U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

1

79–010

" ! SENATE 106TH CONGRESS

2d Session

REPORT

2000

106–360

Calendar No. 712

THE COMPETITIVE MARKET

SUPERVISION ACT

R E P O R T

OF THE

COMMITTEE ON BANKING, HOUSING,

AND URBAN AFFAIRS

UNITED STATES SENATE

TO ACCOMPANY

S. 2107

together with

ADDITIONAL VIEWS

JULY 25, 2000.—Ordered to be printed

(II)

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama

CONNIE MACK, Florida

ROBERT F. BENNETT, Utah

ROD GRAMS, Minnesota

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

JOHN F. KERRY, Massachusetts

RICHARD H. BRYAN, Nevada

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

JOHN EDWARDS, North Carolina

WAYNE A. ABERNATHY, Staff Director

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

LINDA L. LORD, Chief Counsel

GEOFFREY C. GRADLER, Financial Economist

STEPHEN S. MCMILLIN, Financial Economist

DEAN V. SHAHINIAN, Democratic Counsel

ERIN HANSEN, Democratic Legislative Assistant

GEORGE E. WHITTLE, Editor

(III)

C O N T E N T S

Page

Introduction .............................................................................................................. 1

History of Legislation .............................................................................................. 1

Background .............................................................................................................. 2

Purpose and Scope of Legislation ........................................................................... 5

Section-by-Section Analysis .................................................................................... 10

Section 1. Short Title and References ............................................................. 10

Title I—Fees and Comparability ............................................................................ 11

Section 101. Reduction in Registration Fees; Elimination of General Revenue Component. .......................................................................................... 11

Section 102. Reduction in Merger and Tender Fees; Reclassification as

Offsetting Collections .................................................................................... 11

Section 103. Reduction in Transaction Fees; Elimination of General Revenue Component ........................................................................................... 11

Section 104. Adjustment to Fee Rates ............................................................ 11

Section 105. Comparability Provisions ........................................................... 11

Section 106. Authorization for Appropriations ............................................... 12

Section 107. Effective Date .............................................................................. 12

Title II—Securities Markets Enhancement ........................................................... 12

Section 201. Short Title ................................................................................... 12

Section 211. Exempted Securities and Organizations ................................... 12

Section 212. National Market Treatment for Certain Securities ................. 12

Section 221. Ensuring Adequate Record Keeping .......................................... 13

Section 222. Elimination of Barriers to Providing Services .......................... 13

Section 223. Reducing Financial Reporting Burdens .................................... 13

Section 224. Enhancing Transparancy of Records ......................................... 13

Regulatory Impact Statement ................................................................................. 14

Cost of Legislation ................................................................................................... 15

Changes in Existing Law ........................................................................................ 20

Additional Views of Senator Shelby ....................................................................... 21

Additional Views of Senators Sarbanes, Dodd, Kerry, and Reed ........................ 24

Additional Views of Senators Bryan, Sarbanes, Dodd, Kerry, Reed, and

Edwards ................................................................................................................ 26

Calendar No. 712

106TH CONGRESS REPORT

2d Session " ! SENATE 106–360

THE COMPETITIVE MARKET SUPERVISION ACT

JULY 25, 2000.—Ordered to be printed

Mr. GRAMM, from the Committee on Banking, Housing, and Urban

Affairs, submitted the following

REPORT

together with

ADDITIONAL VIEWS

[To accompany S. 2107]

The Committee on Banking, Housing, and Urban Affairs, to

which was referred the bill (S. 2107) to amend the Securities Act

of 1933 and the Securities Exchange Act of 1934 to reduce securities fees in excess of those required to fund the operations of the

Securities and Exchange Commission, to adjust compensation provisions for employees of the Commission, and for other purposes,

having considered the same, reports favorably thereon with amendments and recommends that the bill (as amended) do pass.

INTRODUCTION

On July 13, 2000, the Senate Committee on Banking, Housing,

and Urban Affairs met in legislative session and marked up and

ordered to be reported S. 2107, the Competitive Market Supervision Act of 2000, a bill to amend the Securities Act of 1933 and

the Securities Exchange Act of 1934 to reduce securities fees in excess of those required to fund the operations of the Securities and

Exchange Commission, to adjust compensation provisions for employees of the Commission, and for other purposes, with a recommendation that the bill do pass, with amendments. The Committee reported the bill favorably by voice vote.

HISTORY OF LEGISLATION

During the first session of the 106th Congress, on Wednesday,

March 24, 1999, a hearing was held by the Subcommittee on SecuVerDate 11-MAY-2000 05:59 Jul 28, 2000 Jkt 079010 PO 00000 Frm 00005 Fmt 6659 Sfmt 6602 E:\HR\OC\SR360.XXX pfrm03 PsN: SR360
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rities on the need to reduce the excess of user fees collected by the

Securities and Exchange Commission (SEC or Commission). Testimony was received from Arthur Levitt, Chairman, Securities and

Exchange Commission; Marc Lackritz, President, Securities Industry Association; Lee Korins, President and Chief Executive Officer,

Security Traders Association; Arthur Kearney, Chairman, Security

Traders Association; and Robert W. Seijas, Executive Vice President of Fleet Specialists and Co-President of the Specialists Association.

The full committee conducted a legislative hearing in New York

on February 28, 2000, on S. 2107, the Competitive Market Supervision Act of 2000. Testimony was received from SEC Chairman

Arthur Levitt; J. Patrick Campbell, Chief Operating Officer and

Executive Vice President, Nasdaq-Amex Market Group Inc.; Keith

Helsby, Senior Vice President and Chief Financial Officer, New

York Stock Exchange; Hardwick Simmons, President and Chief Executive Officer, Prudential Securities Inc.; Leopold Korins, President and Chief Executive Officer of the Security Traders Association; and Robert Seijas, Executive Vice President, Fleet Specialists,

and Co-President, Specialists Association.

On July 13, 2000, the Committee met in legislative session to

mark up the Competitive Market Supervision Act of 2000 (S. 2107).

During the mark up the Committee considered three amendments.

Chairman Gramm offered an amendment to authorize appropriations for the SEC and another amendment to provide regulatory relief to the securities markets. Both of these amendments were accepted by voice vote. Senator Shelby offered an amendment designed to prohibit the buying and selling of Social Security numbers without consent. The Shelby amendment was not adopted, on

a vote of 10–10 (Senators voting ‘‘Aye’’—Shelby, Sarbanes, Dodd,

Kerry, Bryan, Johnson, Reed, Schumer, Bayh, and Edwards; Senators voting ‘‘No’’—Gramm, Mack, Bennett, Grams, Allard, Enzi,

Hagel, Santorum, Bunning, and Crapo). The Committee by voice

vote reported the bill as amended to the Senate for consideration.

BACKGROUND

Origins of securities fees

Since its creation, the Commission has collected securities-related fees. Section 6(b) of the Securities Act of 1933 imposed fees

on the registration of securities at a rate equal to one one-hundredths percent of the offering price. In 1965, registration fee rates

were increased to one fiftieth percent. These fees were deposited in

the Treasury as general revenue. Section 31 of the Securities Exchange Act of 1934 imposed fees on transactions of exchange-traded

securities at a rate equal to one five-hundredths percent of the aggregate amount of sales. This fee rate was later increased to one

three-hundredths percent, and, like the registration fees, were deposited in the Treasury as general revenue. The 1983 Securities

Exchange Act Amendments (Public Law 98–38; June 6, 1983) imposed general revenue fees on mergers, proxy solicitations, and

other activities to the extent registration fees were not already imposed, at a rate equal to one fiftieth percent of the value of the securities involved.

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As amended by the National Securities Markets Improvement

Act of 1996, Paragraph (1) of Section 6(b) states that registration

fees ‘‘are designed to recover the costs to the government of the securities registration process,’’ while subsection (a) of Section 31

states that transaction fees ‘‘are designed to recover the costs to the

government of the supervision and regulation of securities markets

and securities professionals.’’ However, since the fees were all deposited as general revenues, resources to operate the Commission

had to be provided in annual appropriations acts. Beginning in fiscal year 1990, and continuing though FY 1997, annual appropriations acts contained language increasing registration fee rates to

one twenty-ninth percent, with the amount of fees in excess of the

one fiftieth percent rate credited as offsetting collections. By imposing new fees and dedicating them to offsetting appropriations for

the Commission, the appropriations acts effectively reduced the

amount of direct appropriations required to fund the Commission.

The National Securities Markets Improvement Act of 1996

To balance the goals of providing sufficient resources to the Commission and minimizing taxation of investment, Congress enacted

the National Securities Markets Improvement Act of 1996

(NSMIA). This legislation began a gradual reduction in registration

fee rates from the equivalent of one twenty-ninth percent in FY

1997 to one fiftieth percent in FY 2006, with a further reduction

to one one-hundred-fiftieth percent in FY 2007 and thereafter. In

addition, NSMIA set up a reduction in transaction fee rates, which

remain at one three-hundredth percent through FY 2006 and then

drop to one eight-hundredth percent in FY 2007 and thereafter.

