directors of the Specialist Association

of the New York Stock Exchange. I am pleased to appear before

you to present the Association’s views on reducing excessive fees

collected by the Securities and Exchange Commission. My testimony will focus on transaction fees commonly known as Section 31

fees imposed by Section 31 of the Securities Act of 1934.

The Specialist Association is comprised of 18 broker-dealer firms

which include all of the individual specialists of the New York

Stock Exchange. Our specialists are at the heart of the auction

market of the world’s most active exchange. The Exchange’s auction trading marketplace is the mechanism through which prices of

stocks listed on the Exchange are discovered and liquidity is provided to buyers and sellers. We coordinate orderly trading in our

respective specialty stocks. We supply liquidity when necessary to

proper operation of the market, acting as a buyer or seller in the

absence of public demand to buy or sell in those stocks.

Over 260 billion shares of stock were traded on the Exchange in

2000 in more than 221 million transactions. Specialists participated as principal, selling for their own accounts, in 13.6 percent

of those transactions, paying approximately $50 million in Section

31 fees last year, an amount we expect to see significantly increase

this year. A total of $370 million was paid for Section 31 fees in

2000 on NYSE transactions by all New York Stock Exchange member firms and their customers. Over 86 percent of the transaction

fees paid on the New York Stock Exchange floor are passed directly

on to investors.

Please let there be no misunderstanding. We support continued

full funding of the SEC, an Agency that has overseen our constantly growing, remarkably fair and efficient markets that raise

new capital and serve the public investor, contributing to a worldwide reputation for fairness and integrity. What we object to is the

misuse of the financing mechanism designed to offset the cost of

operating the SEC through the overcollection of fees and application of the proceeds to completely unrelated purposes.

As things stand, the Section 31 fee cannot be viewed as anything

but a tax on the sale of securities, a purpose for which it was never

intended. Although assessed in relatively small increments, it is
38

currently set at 1⁄300th of 1 percent of the total dollar amount of securities sold, the tax is creating a drag of over $1 billion per year

on capital markets. This drag on our markets represents a cost

paid by all investors, including the huge number of individual participants in mutual funds, pension plans and other forms of retirement accounts.

These fees have constantly grown over the years. In fiscal 1999,

the SEC’s fee collections from Section 6(b) and Section 31 fees

mushroomed to $1.75 billion. That is, the SEC’s collections amounted to more than 5 times its $337 million budget in 1999. In fiscal

2000, the Agency collected more than $2.27 billion, more than 6

times what the Agency needed to fund its operation. Also, we expect the Exchange—expect trading volume on the Exchange to continue to increase, which in turn will have the effect of increasing

the Section 31 tax.

In 1999, average daily trading volume on the Exchange was 809

million. In 2000 it was over 1 billion, and with decimalization now

fully implemented, volumes surely will increase by a significant

amount as it did when the standard trading increment was reduced

to 1⁄16th from 1⁄8th.

We would also be wise to remember that we had the benefit of

a thriving and competitive bull market for an unprecedented number of years. During such times the impact of measures placing inappropriate burdens on capital formation, and market activity can

be softened or blunted. As is often the case with respect to ill-advised policy, it is only when the market conditions eventually decline and liquidity becomes more scarce that the full brunt of a

cloaked tax such as the current Section 31 fees will be felt by us

all. This will be particularly true to the extent that the market

prices stagnate or decline as they have in the last 12 months.

In conclusion, general tax revenue is the objective of other laws

but not the securities laws. Congressional action to restore the unintended tax represented by the Section 31 fees to its original purpose, to fund the operations of the SEC and not for any other type

of Federal expenditure, is long overdue. Reducing excessive SEC

fees would save millions of individuals money as they try to invest

their hard-earned money for the future. We urge the subcommittee

to move forward with legislation to reduce excessive SEC fees. We

are committed to working with you and the subcommittee regarding this important matter.

The Association is thankful for the opportunity to express its

views on these fees. Thank you, Mr. Chairman, Ranking Member

Kanjorski. I would be pleased to respond to any other questions.

[The prepared statement of Christopher C. Quick can be found

on page 87 in the appendix.]

Chairman BAKER. Thank you Mr. Quick.

Mr. Toes, welcome.

