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[Senate Report 106-360]
[From the U.S. Government Publishing Office]

                                                       Calendar No. 712
106th Congress                                                   Report
                                 SENATE
 2d Session                                                     106-360
_______________________________________________________________________

                        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

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
79-010                     WASHINGTON : 2000

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama           PAUL S. SARBANES, Maryland
CONNIE MACK, Florida                 CHRISTOPHER J. DODD, Connecticut
ROBERT F. BENNETT, Utah              JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota                 RICHARD H. BRYAN, Nevada
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska                CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania          EVAN BAYH, Indiana
JIM BUNNING, Kentucky                JOHN EDWARDS, North Carolina
MIKE CRAPO, Idaho

                   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

                            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
                                 SENATE
 2d Session                                                     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

                              R E P O R T

                             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 Securities 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.
    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 actuality 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 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.
    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 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
---------------------------------------------------------------------------
    \1\ Testimony 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.
---------------------------------------------------------------------------
    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 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.
    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.
    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.''

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 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 governments, 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 
broker-dealers 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 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, broker-dealers, 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, therefore, 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.
    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 established 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 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.
    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 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.

                   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 Gramm-Leach-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.
    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-Leach-Bliley 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 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 Gramm-
Leach-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.

      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.
    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.

 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 information-sharing.
    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.''
    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 publicly-stated privacy policy, sharing 
confidential customer account information--without any 
notification to their customers--to a third-party 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.
    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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