Accompanying this reduction in fee rates was a reallocation of

fees credited as offsetting collections. Registration fees credited as

offsetting collections would slowly be phased out (leaving only general revenue registration fees), while transaction fees would for the

first time be applied to last-reported-sale securities traded primarily on the national market systems, with these new transaction

fees credited as offsetting collections. Using projections of securities

market activities available at the time, total fee collections were expected to fall from $711 million in FY 1997 to $351 million in FY

2007. In the words of the Joint Explanatory Statement of the

NSMIA conference report, ‘‘It is the intent of the Managers that at

the end of the applicable ten year period, the SEC collect in fees

a sum approximately equal to the cost of running the agency.’’

Since the time NSMIA was signed into law on October 11, 1996,

there has been an unexpected surge in securities market activity,

with growth in share values and trading volumes far outstripping

the projections that guided NSMIA’s authors. According to the Office of Management and Budget (OMB), Nasdaq transaction fees

alone were expected to grow at a 5 percent annual rate. Instead,

these fees have more than quadrupled in just three years, and are

now projected to grow at an annual rate of 15 percent according to

OMB, and at an annual rate of 25 percent according to the Congressional Budget Office (CBO). Registration fees and fees on exchange-traded securities transactions have also grown enormously

and are now running at double the levels projected at the time of

NSMIA. Thus, while the goal of NSMIA was to have fee collections

approximately equal the cost of running the Commission, in actuVerDate 11-MAY-2000 05:59 Jul 28, 2000 Jkt 079010 PO 00000 Frm 00007 Fmt 6659 Sfmt 6602 E:\HR\OC\SR360.XXX pfrm03 PsN: SR360
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ality the Commission will collect about five hundred percent of its

budget in fees in FY 2000. Moreover, while projections at the time

of the enactment of NSMIA showed a significant share of total fees

being allocated to offsetting collections, the bulk of these offsetting

collections would be reclassified as general revenues if the

NASDAQ Stock Market ceases to be a national market system and

becomes a national stock exchange.

U.S. CONGRESS,

CONGRESSIONAL BUDGET OFFICE,

Washington, DC, May 11, 2000.

Hon. PHIL GRAMM,

Chairman, Committee on Banking, Housing, and Urban Affairs,

U.S. Senate, Washington, DC.

DEAR MR. CHAIRMAN: I am pleased to provide you with the information you requested regarding the budgetary impact that would

result if NASDAQ becomes a national securities exchange on September 1, 2001. CBO estimates that such a change would increase

revenues (governmental receipts) and decrease offsetting collections

by a total of $13.6 billion over the 2002–2010 period.

Under current law, the Securities and Exchange Commission

(SEC) charges national securities exchanges, national securities associations, brokers, and dealers transaction fees equal to 1/300 of

a percent of the aggregate dollar amount of securities sales. Fees

from national securities associations are collected subject to appropriation action and are recorded as an offset to discretionary spending (offsetting collections), while fees from national securities exchanges, dealers, and brokers do not require appropriation action

and are recorded as revenues (governmental receipts).

The National Association of Securities Dealers (NASD) is the

only national securities association, and NASDAQ is a subsidy of

NASD. Currently, transactions for three types of securities flow

through NASD: national market securities, small-capitalization

stocks, and over-the-counter (OTC) stocks. If NASDAQ becomes an

exchange, CBO expects all of the fees generated from transactions

of national market securities and small-capitalization stocks would

be recorded as revenues. It is not clear whether OTC stocks would

qualify as exchange-listed securities, even if NASDAQ were an exchange.

For the purposes of this estimate, CBO assumes that OTC stocks

would qualify as exchange-listed securities and that transaction

fees collected on those issues would be recorded as revenues. In

1999, the SEC collected $51 million for transactions involving OTC

stocks—about 9 percent of its total offsetting collections. CBO does

not anticipate that the volume of securities traded would change if

NASDAQ becomes a national securities exchange.

The SEC collects transaction fees twice each fiscal year—in

March and September. If the NASDAQ becomes an exchange on

September 1, 2001, the change would first affect how collections

are recorded in the budget beginning in fiscal year 2002 because

the revenues that would reflect this change would initially be collected in March 2002. Based on the historical growth in the volume

of trades executed, CBO estimates that SEC collections from

NASDAQ will be about $1 billion in fiscal year 2002. Thus, if

NASDAQ becomes a national securities exchange, revenues would

5

increase and offsetting collections would decrease by about $1 billion in 2002. This amount would be about 90 percent of the total

offsetting collections anticipated for the SEC in that year. The shift

in subsequent years would be greater.

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contacts are Market Hadley and

Hester Grippando.

Sincerely,

DAN L. CRIPPEN, Director.

Securities Markets Enhancement Act of 2000

Early last year, Senators Gramm, Grams, Sarbanes and Dodd

began an extensive effort to solicit from a broad range of market

participants suggestions to reform the U.S. securities statutes to

update outdated and unneeded provisions in the securities statutes.

By the end of April, suggestions had been received from individual

investors, professional groups, the New York Stock Exchange, the

National Association of Securities Dealers, the Securities Industry

Association, the Bond Market Association, the Investment Counsel

Association of America, the Financial Planning Association, the National Association of Personal Financial Advisors, the Certified Financial Planner Board of Standards, and the American Bankers

Association. The SEC and the North American Securities Administrators Association also provided suggestions. On June 28, 1999,

the Committee published a list of suggested changes and requested

comments from interested parties. Those comments and the original suggestions were used to craft the Securities Markets Enhancement Act of 2000, that was accepted on a voice vote as an amendment during mark up and is now contained as Title II of the legislation.

PURPOSE AND SCOPE OF LEGISLATION

Reduction of securities user fees

The original objective of the user fees collected by the SEC was

to provide a funding source for the agency’s operations. However,

increases in stock market volume and valuation have spawned revenues that far surpass what is needed to operate the agency. For

example, aggregate fee revenue in FY 1999 was $1.76 billion while

the SEC’s budget totaled only $341 million. The latest Congressional Budget Office (CBO) projections predict that this imbalance

will worsen even further, with total SEC fee revenues increasing

to over $3.5 billion by FY 2006.

The Committee believes that, rather than user fees, these revenues have become taxes on savings and investment that fund general government operations. In the Committee’s view, the excess

collections of Section 31 fees are simply a tax that lowers the returns of every investor who buys stock, owns a mutual fund, or

plans to use Individual Retirement Accounts, 401(k) plans, or pensions to retire. Furthermore, excess Section 6(b) fees are particularly harmful since these taxes are imposed at the beginning of the

investment cycle, subtracting from the economy monies that could

be leveraged into several times their value to finance companies’ efforts to spur growth, employment, and wealth creation.

6

Section 101 of the reported legislation amends Section 6(b) of the

Securities Act of 1933 to lower registration fee rates. In addition,

this section eliminates the general revenue portion of the registration fee. The offsetting collection rate is set at $67 per $1 million

of securities registered for FY 2001–06, and at $33 per $1 million

for FY 2007 and thereafter. Section 102 reduces merger and tender

fee rates in Section 13(e)(3) and Section 14(g) of the Securities Exchange Act of 1934 from one fiftieth percent under current law to

$67 per $1 million of securities involved for the period FY 2001–

06, and reduces rates further to $33 per $1 million for FY 2007 and

thereafter, and all fees are also reclassified from general revenues

to offsetting collections. The Committee realizes the importance of

harmonizing the fee registration, and merger and tender fee rates

so as to provide no distortions or inject any unintended incentives

into the managerial decision as to when a merger should occur.

Under Section 103, all transactions included in Section 31 of the

Securities Exchange Act of 1934 are consolidated, with the same

fee rate applied to each as an offsetting collection. Transaction fees

in any particular fiscal year will be set in appropriations acts at

a rate estimated to collect the target dollar amount set in Section

103 for that year. The target dollar amount is calculated to approximate the amount of transaction fees required so that, when combined with anticipated registration and merger/tender fees, total

offsetting collections will approximately equal the offsetting collections produced by NSMIA. If current projections prove accurate,

this will reduce transaction fee rates by as much as two-thirds.

Authority of SEC to adjust to fee rates

Given the difficulty in predicting fee revenues, the Committee realizes the importance of providing a framework that ensures full

funding for the SEC. Therefore, Section 104 of this legislation provides the SEC with the authority to adjust fee rates to ensure that

the agency is fully funded in the event that reductions in market

valuations or volume bring about revenues below the legislative

targets. In addition, Section 104 requires the agency to lower fee

rates when fees are projected to bring in revenues that are in excess of the cap on fee collections laid out in the bill. To provide a

safeguard against misuse of the authority granted in Section 104,

the legislation requires the agency to report to Congress before it

exercises any authority to adjust fees.