STATEMENT OF JAMES A. TOES, DIRECTOR, MERRILL LYNCH

& COMPANY, ON BEHALF OF THE SECURITY TRADERS ASSOCIATION

Mr. TOES. Thank you very much. Mr. Chairman, Members of the

subcommittee. I am pleased today to be testifying before you on the

issue of securities fees. I am James Toes. I am a Director at Merrill
39

Lynch Equity Trading, and I am also President of the Security

Traders Association of New York, which is an affiliate of the Securities Traders Association, on whose behalf I am testifying today.

In 1996 Congress enacted the National Securities Market Improvement Act, reforming regulation of the securities and mutual

funds market. NSMIA also restructured fees imposed by the various securities laws, including extension to NASDAQ trades of the

transaction fees imposed by Section 31 of the Securities Exchange

Act of 1934. In restructuring the fees, Congress intended to ensure

a stable source of funding for the SEC while also ensuring that the

fees did not grow so large that they became a de facto tax on savings and investment rather than a user fee, which is the very situation we find ourselves in today.

The new structure established by NSMIA was the result of a

complex compromise worked out between the House and Senate authorizers and appropriators, the House Ways and Means committee, the Office of Management and Budget, and the SEC following years of congressional debate over the new SEC funding

mechanism. Unfortunately, however, NSMIA has not controlled the

growth of fees as originally intended. Actual fee collections significantly outpaced NSMIA’s projections. We believe that the reason

for this is that the Congressional Budget Office and the OMB used

conservative estimates of the stock market growth which were relied on by Congress in drafting NSMIA.

In fiscal year 2000, actual collections from all sources, including Section 31, Section 6(b) and merger and tender fees grew to $2.27

billion, over 6 times the SEC’s budget of $377 million. The latest CBO estimates show runaway growth in the fees from $2.478 billion in fiscal year 2001 to $3.7 billion in fiscal year 2005. In other

words, total SEC fees are projected to raise $15.2 billion over the

next 5 years, while the SEC budget will require only a fraction of

that amount over the same period. Without a change in law, these

fees will generate $16 billion in excess of what Congress intended

in NSMIA, over just a 7-year period from fiscal year 2001 to fiscal

year 2007.

Another defect in the NSMIA fee structure is that it fails to accommodate for changes in the securities market. For example, if

and when the NASDAQ’s conversion to an exchange is completed,

the current fee structure will result in a redirection to the general

fund of a significant portion of the fees that are currently made

available to fund the SEC. Thus we face the possibility of a fee

structure generating billions of dollars in unanticipated fees while

at the same time creating a funding crisis at the SEC.

Clearly, this is not the scenario Congress intended when it redesigned the SEC funding structure in 1996 to reduce the amount of

fee surplus.

Ultimately, the investing public shoulders the burden of these

fees. Section 31 fees are a tax on personal savings and investment

in the form of lower returns, and as more Americans invest, more

people pay this tax. Indeed the percentage of households owning

equities has increased from around 32 percent in 1989 to over 50

percent in 2000. It is important to note that Americans of all incomes are increasing their savings through equity ownership. According to the most recent statistics, 29 percent of households with
40

incomes between $15,000 and $25,000 own stock. Therefore, this

tax is paid by the smallest as well as the largest market participants.

Section 31 fees also burden those who participate in pension

plans, including public pension plans. For example, over a 5-year

period, many States’ public pension plans will pay millions of dollars in Section 31 fees. Some examples include California, nearly,

$18 million; New York, $13 million; Ohio, approximately $4.6 million; Pennsylvania, $6.5 million; and Texas, over $7 million. At a

time when the Government is encouraging savings, it is inconsistent for it to levy this tax on investment.

To address the growing burden of the fees, the STA supports legislation that reduces fee rates so that they fulfill their intended

purpose of funding the SEC and are not acting as a tax on investment; puts in place an automatic mechanism that will limit collections if the original fee rate cut does not reduce the actual collections as intended; and creates a safeguard that fully protects the

amount of collections currently projected to be made available to

the appropriators including the funding necessary for the SEC.

STA has testified in the Senate in support of Section 143 which

includes the provisions outlined above. We urge the House to develop legislation with these characteristics. The Senate bill also allows for growth in the SEC budget, including pay parity for SEC

employees which, by the way, we also support.

Including the safeguards to prevent overcollections and undercollections will ensure that no matter how high or how low today’s

fee projections are, the fees will still collect the actual amounts intended by Congress. We should not enact legislation only to find

ourselves back here in 5 years because projections missed their

mark or that the market structure changes created unintended

shortfalls or windfalls in fee collections.