SEC pay comparability

Section 105 amends the Securities Exchange Act of 1934 to permit the Commission to adjust base rates of compensation for all of

its employees outside the Civil Service’s General Schedule (GS).

Under existing law, the SEC may do so only for its economists. The

provisions allow parity among the SEC and Federal banking agency compensation programs. An amendment also is made to the Federal Deposit Insurance Act to bring the SEC within the consultation and information-sharing requirements of other agencies mentioned at 12 U.S.C. 1833b with respect to rates of employee compensation. A further technical amendment to section 1833b deletes

references to entities that have been abolished.

Although the Committee believes in the need to provide parity of

compensation to the SEC, the legislation does not require the SEC

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1Testimony of Chairman Arthur Levitt, before the Committee on Banking, Housing, and

Urban Affairs, United States Senate, February 28, 2000, p. 8. 2 Id., p. 9.

3 Id., pp. 8–9.

4 Id., p. 12.

to institute such changes. In testimony earlier this year before the

Congress, SEC Chairman Arthur Levitt stated that during the past

two years, the Commission lost 25 percent of its attorneys, accountants, and examiners.1 During FY 1999, SEC records reflect an

overall staff attrition rate of 13 percent, ‘‘nearly twice the government-wide average. * * *’’ 2 According to Chairman Levitt, the

level of staff turnover and inability to attract qualified staff adversely affects the productivity of the Commission.3 Indeed, during

FY 1999, only 46 percent of the Commission’s available accountant

positions were filled.4

The legislation assures that reductions, if any, in the base pay

of an SEC employee represented by a labor organization with exclusive recognition in accordance with Chapter 71 of Title 5 of the

United States Code, result from negotiations between such organization and SEC management, rather than by reason of the enactment of this amendment.

Securities markets enhancement

The Committee strongly endorses the practice of continually reviewing statutes, rules, and regulations under its jurisdiction.

Therefore, in addition to creating a new framework for fee collections and providing pay comparability for employees of the agency,

the Securities Markets Enhancement Act of 2000 (Title II of the reported legislation) is designed to eliminate unnecessary, outdated,

and duplicative regulation in the securities markets.

Under Section 3(b) of the Securities Act of 1933, the SEC has discretionary authority to establish exemptions from registration

under Section 5 of the Securities Act of 1933 for offerings not exceeding $5,000,000. This maximum dollar amount has not been increased for a substantial period of time, and the utility of some of

the exemptions under this section has been questioned given the

current maximum dollar limitation. Therefore, Section 211 was included to increase the exemption threshold to $12 million, as well

as provide for subsequent inflation adjustments.

In addition, Section 211 proposes an amendment to the exemptive provisions of the Securities Exchange Act of 1934 that would

exempt from the broker-dealer provisions certain persons who market and sell exempt securities on behalf of charitable organizations.

This provision would amend Section 3(e) of the Securities Exchange

Act of 1934 to permit a person registered, licensed, or certified by

a federal or state agency, self regulatory organization or professional licensing authority as an attorney, financial planner, insurance agent, or other enumerated professional is not subject to the

broker-dealer provisions of the Securities Exchange Act of 1934,

provided that the criteria in Section 3(e)(2)(B) are met.

Section 212 is designed to rationalize the treatment of certain securities under Section 18(b)(1) of the Securities Act of 1933. Currently, issuance of a warrant or subscription right not listed on an

exchange where the underlying security is listed may be subject to

state registration requirements. The result is that the exemption

8

from the registration requirements of state securities laws in

NSMIA is inconsistent with that of exchange-listed securities described in Section 18(b)(1) of the Securities Act of 1933. The Committee believes that this anomaly should be remedied by including

as a covered security any warrant or right to purchase or subscribe

to any security described in Section 18(b)(1) (A), (B), or (C).

Also under Section 212, the treatment of interests in employee

benefit plans is changed to lower regulatory burden. In the past,

some states have required exemption filings to be made for participation interests in employee benefit plans because the interests

were not covered securities under NSMIA, even though the underlying securities to be issued pursuant to the plan were covered securities under Section 18(b)(1). It is the Committee’s belief that

there are no investor protection issues at stake to compel registration filing of an employee benefit plan where the securities to be

issued pursuant to the plan are covered securities. Therefore, the

legislation amends Section 18(b)(1) to include interests of employee

benefit plans whose underlying securities are covered securities

under Section 18(b)(1) (A), (B), or (C).

Section 212 also addresses the problem encountered by securities

brokerage firms when they need to verify whether foreign stocks

are covered securities under Section 18(b)(1) or (b)(4)(A) before they

effect a customer trade. These transactions are known as secondary

market, non-issuer transactions. In these instances, brokers must

check the laws of each state to insure that there is a secondary

market transaction exemption available prior to executing a customer’s order. It is the intent of the Committee to eliminate the

need for brokers to check for state secondary market exemptions

for a foreign equity security that is defined as a margin security.

The Committee does not believe that this section diminishes investor protection, as persons effecting these transactions remain subject to state and federal laws requiring broker-dealer and agent

registration.

Section 212 clarifies the original intent of NSMIA with respect

to notice filings and fees. It is the Committee’s intent that the

states are permitted to receive the entire SEC Form D, including

those items of Form D which are not required to be filed with the

SEC. Section 212 also amends Section 18(c)(2) of the Securities Act

of 1933 to address the fact that, under NSMIA, states were allowed

to continue to receive notice filings and fees with respect to certain

transactions exempted under Section 3(a) of the Securities Act of

1933. With this provision, states would be prohibited from imposing notice filings or fees for these transactions. However, it is the

intent of the Committee that this provision shall not preclude application of state notice filing or fee requirements to certain municipal securities exempt under Section 3(a)(2) of the Securities Act of

1933, and state registration provisions applicable to securities exempt under Sections 3(a)(4) and 3(a)(11) and expressly deemed not

to be covered securities under Section 18(b)(4)(C) of Securities Act

of 1933.

Section 212 creates Section 18(e) of the Securities Act of 1933.

This new subsection clarifies the intent of Congress in NSMIA that

states cannot require registration of individuals as agents if they

represent an issuer in a Rule 506 offering and if the individual receives no compensation in connection with the offering.

9

Section 221 amends Section 203A(b)(2) of the Investment Advisers Act of 1940 to reaffirm Congress’ intent when it enacted

NSMIA. Specifically, nothing was meant to prohibit states from (1)

investigating and bringing enforcement actions with respect to

fraud or deceit against, or (2) receiving a notice filing, consent to

service of process, and a fee from a federally registered adviser,

provided the de minimis provisions enacted in this legislation are

honored. It is the intent of the Committee that Section 203A(b)(1)

(A) and (B) and Section 203A(b)(2) (A) and (B) not be read as requiring a state to exercise one of these grants of authority to the

exclusion of the other. With regard to notice filings, Section 221

clarifies Congress’ original intent in NSMIA that states can only

require those documents from federally registered advisers that

they file with the SEC under the Investment Advisers Act of 1940.

Under Section 222, a new subsection, Section 203A(e), is added

to the Investment Advisers Act of 1940 to create de minimis provisions relating to prohibitions on states from requiring notice filings,

fees and registrations. The Committee believes that adoption of a

single statutory section provides an effective and efficient way to

identify restrictions applicable to the states for all investment advisers. Section 203A(e)(1) prohibits states from requiring the filing

of documents, or payment of fees, from a supervised person of a

federally registered adviser if that individual has no place of business in the state. While the vast majority of states do not subject

these individuals to multi-state licensure, a few states have required notice filings and fees from these persons. In adopting this

provision, the Committee intends to stop this practice and insure

that these prohibitions apply not only with respect to a supervised

person directly, but also to anyone who might be required to make

a filing or pay a fee on behalf of a supervised person. Section

203A(e)(2) establishes a national de minimis provision applicable to

federally registered advisers. This section creates an exemption

from state notice filing, fee, and consent to service requirements

when the adviser has a place of business in another state and has

a de minimis number of clients in the state which seeks to impose

the requirements. Section 203A(e)(3) is the national de minimis

provision that was originally enacted in NSMIA as Section 222(d)

of the Investment Advisers Act of 1940 pertaining to state registered advisers. The Committee has moved this provision and has

incorporated it within the single provision for all investment advisers.

Section 222 also creates the new subsection Section 203A(f), that

preserves the ability of states to collect filing, registration, and licensing fees for federally registered advisers. It is the Committee’s

intent that this subsection be construed as permitting states to receive fees, consistent with the limitations provided in the Investment Advisers Act of 1940, no matter how such fees may be characterized in state law. For example, this subsection shall not be construed as prohibiting a state from receiving a filing fee from a federally registered investment adviser even where such fee is denominated in state law as a ‘‘registration’’ fee, provided that the

other limitations imposed on the states by the Investment Advisers

Act of 1940 are observed. That is to say, a state may continue to

receive a ‘‘registration’’ fee even though it cannot continue to require registration.