In closing, Mr. Chairman, the STA applauds you for scheduling

this prompt hearing on an issue of great importance to our members across the United States, and I also will be happy to answer

any questions.

[The prepared statement of James A. Toes can be found on page

93 in the appendix.]

Chairman BAKER. Thank you, Mr. Toes.

Gentlemen, to facilitate the Members who are here, I am going

to suspend my questions, and I will follow up in writing for you at

a later time but would recognize Mr. Kanjorski. I fully expect we

will have a vote here in the next few minutes and I would like to

get Members’ participation before that vote.

Mr. Kanjorski.

Mr. KANJORSKI. Yes. Can any of you gentlemen tell me whether

or not there is a fee schedule or a tax on security transactions in

Germany or Great Britain?

Mr. QUICK. I don’t have the answer for that.

Mr. KANJORSKI. You are making a compelling argument. None of

us are unsympathetic to fee schedules that are set for special purposes, and of course your fee schedule, unbeknownst to the Congress’ wisdom in 1996, now has far exceeded its anticipated needs.

In effect, it serves as a source of revenue for the Government to

be used for other purposes. Meaning that if we reduce the fee
41

schedule we will get a shortfall of somewhere between $1 billion

and $11⁄2 billion a year.

Assuming that the budget of the United States is absolutely balanced, revenues to expenditures, and we are taking into consideration the additional income from the overpayment of fees that you

are making, where would you suggest that we get the additional

$1 billion or $11⁄2 billion revenue shortfall that would be in existence in a balanced budget situation?

Mr. TOES. I would suggest just cutting spending.

Mr. KANJORSKI. Well, we are making the assumption this is a

balanced budget in this new Administration that we are having.

We are cutting programs to the bone. When the President sends up

a budget, are we to presume in other words, your answer is if we

cut revenues then we should just cut expenditures, regardless of

where that would be? If we had to cut Social Security, if we had

to cut Medicare, if we had to cut the environment expenses, you

would just do that?

Mr. TOES. It is my understanding that we are not asking for our

money back. We are just asking that, going forward, that we just

pay a different rate.

Mr. KANJORSKI. Not the money back. Next year, if we grant what

you are requesting—and I am not suggesting we should not do it— we are going to have a shortfall of $1 billion or $11⁄2 billion in revenues. My question to you is where should we make that up? Should

the Congress consider a tax on security transactions instead of the

fee schedule in order to make up the $11⁄2 billion? This solution

would be honest. We would be saying we are going to get that revenue out of securities transactions instead of out of fee-generated

costs.

Mr. TOES. You are going to have to excuse my naiveness with

how Congress and Government works, but if you did give us what

we needed, and therefore you would know that the money would

not be there, then you wouldn’t spend it.

Mr. KANJORSKI. Even if we had the need for it?

Mr. TOES. Well, you have got me in a corner now.

Mr. KANJORSKI. That is always our problem here. Yes.

Mr. EVANS. Congressman, to me they are two separate questions.

The first question is we have a user fee that is being levied toward

securities markets participants to fund the SEC so that they can

regulate us. That user fee ought to be in close proximity to the

costs of running the SEC. The second is a funding question that

refers to general revenue creation, and there are many checks and

balances to it. I believe it is outside of the scope of my testimony

here today, but ultimately the revenue would have to be made up

with increased tax revenue or decreased spending. That is the appropriate place for it to be considered.

Mr. KANJORSKI. And that is the correct answer. Either increase

taxes on other people, other than these transactions, or decrease

the expenditures perhaps on necessity.

But let me ask you a question. Are you aware of parking meters?

Do you ever use parking meters?

Mr. EVANS. Yes, sir, we have those in New York.

Mr. KANJORSKI. Well, a parking fee is justified under municipal

law for traffic control. If you have recently used a parking meter,
42

you realize that whether you put in a quarter an hour or a dollar

an hour, the rental fee for that space far exceeds the costs to the

Government of that regulation of parking. In most municipalities

in the country it becomes a huge income revenue source. Would it

not be proper for every American to make the argument that the

parking fee per hour should be reduced commensurate with the

money necessary to fund that proportion of the governmental function, and any additional funds should not be allowed to be used for

any other purposes of Government? Is that a logical argument?

Mr. EVANS. If the legislation that enacted the ability to charge

that parking fee were directly related to the costs, then I think you

could make a similar argument.

Mr. KANJORSKI. You do not have the right to raise revenues in

the parking fees. It is only for purposes of police powers, for regulation of traffic control.

Mr. QUICK. It sounds like we could privatize parking and do an

IPO or something. It sounds like a good proposition to me.

Mr. KANJORSKI. You experts have an answer in the private market for everything. I appreciate it. I did have a hard question here.

I do not want to appear that I am unsympathetic to using fees as

a portion to cover up what is actually a tax, and I recognize by collecting this fee in effect we are taxing the securities industry, and

subsequently their investors, but I am pressed with the problem of

how we make up for the shortfall in revenue.

Mr. QUICK. Well, I would like to go back to 1996 when the fees

were changed and go back to what we did before then when we appropriated the money for the sole purpose of funding the Securities

and Exchange Commission by the Congressional Budget Office.

Now, all of a sudden, we find ourselves in a position, because of

conditions not responsible to anybody in this room, that the market

and transactions and the dollar volume have exploded, that we

have created these excess fees, but what we have done is we have

turned it into a tax which goes into the general revenue of the

budget, for which it was never intended.

Mr. KANJORSKI. I agree. But let us play a worst case scenario

game. Rather than go into a soft landing, we in fact go into a depression, and the acceleration of the market from 1996 to 2000 reverses itself but does not reverse itself to 1995, it goes back to 1950

in sales. So that the fee, even under present schedule, is out there,

would not be enough to generate the revenue needed.

Mr. QUICK. I think the bill itself, as Senator Gramm testified

earlier, has a 40 percent cushion in it. So I do think we are not

in danger of violating that 40 percent cushion.

Mr. KANJORSKI. So, we can be assured that the market will not

fall 40 percent?

Chairman BAKER. Mr. Kanjorski, what we do is raise those parking fees and have an offset.

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman. I want to follow up with Mr.

Evans on one particular issue that I am a little bit confused on.

Within the portfolios that TIAA-CREF has, you have a zillion different individual people for whom you act as a fiduciary on their

investment programs. Let’s say I am one of those, and in the course

of a day I want to say all right, I am going to call Scott Evans and
43

I am going to change the mix. And over the course of that day, of

your 373,000—whatever it is—individual investors, you have

50,000 of them do a similar activity.

At the end of the day, as I understand current industry practices,

you guys reconfigure your portfolios within the overall portfolio

itself, shifting stock back and forth to balance buys and sells, and

to the extent you are short or long, you will go into the market and

either buy or sell to make up the accurate end-of-the-day reconfiguration; is that correct?

Mr. EVANS. Roughly, Congressman.

Mr. OSE. Roughly is about as good as it gets.

Mr. EVANS. We have 2.3 million participants in our pension accounts and they can on any given day change the allocation of their

pension savings that they have invested with us. They would put

those orders in. We would then take those orders, and when the

net sales—that is when the sales exceeded the purchases—we

would sell securities. Then and only then would we be assessed the

Section 31 tax—I am sorry, Section 31 user fee of approximately $33 per million on that transaction. When there is a purchase

there is no user fee, as I understand it.

Mr. OSE. The only fees you pay are on the long or short portion

at the end of the day? You don’t pay for the intraportfolio movement?

Mr. EVANS. That is not a transaction in the securities markets.

When a transaction occurs and it is a sale transaction, we are assessed a fee under Section 31.

Mr. OSE. Mr. Chairman, I think we need to clarify this, because

my understanding of the earlier testimony was that the

intraportfolio transactions were subjected to the assessment, the

fee, the tax, whatever you want to call it. So I appreciate, I appreciate you clarifying that. I mean, you are the practitioner. You

ought to know.

Mr. EVANS. We may be referring to different types of transactions, but as I understand it, Congressman, when TIAA-CREF

goes to the securities markets and transacts with a third party,

that is when the user fee is assessed.

Mr. OSE. Inside the portfolio itself, separate from the market,

when you balance everything out prior to going into the market,

those movements are not subject to the tax or the assessment. In

effect, that is almost a trusteeship, if you will?

Mr. EVANS. I don’t believe so, Congressman, but the question is

on a level of detail that I may be mistaken. In looking at how the

$1.1 million of fees is structured, I believe my answer is correct.