10

Section 223 will prohibit states from enforcing their financial reporting requirements when out-of-state advisers are in compliance

with their home state’s laws and have not taken custody of any assets of a client residing in the other state within the prior 12

months. Currently, a few states require investment advisers to supply certain financial information, even though the advisers have

their principal place of business in another state. Section 223 is

consistent with Congress’ intent in NSMIA to reduce reporting burdens on investment advisers.

Section 223 also creates a new subsection, 222(e) of the Investment Advisers Act of 1940, that will prohibit states from imposing

certain filing requirements or fee payment requirements if the

state does not accept filings in the new Investment Adviser Registration Depository (IARD) designated under Section 224 of this

Act. The Committee believes that universal state participation in

IARD will maximize efficiency of the regulatory system while imposing the least cost upon the industry. Investors also will benefit

from having access to a complete public disclosure database for

both state and federally registered advisers.

Section 224 embodies the Committee’s recognition that in the

last few years the Internet has become an integral part of the communications infrastructure of the United States and is regularly

used by millions of Americans. In light of this development, the

National Association of Securities Dealers (NASD) has developed a

means to make its Public Disclosure Program available over the

Internet. Currently, investors and others can only access administrative and disciplinary information about a registered person or

firm over a telephone hotline. Section 224 creates a legal environment whereby the NASD can make this information available on

its web site by extending the immunity from liability that is set

forth in Section 15A(i) of the Securities Exchange Act of 1934. Immunity will now apply to the information disclosed over the Internet, or any other electronic system that may be developed. In addition, immunity is provided to national securities exchanges that

provide such information pertaining to its members and associated

persons into the NASD’s Public Disclosure Program.

Section 224 also repeals the provision of NSMIA in which Congress mandated that the SEC provide for the establishment of a

public disclosure program for investment advisers, and it codifies

the provision as part of the Investment Advisers Act of 1940. In its

place, a provision is inserted that permits the Commission to designate the NASD to carry out its plans to administer the investment adviser public disclosure program—known as the Investment

Adviser Registration Depository. This provision also is conformed

to the terms of Section 15A(i) of the Securities Exchange Act of

1934 so that the disclosure programs for brokers and firms, as well

as investment advisers, will be subject to consistent statutory provisions.

SECTION-BY-SECTION ANALYSIS

Section 1. Short title

Designates this title as the ‘‘Competitive Market Supervision

Act.’’

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Title I—Fees and Comparability

Section 101. Reduction in registration fees; elimination of

general revenue component

Registration fee rates in Section 6(b) of the Securities Act of 1933

(15 U.S.C. 77f(b)) are reduced. The general revenue portion of the

registration fee is eliminated. The offsetting collection rate is set at

$67 per $1 million of securities registered for FY 2001–2006, and

at $33 per $1 million for FY 2007 and thereafter.

Section 102. Reduction in merger and tender fees; reclassification as offsetting collections

Section 102 reduces merger and tender fee rates in Section

13(e)(3) and Section 14(g) of the Securities Exchange Act of 1934

(15 U.S.C. 78m(e)(3) and 78n(g), respectively) from one fiftieth percent under current law, to $67 per $1 million of securities involved

for the period FY 2001–2006, and reduces rates further to $33 per

$1 million for FY 2007 and thereafter. All fees are reclassified from

general revenues to offsetting collections.

Section 103. Reduction in transaction fees; elimination of general revenue component

Under this section, all transactions included in Section 31 of the

Securities Exchange Act of 1934 (15 U.S.C. 79z–5) are consolidated,

with the same fee rate applied to each as an offsetting collection.

Transaction fees in any particular fiscal year will be set in appropriations acts at a rate estimated to collect the target dollar

amount set for that year. The target dollar amount is calculated to

approximate the amount, when combined with anticipated registration and merger/tender fees, that will approximately equal the offsetting collections anticipated to be produced under current law.

Section 104. Adjustment to fee rates

The Commission is given authority to increase or decrease transaction fee rates after the first half of the fiscal year if projections

show that either the cap or floor for total fee collections will be

breached. To provide a safeguard against misuse of the authority

granted in Section 104, the legislation requires the agency to report

to Congress before it exercises any authority to adjust fees.

Section 105. Comparability provisions

Section 105(a) amends Section 4(b) of the Securities Exchange

Act of 1934 (15 U.S.C. 78d(b)) to authorize, but not require, the

SEC to compensate its employees according to a scale outside the

Federal Government’s General Schedule (GS) rates. Pursuant to

this authority, the SEC may provide additional compensation and

benefits to its employees on the same comparable basis as do the

agencies referred to under Section 1206(a) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C.

1833b). Such agencies include the federal banking agencies, the

National Credit Union Administration, the Federal Housing Finance Board, and the Farm Credit Administration. The amendment ensures that reductions, if any, in base pay for an employee

of the SEC represented by a labor organization with exclusive recognition in accordance with Chapter 71 of Title 5 of the United

12

States Code, result from negotiations between such organization

and SEC management, as opposed to by reason of the enactment

of this amendment.

In establishing and adjusting schedules of compensation and benefits for its employees, Section 105(b) requires the SEC to inform

the heads of the agencies mentioned above and to maintain comparability with such agencies regarding compensation and benefits.

A technical change is made to strike from Section 1206(a) the reference to the Thrift Depositor Protection Oversight Board of the

Resolution Trust Corporation, which was abolished on December

31, 1995. Section 105(c) provides certain conforming amendments

to Title 5 of the United States Code to reflect changes made under

Subsection (a).

Section 106. Authorization for appropriations

Appropriations for the SEC are authorized for $422,800,000 for

fiscal year 2001.

Section 107. Effective date

In general, Title I becomes effective on October 1, 2000. However,

the authorities provided by Section 13(e)(3)(D), Section 14(g)(1)(D),

Section 14(g)(3)(D), and Section 31(d) of the Securities Exchange

Act of 1934, as so designated by this title shall not apply until October 1, 2001.

Title II—Securities Markets Enhancement

Section 201. Short title

Designates this title as the ‘‘Securities Markets Enhancement

Act of 2000.’’

Subtitle A—Reducing the Cost of Capital Formation

Section 211. Exempted securities and organizations

Section 211(a) raises the exemption threshold under Section 3(b)

of the Securities Act of 1933 (15 U.S.C. 77c(b)). Currently, the SEC

has the ability to exempt certain offerings from registration, but

not exceeding an amount of $5 million. Section 211(a) raises the

maximum size that the SEC can exempt to $12 million. Section

211(b) amends the Securities Exchange Act of 1934 (15 U.S.C.

78c(e)(2)) to provide an exception to individuals from broker-dealer

registration who are compensated in connection with the issuance

by charitable organizations of exempt securities described in Section 3(a)(12)(A)(v) of the Securities Exchange Act of 1934. Individuals receiving such compensation do not have to register as a

broker-dealer, provided that the charitable organization, and the

individual, meet the criteria laid out in Section 3(e)(2)(B) of the Securities Exchange Act of 1934.

Section 212. National market treatment for certain securities

Section 212 expands the definition of covered securities under

Section 18 of the Securities Act of 1933 (15 U.S.C. 77r) to include

new categories of securities that are offered and exchanged nationally (and even internationally) or are products where the underlying security is a covered security. The list of new covered securities includes certain rights and warrants, securities of foreign govVerDate 11-MAY-2000 05:59 Jul 28, 2000 Jkt 079010 PO 00000 Frm 00016 Fmt 6659 Sfmt 6602 E:\HR\OC\SR360.XXX pfrm03 PsN: SR360
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ernments, any foreign equity security that qualifies as a ‘‘margin

security’’ under the rules and regulations of the Board of Governors

of the Federal Reserve System, and interests in employee benefit

plans. Section 212 also eliminates the ability of states to collect

fees on secondary market transactions involving the securities outlined in Section 18 as amended by this legislation. Further, Section

212 will allow officers and directors of firms that offer the securities described in Section 18(b)(4)(D) of the Securities Act of 1933

(15 U.S.C. 77r(b)(4)(D)) to avoid state registration and licensing as

issuer agents, provided that they receive no compensation in connection with such offerings.

Subtitle B—Enhancement of Disclosure and Investment Adviser

Regulation

Section 221. Ensuring adequate record keeping

Section 221 amends Section 203A(b)(2) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3a(b)(2)) to reaffirm Congress’ intent when it enacted NSMIA, that nothing was meant to prohibit

states from (1) investigating and bringing enforcement actions with

respect to fraud or deceit against, or (2) receiving a notice filing,

consent to service of process, and a fee from a federally registered

adviser, provided the de minimis provisions enacted in this legislation are honored.

Section 222. Elimination of barriers to providing services

Section 222 adds a new subsection, Section 203A(e), to the Investment Advisers Act of 1940 to create de minimis provisions relating to prohibitions on states from requiring notice filings, fees,

and registrations for all investment advisers.

Section 223. Reducing financial reporting burdens

Currently, a few states require investment advisers to supply financial information, even though the advisers have their principal

place of business in another state. Section 223 will prohibit states

from enforcing these reporting requirements as long as advisers are

in compliance with their home state’s laws and have not taken custody of any assets of clients residing in the other state in the prior

12 months. Section 223 also provides an incentive to states to use

the new Investment Adviser Registration Database (IARD) by not

allowing a state to collect fees or require filings from certain investment advisers unless the state uses the one-stop electronic filing

system currently being designed by the SEC and the NASAA pursuant to Section 204(b) of the Investment Advisers Act of 1940.

Section 224. Enhancing transparency of records

Section 224 will foster better disclosure of violations by brokerdealers and investment advisers by granting immunity protection

to disclosures of such information over the Internet. Similar disclosures that currently occur over established telephone hotlines are

already granted immunity. In 1996, as part of the NSMIA, Congress mandated that the SEC provide for the establishment of a

public disclosure program for investment advisers. Section 224 repeals this provision of NSMIA and codifies it as part of the Investment Advisers Act of 1940 by permitting the SEC to designate an

14

entity, such as the NASD, to administer the forthcoming IARD program.

REGULATORY IMPACT STATEMENT

In accordance with Paragraph 11(g), rule XXVI of the Standing

Rules of the Senate, the Committee makes the following statement

regarding the regulatory impact of the bill.

Title I of the bill dramatically lowers user fees on securities

transactions and registrations, as well as mergers and tender offerings. The reduction of these fees lowers the cost of savings and investment for consumers, and reduces fee burden on businesses that

raise capital in the securities markets. According to the Congressional Budget Office, beginning in FY 2001, the savings to investors and issuers from this bill are expected to be $10.4 billion over

five years. The savings are expected to be $19.7 billion over ten

years.

Title I also provides the SEC with authority to compensate its

employees according to a scale outside of the Federal Government’s

General Schedule rates. This compensation parity provision will result in no increase in regulatory burden. Neither does it necessitate

any increase in the SEC budget, since the increase is not mandatory. That is to say, the SEC would exercise this authority on a discretionary basis within the context of funds made available to the

Commission by Congress through the normal authorization and appropriations process.

Title II of the bill makes many significant changes that lower the

impact of regulation and its associated costs on issuers, brokerdealers, investment advisers, investors, and other participants in

the securities markets.

The bill reduces regulatory burden by providing a greater opportunity for issuers of securities to avail themselves of exemptions

from registration of their offerings. Greater use of such exemptions

allow issuers to avert the paperwork and legal costs associated

with the registration process.

The legislation will exempt individuals involved in offering certain qualifying securities on behalf of charitable organizations from

registering as broker-dealers. The regulatory burden will be reduced for those individuals who previously had to register and for

the charities that rely on the offering process.

By expanding the definition of covered securities, and thus allowing a greater number of offerings to qualify for a single registration

(rather than multiple registrations with different states), the bill

streamlines the offering process and eases regulatory burden on

issuers. In addition, the regulatory burden will be reduced on brokers who participate in secondary market transactions involving

these securities. Under current law, brokers are required to verify

that a given security was registered in the particular state where

the investor resided before the brokers could consummate a secondary transaction involving securities affected by this provision.

Brokers will be able to avoid this extra step when engaging in

transactions involving securities that will become covered securities

upon enactment of this bill.

The bill eliminates the authority of states to collect paperwork

and fees on secondary market transactions involving covered securities. No states currently require such paperwork or fees, thereVerDate 11-MAY-2000 05:59 Jul 28, 2000 Jkt 079010 PO 00000 Frm 00018 Fmt 6659 Sfmt 6602 E:\HR\OC\SR360.XXX pfrm03 PsN: SR360
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fore, this provision is viewed to be a technical correction that will

have no regulatory impact but serves rather to prevent an

unneeded regulatory burden from being added in the future.

The bill preserves the ability of states to collect certain filings,

fees, and documents from investment advisers. This provision is

simply a reaffirmation of current practice and will not have any

regulatory impact.

Directors and officers of issuing firms sometimes assist in the offering of their firm’s securities. This bill will lower regulatory burden on these individuals by allowing them to avoid registration as

issuer agents, provided that they receive no compensation particularly related to the offering.

The legislation creates specific guidelines that will allow investment advisers to avoid filings, fees, registrations, and the providing

of financial information to states where they have no place of business and only a de minimis number of clients. This provision significantly lowers regulatory costs on investment advisers who qualify for such treatment.

The legislation provides a legal environment that will allow self

regulatory organizations (SROs) to provide disclosures over the

Internet to investors about the administrative and disciplinary

backgrounds of broker-dealers, investment advisers, and other market participants. By realizing the efficiency of communicating such

information electronically, regulators will avoid certain paperwork,

as well as receive disclosures in a more timely fashion and at lower

cost. Using such an electronic process lowers the burden on members of SROs and investment advisers who must fund the disclosure programs, and improves investor access to such information.

The bill creates a one-stop system to allow investment advisers

to fulfill their registration, filing, and other regulatory obligations

without having to do so state-by-state. This system will maximize

efficiency of the regulatory system while lowering fees and regulatory cost incurred by the investment adviser industry.

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

Senate rule XXVI, Section 11(b) of the Standing Rules of the Senate, and Section 403 of the Congressional Budget Impoundment

and Control Act, require that each committee report on a bill containing a statement estimating the cost of the proposed legislation,

which was prepared by the Congressional Budget Office. The Congressional Budget Office Cost Estimate and its Estimate of Costs

of Private-Sector Mandates, both dated July 24, 2000, are hereby

included in this report.

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, July 24, 2000.

Hon. PHIL GRAMM, Chairman, Committee on Banking, Housing, and Urban Affairs,

U.S. Senate, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for S. 2107, the Competitive Market Supervision Act.

16

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contacts are Mark Hadley and

Kenneth Johnson.

Sincerely,

STEVEN LIEBERMAN

(For Dan L. Crippen, Director).

Enclosure.

S. 2107—Competitive Market Supervision Act

Summary: S. 2107 would adjust the fees that the Securities and

Exchange Commission (SEC) is authorized to collect for registrations, mergers, and transactions of securities. Under current law,

some of those fees are recorded in the budget as governmental receipts (revenues) and some are recorded as offsetting collections

that are credited against discretionary appropriations for the SEC.

The bill would eliminate SEC fees that are recorded as revenues

and would limit the amount of fees that can be collected as an offset to discretionary spending. If implemented, S. 2107 would reduce total SEC fees from an estimated $2.1 billion in fiscal year

2000 to about $0.7 billion in 2001.

The bill would authorize the appropriation of $423 million for the

SEC in 2001. Under S. 2107, the SEC would be allowed to adjust

employees’ compensation and benefits to make them comparable to

agencies that regulate banking, such as the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration. Finally, the bill would exempt certain market participants

and types of securities from state registration requirements.

CBO estimates that implementing S. 2107 in 2001 would increase net SEC spending, relative to 2000 spending. For 2001, the

bill would authorize an increase of $40 million in the gross SEC appropriation, relative to 2000, but it also would limit the amount of

fees that would be credited against gross SEC spending will total

$864 million. Without any limitation, we expect those fee collections would grow to $988 million in 2001. Under S. 2107, however,

we estimate that SEC fees that are credited against gross agency

spending would be limited to $677 million. CBO estimates that net

SEC spending would increase by $275 million from 2000 to 2001,

assuming appropriation of the amount authorized by the bill for

2001. (Estimated budgetary effects of S. 2107 after 2001 would depend on gross appropriations provided to the SEC. This bill would

not authorize such spending beyond 2001.)

Finally, CBO estimates that enactment of S. 2107 would reduce

governmental receipts by $1.3 billion in 2001 and by $7.9 billion

over the 2001–2005 period. Because S. 2107 would reduce governmental receipts, pay-as-you-go procedures would apply.

S. 2107 contains intergovernmental mandates as defined in the

Unfunded Mandates Reform Act (UMRA) because it would preempt

several states’ securities laws. While data are very limited, CBO

estimates that complying with these mandates would not exceed

the threshold established by that act ($55 million in 2000, adjusted

annually for inflation). S. 2107 would impose private-sector mandates on the national securities exchanges, national securities associations, and investment advisors. CBO estimates that the direct

costs of these mandates would be below the annual threshold esVerDate 11-MAY-2000 05:59 Jul 28, 2000 Jkt 079010 PO 00000 Frm 00020 Fmt 6659 Sfmt 6602 E:\HR\OC\SR360.XXX pfrm03 PsN: SR360
17

tablished by UMRA for private-sector mandates ($109 million in

2000, adjusted for inflation).