Mr. OSE. All right. Moving on to my second question. I have actually taken the time to go back to the 1934 legislation and the

1996 legislation, and the reason I did was I wanted to find out if

embedded in the legislation itself, pursuant to my earlier questions, there was an actual description of what the purpose of these

transaction fees or these registration fees is. And I just want to

read for the record, if I may, that as regards registration fees—this

is actual legislation, statutory authority: ‘‘A commission shall in accordance with this subsection collect registration fees that are designed to recover the costs to the Government of the registration

process.’’
44

And then in the transaction fees it says virtually the same thing,

substituting transaction for registration. It does not say collect fees

for ad infinitum programs outside of the jurisdiction of the SEC.

So we really do have a true problem here in that we are assessing America’s investing public, the people who provide our industry

and businesses with capital, a tax that is clearly not authorized.

And with that, Mr. Chairman, I yield back.

Chairman BAKER. Thank you, Mr. Ose.

Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman. I have one question

and one comment. I am in support of this, but I also sit on the

Budget Committee, and even though we now have all the money

we are ever going to need and surpluses as far as the eye can see,

even though I think it was just 6 short years ago it was deficits

as far as the eye can see, and even though we know these projections will never be wrong and there is no need to discount future

revenue streams, at least I know you all do, but we don’t need to

do that—that, you know, there shouldn’t be a problem, but we do kind of have to think where we might come up with $14 billion, because this isn’t in the President’s budget, and you start adding $14 billion here and $12 billion there and $10 billion there, and pretty

soon you get right through the contingency. So it is a little bit more

difficult than you might think, and it is doesn’t matter which party

you are in either.

But the question is this: The proposal put forth in the Senate

would—and this is something we are trying to put together, a proposal here would, if I understand it, allow sort of a 6-month look

back or look forward, with the ability to make adjustments in the

fee structure to ensure that there were sufficient funds for the operation of the Commission.

From your standpoint, does that give you some concerns that as

market makers or as dealers or as investors that you would have

to make adjustments, or is it easy enough, particularly under the

Section 31 fees, that you either have one fee or another fee and you

just make an adjustment, but is it something that the back office

can handle or is it an administrative nightmare?

Mr. EVANS. From our perspective, the variability of the Section

31 fees, in order to continually reassess their capability of covering

SEC costs, is a practical solution, and whether it is $33 per million

or $14 per million or whatever the fee, it is not a large issue for

us administratively. Our principal interest is that that fee level is

closely aligned with the SEC’s ability to fully fund themselves, including their ability to adequately compensate staff relative to

other Federal banking agencies.

Mr. BENTSEN. I guess my question is just specifically if we tell

you it is one thing on January 1 and we come back on June 1 and

tell you it is something else, is that problematic or not—or July 1—

is that problematic or not?

Mr. EVANS. It could present problems if there are retroactive adjustments. If the fee going forward were adjusted to compensate,

I think that might be a more practical—— Mr. BENTSEN. So would it be better to have just a set amount

per year and if you are off a little bit you just make it up? Would

that be your preference as opposed to having——
45

Mr. EVANS. The more simple the fee, Congressman, the easier it

is to administrate.

Mr. BENTSEN. Do any of the others have comments on that?

Mr. QUICK. It is a 30-day adjustment in the Senate bill. It

wouldn’t present a problem from a specialist standpoint at all.

Mr. BENTSEN. It would not?

Mr. QUICK. It would not.

Mr. BENTSEN. And what about for Merrill or a dealer?

Mr. TOES. On Merrill Lynch it wouldn’t be a problem. It is hard

for me to speak for the other broker-dealers, Smith Barney, and— but our understanding is that a 30-day would be adequate time.

Mr. BENTSEN. So that the back office would be able to work it

out and adjust it accordingly?

Mr. TOES. Yes.

Mr. BENTSEN. Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Bentsen.

Gentlemen, the record will remain open for 30 days for Members

to submit additional questions to you in writing and to include your

responses as part of our official record. I want to thank you for

your participation and make it clear that there is general agreement among many Members that this action is indeed appropriate.

There is continuing discussion about the appropriateness of how

the formula is to be implemented, the pay parity issue raised by

the SEC. There may well be other issues that will circle this, but

just the assurance from the committee to you and other market

participants that we believe that the assessment is inappropriate

and that action should be taken by this section of Congress sooner

rather than later, and your appearance here today has helped us

toward that final goal.

Thank you very much. Our hearing is adjourned.

[Whereupon, at 12:17 p.m., the hearing was adjourned.]

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