Estimated cost to the Federal Government: The estimated budgetary impact of S. 2107 on revenues is shown in Table 1. The effect

of the bill on spending subject to appropriation after 2001 would

depend on the gross amounts appropriated to the SEC. The costs

of this legislation fall within budget function 370 (commerce and

housing credit).

Basis of estimate

CBO estimates that implementing S. 2107 would increase net SEC spending from 2000 to 2001 by $275 million, assuming appropriation of the bill’s authorized amount. We estimate that enactment of the bill would reduce revenues by $1.3 billion in 2001 and

by $7.9 billion over the 2001–2005 period by eliminating SEC fees

that are currently recorded in the budget as revenues.

Spending subject to appropriation

S. 2107 would authorize the appropriation of $423 million in

2001 for the SEC, and would reduce the amount of fees the agency

is authorized to charge, subject to appropriation action. In addition,

the bill would establish upper and lower limits on the total amount

of fees the SEC could collect each year to offset its appropriated

spending.

TABLE 1.—ESTIMATED BUDGETARY EFFECTS OF S. 2107

By fiscal year, in millions of dollars—

2000 2001 2002 2003 2004 2005

SPENDING SUBJECT TO APPROPRIATION 1

SEC spending under current law:

Estimated budget authority 2 ............................................. ¥496 0 0 0 0 0

Estimated outlays .............................................................. ¥515 111 0 0 0 0

Proposed Changes:

Gross SEC spending:

Authorization Level .................................................... 0 423 0 0 0 0

Estimated outlays ..................................................... 0 326 93 0 0 0

Offsetting collections:

Estimated authorization level ................................... 0 ¥677 0 0 0 0

Estimated outlays ..................................................... 0 ¥677 0 0 0 0

Net SEC spending:

Estimated authorization level ................................... 0 ¥254 0 0 0 0

Estimated outlays ..................................................... 0 ¥351 93 0 0 0

SEC Spending under S. 2107:

Estimated authorization level 3 .......................................... ¥496 ¥254 0 0 0 0

Estimated outlays .............................................................. ¥515 ¥240 93 0 0 0

CHANGES IN REVENUES

Estimated revenues ..................................................................... 0 ¥1,306 ¥1,420 ¥1,545 ¥1,717 ¥1,910

1 After 2001, the impact on discretionary spending or the changes in SEC for rates that would be made by S. 2107 would depend on the gross appropriation provided for the agency. This bill only authorizes such funding for 2001. 2 The 2000 level is the estimated net amount appropriated for that year, the gross SEC appropriationf or 2000 was $383 million.

Changes in Gross Spending.—S. 2107 would authorize a gross

SEC appropriation for 2001 that is $40 million more than the 2000

level. Based on historical spending patterns of the agency, CBO estimates implementing this provision would cost about $420 million

over the 2001–2002 period.

Changes in Offsetting Collections.—The bill would reduce offsetting collections by reducing the current statutory rates on all three

18

types of SEC fees: registration fees, merger and tender fees, and

transaction fees. The bill also would establish an upper and lower

limit on the total amount of offsetting collections the SEC may collect in any year.

Based on historical information from the securities industry and

the likelihood that offsetting collections would exceed the upper

limit that would be established by the bill, CBO estimates that the

lower fee rates authorized by S. 2107 would reduce offsetting collections relative to CBO’s baseline by about $311 million in 2001 and

by $2.5 billion over the 2001–2005 period, subject to future appropriation action. Table 2 compares CBO’s baseline estimates of SEC

fee collections with our estimates of fee collections under S. 2107.

TABLE 2.—ESTIMATED OFFSETTING COLLECTIONS FROM SEC FEES, RELATIVE TO CBO BASELINE

ESTIMATES

Outlays in millions of dollars by fiscal year—

2000 2001 2002 2003 2004 2005

CBO baseline estimates of SEC offsetting collections .............. ¥864 ¥988 ¥1,154 ¥1,360 ¥1,582 ¥1,919

Estimated reduction in fees authorized by S. 2107 .................. 0 311 388 479 591 723

Estimated SEC offsetting collections under S. 2107 ................. ¥864 ¥677 ¥766 ¥881 ¥991 ¥1,196

Registration fees.—Under current law, the SEC collects a fee on

the registration of securities. The current registration fee is $200

per $1 million of the maximum aggregate price for securities that

are proposed to be offered during the 2000–2006 period. After 2006,

the fee drops to $67 per $1 million of the maximum aggregate price

for securities that are proposed to be offered. These fees are recorded as governmental receipts (revenues). Current law also requires, subject to appropriation, that the SEC charge an additional

registration fee of $50 per $1 million of the maximum aggregate

price for securities that are proposed to be offered in 2001. Under

current law, this added registration fee gradually declines after

2001, until it ends at the end of 2005. These additional fees are recorded as offsetting collections.

S. 2107 would eliminate all registration fees that are recorded as

governmental receipts and would set fees that are recorded as offsetting collections at $67 per $1 million of the maximum aggregate

price for securities that are proposed to be offered during the 2001–

2006 period. The bill also would change the registration fees for

2007 and thereafter to $33 per $1 million of the maximum aggregate price for securities that are proposed to be offered. CBO estimates that under the bill the SEC would collect $229 million in

registration fees in 2001, subject to appropriation action.

Merger and tender fees.—Under current law, the SEC charges a merger fee equal to $200 per $1 million of the value of securities

proposed to be purchased as part of a merger. These current fees

are also recorded revenues. S. 2107 would eliminate those merger

fees and establish new merger fees to be recorded as offsetting collections at the rate of $67 per $1 million of the aggregate value of

securities proposed to be purchased during the 2001–2006 period.

The bill also would establish merger fees for 2007 and thereafter

at the rate of $33 per $1 million of the aggregate value of securities

proposed to be purchased as part of a merger. CBO estimates that

under S. 2107 the SEC would collect about $46 million in merger

fees in 2001, subject to appropriation.

19

Transaction fees.—Under current law, the SEC collects 1/300th of

a percent of the aggregate dollars traded through national securities exchanges, national securities associations, brokers, and dealers. The fee rate will decline to 1/800th of a percent for 2007 and

thereafter. Fees collected from national securities associations are

recorded as offsetting collections. (Fees from other sources are recorded as revenues.)

Under the bill, all transactions fees would be recorded as offsetting collections. Furthermore, the bill would require the SEC to set

the transaction fee rate at the beginning of each fiscal year so that

transaction fee collections in a given fiscal year will equal a specified amount. For 2001, this amount would be $413 million. By comparison, under our baseline assumptions, CBO estimates the SEC

will collect $817 million of offsetting collections from transaction

fees in 2001.

S. 2107 would require that the SEC adjust the transaction fee

rate during the year so that total SEC fee collections (including

fees for registrations, mergers, and transactions) would not fall

below a specified floor amount of collections, nor exceed a specified

ceiling amount of collections. The bill would set the floor amount

equal to the amount appropriated to the SEC for fiscal year 2001,

and adjust it annually for changes in inflation thereafter, or at the

amount authorized to be appropriated for the SEC in a given year,

whichever is greater. The bill would set the ceiling amount equal

to the most recent CBO baseline for total SEC collections, plus 5

percent above this level, for fiscal years 2001 through 2010. The

bill would set the ceiling equal to the amount authorized to be appropriated for the SEC, plus an additional 5 percent, for fiscal

years 2011 and thereafter.

By changing the fee rates paid for registrations, mergers, and

transactions, the bill would reduce total offsetting collections from

the CBO baseline estimates of $988 million to about $688 million

in 2001. Offsetting collections, however, could be higher or lower

depending on the volume of each of those activities. By limiting the

total amount the SEC could collect through a floor and ceiling, the

bill would eliminate the possibility that offsetting collections could

be less than $423 million or more than $1,037 million in 2001.

Based on the historical growth of SEC fees, CBO does not expect

fees would be less than the floor in any year. Based on the likelihood that SEC fees under the bill would be greater than the ceiling

in 2001, CBO estimates these provisions would cost about $11 million in that year. CBO estimates the ceiling provisions would reduce expected fees by about $90 million over the 2001–2005 period.

Revenues

S. 2107 would eliminate all registration, merger and tender, and

transaction fees that are currently recorded as revenues. CBO estimates that S. 2107 would reduce revenues by $7.9 billion over the

2001–2005 period and by $14.4 billion over the 2001–2010 period.

Pay-as-you-go considerations: The Balanced Budget and Emergency Deficit Control Act sets up pay-as-you-go procedures for legislation affecting direct spending or receipts. The net changes in

governmental receipts that are subject to pay-as-you-go procedures

are shown in Table 3. For the purposes of enforcing pay-as-you-go

20

procedures, only the effects in the current year, the budget year,

and the succeeding four years are counted.

TABLE 3.—ESTIMATED IMPACT OF S. 2107 ON DIRECT SPENDING AND RECEIPTS

By fiscal year, in millions of dollars—

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Changes in

outlays ...... Not applicable

Changes in

receipts .... 0 –1,306 –1,420 –1,545 –1,717 –1,910 –2,108 –1,000 –1,026 –1,129 –1,241

Estimated impact on state, local, and tribal governments: S. 2107

would preempt state laws to prohibit states from imposing certain

filing and fee requirements on specified securities and securities

providers. Such preemptions would be mandates as defined in

UMRA. Because states vary significantly in filing requirements, fee

structures, and scope of regulation, CBO cannot determine precisely the total revenue loss they would experience as a result of

this bill. However, based on information provided by groups representing securities administrators, securities attorneys, and a

sample of states most likely to be affected, we estimate that those

losses would not exceed the threshold established by UMRA ($55

million in 2000, adjusted annually for inflation).

Estimated impact on the private sector: S. 2107 would require

each national securities exchange and national securities association to file monthly with the SEC an estimate of fees that they are

required to pay. The bill would also impose requirements on a registered securities association and investment advisors by requiring

electronic access to disciplinary and other information. Based on information from government and industry sources, CBO estimates

that the direct costs of the mandates would be below the annual

threshold established by UMRA for private-sector mandates ($109

million in 2000, adjusted for inflation).

Estimate prepared by: Federal costs: Mark Hadley and Kenneth

Johnson; revenues: Hester Grippando and Erin Whitaker; impact

on State, local, and tribal governments: Shelly Finlayson; impact

on the private sector: Jean Wooster.

Estimate approved by: Peter H. Fontaine, Deputy Assistant Director for Budget Analysis; Roberton Williams, Deputy Assistant

Director Tax Analysis.

CHANGES IN EXISTING LAW

In the opinion of the Committee, it is necessary to dispense with

the requirement of Section 12 of rule XXVI of the Standing Rules

of the Senate in order to expedite the business of the Senate.

(21)

ADDITIONAL VIEWS OF SENATOR SHELBY

Last year, this Committee tore down the legal barriers separating banking, securities and insurance and passed into law the

Gramm-Leach-Bliley Act. As hard as I tried, I could not convince

the Committee to adopt strong privacy provisions to provide individuals any real ability to control the use of their most personal financial and medical information. At that time, I was essentially

told that ‘‘this is not the time, or the place.’’

During the markup of S. 2107, I offered an amendment which

would have disallowed financial institutions from purchasing or

selling Social Security numbers and would have expanded the definition of the term ‘‘nonpublic personal information’’ in the GrammLeach-Bliley Act to include Social Security numbers. Again, I was

told this is not the time or the place and that my amendment may

have ‘‘unintended consequences.’’ On this basis, my amendment

was voted down by a vote of 10 to 10.

While opponents of my amendment talked about unintended consequences of adopting the amendment, I would like to discuss the

unintended consequences of not adopting my amendment and instead choosing the status quo.

According to a New York Times article on April 3rd of this year,

‘‘Law enforcement authorities are becoming increasingly worried

about a sudden, sharp rise in the incidence of identity theft, the

outright pilfering of peoples personal information for use in obtaining credit cards, loans and other goods.’’ The article goes onto say

that the ‘‘Social Security Administration reported that they had received more than 30,000 complaints about the misuse of Social Security numbers last year, most of which had to do with identity

theft.’’

Ironically, on the very same day of the markup, the Washington

Post featured an article on the front page of the Business section

that read, ‘‘ID Theft Becoming Public Fear No. 1.’’ The article reported that ‘‘Consumers are besieging federal agencies with complaints about fraudulent loans taken out in their names, misuse of

Social Security numbers and falsified credit card accounts.’’

Identity theft is real. At the markup, I told the story of Mr. Bob

Hartle, a factory worker in Arizona. One day, much to Mr. Hartle’s

dismay, he found out that an individual had obtained his personal

information and used that information to steal his identity, apply

for credit cards and open accounts. That individual ran up over

$100,000 in credit card debt under Mr. Hartle’s name, purchased

motorcycles, even a home, filed for bankruptcy, obtained a drivers

license, and was even fired from his job—all in Mr. Hartle’s name.

Mr. Hartle spent $15,000 and moved to Phoenix just to track down

the thief.

22

The thief was ultimately prosecuted for fraud, but only after the

criminal had obtained four life insurance policies in Hartle’s name

and had even assumed his status as a Vietnam veteran.

In addition, I shared the story of Amy Boyer, a girl whose social security number was bought on the Internet for $45 and was subsequently murdered by a stalker.

The economic toll of identity theft is not insignificant. In 1997, the Secret Service made nearly 9,500 arrests amounting to $745

million in losses to individuals and financial institutions. Indeed,

ninety-five percent of financial crimes arrests involve identity theft.

While financial institutions have used the Social Security number as an identifier, the sale and purchase of these numbers facilitates criminal activity and can result in significant invasions of individual privacy. These are the unintended consequences of having

no federal law that prohibits the buying and selling of Social Security numbers. I would argue these unintended consequences far

outweigh any inconvenience my amendment would cause financial

institutions.

What gives companies the right to buy and sell your Social Security number, anyway? The Social Security number was created by

the federal government in 1936 as a means of tracking workers

earnings and eligibility for Social Security benefits. There was

never any intention or consideration for financial institutions to

use a person’s Social Security number as a universal access number.

However, the financial services industry has come to use and depend on an individual’s private Social Security number, both as an

identifier and in order to conduct transactions. Indeed, banks use

the last four digits of the Social Security number as the default

PIN number for ATM cards and for telephone banking access. It

has been reported that many insurance companies use an individual’s Social Security number as the account number which is printed on the member card that individuals carry in their wallet.

Again, no federal law prohibits the buying and selling of individual

Social Security numbers.

Last year, a reputable Fortune 500 company, U.S. Bancorp, sold

account information—including Social Security numbers—of one

million of its customers to MemberWorks, a telemarketer of membership programs that offer discounts on such things as travel to

health care services. Now some may believe we stopped such activity by including a provision, Section 502 (d), in the Gramm-LeachBliley Act limiting the ability of institutions to share account information with telemarketers.

That provision, however, does not stop a financial institution

from buying and selling individual Social Security numbers. Indeed, it is even legal to sell an individual’s birth date, and mother’s

maiden name. If you have those three things, you have the keys

to the kingdom—not to mention any and every account that individual has.

While it is true identity theft is against the law, the sponsor of

the law, Senator Jon Kyl admitted just one day before our markup

that, ‘‘Almost two years after the passage of the Act (Identity Theft

and Assumption Deterrence Act of 1998, P.L. No. 105–318 (1998)),

identity theft unfortunately continues to grow. * * *’’ There is no

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question that this increase in criminal activity is due to the proliferation of using Social Security numbers at financial institutions.

In addition, my amendment included Social Security numbers as

nonpublic personal information for the purpose of the GrammLeach-Bliley Act, thereby subjecting the sharing of Social Security

numbers to the privacy protections in that Act. Current regulations

say that Social Security numbers are not considered nonpublic personal information if the number is ‘‘publicly available,’’ as in bankruptcy filings, etc.

I just cannot find a reason as to why Congress should aid and

abet criminals in attaining individual Social Security numbers by

having a law on the books that treats Social Security numbers as

‘‘public information.’’ Indeed, no American would agree the public

good is being served by making their personal Social Security number available for anyone who wants to see it.

Last year, during the debate on financial modernization, the financial industry argued they needed the ability to share information among affiliates. To be clear, my amendment would not have

limited a financial institution’s ability to share an individual’s Social Security number among affiliates.

I believe the time to protect Social Security numbers is now. The

evolution of technology is making the collection, aggregation, and

dissemination of vast amounts of personal information easier and

cheaper. The longer we wait to act on this very important issue—

an issue that is supported by a vast majority of Americans—the

more the American people lose confidence in the U.S. Congress and

our ability to lead.

I am disappointed the Committee did not concur with me on the

urgency of this issue. I hope we can add significant privacy protections on S. 2107 before this legislation is passed into law.

RICHARD SHELBY.

(24)

ADDITIONAL VIEWS OF SENATORS SARBANES, DODD,

KERRY, AND REED

We support the provisions in S. 2107 that permit the Securities

and Exchange Commission (SEC) to compensate employees in a

manner comparable to that of employees at the other Federal financial regulators. We also support amendments to the Federal securities laws that remove unnecessary restrictions and requirements and make the markets more efficient.

However, we share the Administration’s ‘‘deep concerns’’ that reducing the registration and transaction fees collected by the SEC

will come at the expense of other Administration priorities, including ‘‘strengthening Social Security and Medicare, providing tax relief to middle-income families, funding critical initiatives, and paying off the debt by 2013.’’

We are also concerned that, as OMB points out in its letter to

the Committee, this legislation ‘‘is subject to the pay-as-you-go requirements of the Omnibus Budget Reconciliation Act of 1990’’ and

‘‘the absence of any offsets could cause a significant sequester of

mandatory programs.’’ A copy of OMB Director Jacob J. Lew’s letter to the Committee is included below.

We note also that the SEC fees would be reduced in a period

when the securities industry and securities investors have been enjoying great economic prosperity. According to the Securities Industry Association, ‘‘The securities industry posted record results in almost every financial parameter during the first quarter of 2000.

Pretax profits reached a new record $8.2 billion, a 20% increase

over the previous quarter’s then record $6.8 billion profit and an

82% increase from year earlier levels.’’ New York Stock Exchange

members in 1999 earned a record $461 million in profits, up over

50% from 1998 profits.

We believe that the overall impact on individual investors and

public companies of the proposed fee reduction would be negligible

because the amount of the SEC fee charged on each transaction or

offering is small. When an investor sells stock, he or she is charged

a Section 31 transaction fee amounting to 1/300 of 1%. This means,

by way of example, that an investor who sells stock worth $3,000

pays a fee of about 10 cents; when $15,000 is sold, the fee is about

50 cents. When a company registers stock to be sold, it pays a Section 6(b) registration fee of 1/50 of 1%. By way of example, a company that registers $10 million of stock pays $400. The SEC fees

already are scheduled to decline in 2007, as a result of the National

Securities Markets Improvement Act.

From these examples, it appears that few if anyone is deterred

from making an investment in a stock because of the fees incurred

and, similarly, companies are not deterred from selling stock because of the size of the SEC fee.

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For these reasons and, more importantly, because we do not

know the budget implications, we express reservations about those

provisions in this legislation which would reduce the registration

and transaction fees collected by the SEC.

PAUL SARBANES.

CHRISTOPHER J. DODD.

JOHN F. KERRY.

JACK REED.

EXECUTIVE OFFICE OF THE PRESIDENT,

OFFICE OF MANAGEMENT AND BUDGET,

Washington, DC, June 15, 2000.

Hon. PAUL S. SARBANES, Committee on Banking, Housing, and Urban Affairs,

U.S. Senate, Washington, DC.

DEAR SENATOR SARBANES: I am writing to express the Administration’s deep concerns with S. 2107, the ‘‘Competitive Market Supervision Act,’’ which would substantially reduce the registration

and transaction fees collected by the Securities and Exchange Commission (SEC).

The President has proposed a balanced and responsible framework for maintaining fiscal discipline. Any additional reduction in

SEC fees will necessarily come at the expense of strengthening Social Security and Medicare, providing tax relief to middle-income

families, funding critical initiatives, and paying off the debt by

2013. This proposal was not included in the Administration’s FY

2001 budget and we are concerned over the many bills introduced

in Congress that would affect governmental revenues.

In 1996, Congress and the President collaborated on legislation—

the National Securities Markets Improvement Act (NSMIA)—that

established a calendar for reducing SEC fee rates. This legislation

also required that approximately two-thirds of the total fee collections be deposited as general revenue of the Treasury and one-third

as offsetting collections of the SEC. The Administration continues

to support the declining fee rates agreed to in the NSMIA legislation. Proposals to further reduce these fees should be considered in

the context of overall fiscal policy that balances the importance of

debt reduction and competing priorities such as strengthening Social Security and Medicare, providing tax relief to middle-income

families, and other critical initiatives called for in the President’s

FY 2001 budget request.

Finally, please note that S. 2107 would affect receipts; therefore,

it is subject to the pay-as-you-go requirements of the Omnibus

Budget Reconciliation Act of 1990. OMB’s preliminary estimate is

that the bill would reduce general revenue by approximately $1.3

billion per year; the absence of any offsets could cause a significant

sequester of mandatory programs.

Sincerely,

JACOB J. LEW, Director.

(26)

ADDITIONAL VIEWS OF SENATORS BRYAN, SARBANES,

DODD, KERRY, REED, AND EDWARDS

During last year’s consideration of the Financial Services Modernization Act, repeated assurances were given to members of the

Senate Banking Committee that the issue of financial privacy

would be considered and examined by the committee at a reasonable date. With just a few short weeks remaining in the second session of the 106th Congress, it appears that the committee has

failed to address this important issue at all, and it would be reasonable to assume that we will continue to be inundated with

media reports of privacy intrusions and unauthorized informationsharing.

It has been suggested that pursuing privacy legislation would be

an unnecessary and even hazardous exercise in light of last year’s

passage of the landmark Financial Services Modernization Act. Opponents of privacy legislation argue that the provisions in the

Gramm-Leach-Bliley bill addressing consumer privacy should be

provided sufficient time to take effect before we discuss or consider

additional legislative measures.

This argument, however, wrongly assumes that the G–L–B privacy provisions are likely to play a meaningful role in protecting

consumer privacy. They will not. The minimal requirements that

were included in G–L–B merely require financial institutions to

disclose their privacy policies to their customers and to provide

timely notification when information is being shared. Moreover,

while the legislation did require these institutions to provide their

customers the ability to ‘‘opt-out’’ of information-sharing agreements with third parties, an exception was provided for institutions

and third parties that enter into ‘‘Joint Marketing Agreements.’’

Every major consumer organization has concluded that this watered-down restriction is virtually meaningless, and that the ‘‘Joint

Marketing Agreement’’ exception is the proverbial loophole that is

so enormous it has swallowed the rule.

In short, although we support disclosure and believe that financial institutions have a responsibility to keep their customers informed of how and when their information is shared or sold, such

provisions can hardly be referred to as privacy ‘‘protections.’’

It has also been argued that further legislation is not necessary

because the financial institutions are voluntarily adopting privacy

policies. First, it should be noted that most of these policies provide

consumers very little protection. Most only notify consumers when

their information is being shared, and only a few banks provide

their customers the opportunity to ‘‘opt-out’’ of information-sharing

agreements. Virtually no major institutions have adopted the more

extensive privacy protection; that is, the requirement that the bank

obtain the express permission of their customers prior to the sharing or sale of information—so-called ‘‘opt-in.’’

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Second, even when banks do have voluntary policies in place,

how are consumers to know that such policies are being adhered

to? Consider the case of Chase Manhattan, the third largest bank

in the country and one of our Nation’s most revered and storied financial institutions. The Attorney General of the State of New

York found that Chase Manhattan was violating its own publiclystated privacy policy, sharing confidential customer account information—without any notification to their customers—to a thirdparty telemarketing outfit. Eventually, Chase Manhattan avoided

litigation on this matter by entering into a consent agreement with

the Attorney General that established a tough, enforceable privacy

policy for millions of Chase Manhattan customers across the country.

Given the volume of anecdotal evidence, the numerous cases of

banks sharing or selling confidential customer information, the investigations concluded by the State Attorneys General in New York

and Minnesota, and perhaps most important, the clear, unequivocal

support of the American people for strong privacy legislation, we

are disappointed that the committee has missed an opportunity to

address the issue of privacy in a meaningful way.

Opponents of privacy legislation are clinging to the misguided

notion that the marketplace will fall apart if financial institutions

are barred from selling or sharing the most confidential information of their customers without seeking permission first.

But consider that two of the most successful banks in America,

Chase Manhattan and U.S. Bancorp, already provide strong privacy protections to their customers pursuant to consent agreements

they have entered into. Their ability to compete in the financial

marketplace has hardly been diminished. Moreover, American

banks operating in the European Community are required to seek

their customers’ permission prior to sharing their financial information. And yet their overseas operations continue to thrive. One

must ask, why shouldn’t the American customers of an American

bank have the same rights and legal protections as the European

customers of that same American bank?

Support for strong privacy legislation cuts across all partisan and

ideological lines. Two of the leading privacy advocates in the Congress, our colleague Senator Richard Shelby (R–AL) and Rep. Joe

Barton (R–TX), are also two of the more conservative members.

Groups ranging from the ACLU and Consumers Union to the Eagle

Forum and the Free Congress Foundation have formed a coalition

in support of meaningful privacy legislation.

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Momentum for privacy reform will continue to grow, and though

it appears unlikely that any substantive legislation can pass before

the adjournment of this Congress, the 107th Congress will surely

be compelled to address this issue. It is our hope that the Senate

Banking Committee will reverse course next year, and identify financial privacy as a top priority in 2001. If so, the Senate Banking

Committee will have an opportunity to address perhaps the most

critical issue facing American consumers today. We hope that opportunity is not lost.

RICHARD H. BRYAN.

PAUL S. SARBANES.

CHRISTOPHER J. DODD.

JOHN F. KERRY.

JACK REED.

JOHN EDWARDS.

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