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[Senate Hearing 107-]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 107- 266

                       SAVING INVESTORS MONEY AND
                         STRENGTHENING THE SEC

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

  THE ``COMPETITIVE MARKET SUPERVISION ACT'' (S. 143) WHICH SEEKS TO 
REDUCE EXCESS USER FEE COLLECTIONS MADE BY THE SECURITIES AND EXCHANGE 
COMMISSION (SEC), PLACE SEC FUNDING ON A STABLE BASIS, AND PROVIDE FOR 
          PARITY OF SEC SALARIES WITH FEDERAL BANK REGULATORS

                               __________

                           FEBRUARY 14, 2001

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

77-488              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama           PAUL S. SARBANES, Maryland
ROBERT F. BENNETT, Utah              CHRISTOPHER J. DODD, Connecticut
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                ZELL MILLER, Georgia
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN ENSIGN, Nevada                  DEBBIE STABENOW, Michigan
                                     JON S. CORZINE, New Jersey

                   Wayne A. Abernathy, Staff Director

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                      Linda L. Lord, Chief Counsel

                   Rohit Kumar, Deputy Chief Counsel

                 Dean V. Shahinian, Democratic Counsel

                       George E. Whittle, Editor

                                  (ii)

                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, FEBRUARY 14, 2001

                                                                   Page

Opening statement of Chairman Gramm..............................     1
    Prepared statement...........................................    24

Opening statements, comments, or prepared statements of:
    Senator Miller...............................................     5
    Senator Reed.................................................     6
    Senator Stabenow.............................................     6
    Senator Bayh.................................................     7
    Senator Sarbanes.............................................     8
    Senator Schumer..............................................    11
    Senator Carper...............................................    12
    Senator Corzine..............................................    14
    Senator Bunning..............................................    24

                               WITNESSES

Laura S. Unger, Acting Chair, U.S. Securities and Exchange 
  Commission.....................................................     1
    Prepared statement...........................................    25
    Response to written question of Senator Sarbanes.............    38
    Response to oral questions of Chairman Gramm.................    39
James E. Burton, Chief Executive Officer, California Public 
  Employees' Retirement System (CalPERS).........................    15
    Prepared statement...........................................    30
Marc Lackritz, President, Securities Industry Association........    17
    Prepared statement...........................................    32
Leopold Korins, President & Chief Executive Officer, Security 
  Traders Association............................................    19
    Prepared statement...........................................    33

              Additional Material Supplied for the Record

Prepared Statement of Robert B. Fagenson, Vice Chairman, Van der 
  Moolen Specialists USA, Inc., Vice Chairman of the Board of 
  Directors of The Specialist Association of the New York Stock 
  Exchange, February 14, 2001....................................    42
Prepared Statement of Lon Gorman, President, Schwab Capital 
  Markets, Vice Chairman, The Charles Schwab Corporation, Vice 
  Chairman of the Board of the Securities Industry Association, 
  dated February 14, 2001........................................    43
Prepared Statement of Robert H. Forney, President & Chief 
  Executive Officer, Chicago Stock Exchange, dated February 14, 
  2001...........................................................    46
Statement of Investment Company Institute, dated February 14, 
  2001...........................................................    49
Letter to Chairman Phil Gramm from Al Anderson, Coastal 
  Securities, L.P., dated February 13, 2001......................    50
Letter to Chairman Phil Gramm from Robert I. Turner, Knight 
  Trading Group, dated February 14, 2001.........................    51
Letter to Joseph P. Morra, U.S. Securities and Exchange 
  Commission from Cameron Smith, The Island ECN, Inc., dated 
  October 12, 2000...............................................    53
Letter to Chairman Phil Gramm from Matthew Andresen, The Island 
  ECN, Inc., dated February 14, 2001.............................    55

                                 (iii)

 
            SAVING INVESTORS MONEY AND STRENGTHENING THE SEC

                              ----------                              

                      WEDNESDAY, FEBRUARY 14, 2001

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 2:30 p.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Phil Gramm (Chairman of 
the Committee) presiding.

            OPENING COMMENTS OF CHAIRMAN PHIL GRAMM

    Chairman Gramm. Let me call the Committee hearing to order. 
We have the Acting Chairman of the SEC, Laura S. Unger. I want 
to thank you, Madam Chairman for coming today.
    We have a bill before us that does two things. First, it 
seeks to change the law to assure that we always have enough 
money to fund the SEC but that the fees on new stock issues and 
transactions do not become a general revenue source for the 
Federal Government. Second, we want to establish pay parity, 
where we are paying people at the SEC wages that are 
competitive with financial regulatory agencies. I think this is 
very important. While there are few people who love Government 
less than I do, I believe that if you are going to do things in 
Government--and Government does have a role in a free society--
then you need to have the best people performing those 
functions, and having more competitive pay is very important to 
accomplishing that goal.
    Our plan today is to hear from Chairman Unger, to pose a 
question or two and then go to our panel, which is somewhat 
depleted, because the airport is closed due to fog, but we 
still have a good representation of people.
    Madam Chairman, we would be very happy to hear from you.

                  STATEMENT OF LAURA S. UNGER

                          ACTING CHAIR

            U.S. SECURITIES AND EXCHANGE COMMISSION

    Ms. Unger. Thank you very much, Mr. Chairman. It is an 
honor to appear before this Committee today regarding your 
proposed legislation. And hello to Senators Reed and Miller. I 
want to express my appreciation for this legislation, the 
Competitive Market Supervision Act of 2001, and to the 
cosponsors of the legislation for their leadership in 
developing this important bill.
    As you described, the Competitive Market Supervision Act 
addresses two critical issues facing the Commission today. One 
is the excess collections of securities fees, and the other is 
our need to match the pay of the Federal banking regulators.
    The bill, as I understand it, aims to improve the current 
system of SEC fee collections. As you know, the Federal 
securities laws direct the Commission to collect three types of 
fees: Registration fees, transaction fees, and fees on mergers 
and tender offers.
    The SEC's fee collections have been a subject of concern 
since 1983, when we first began contributing more to the 
Treasury than was required to actually fund the agency's 
operations. Congress revised this fee schedule last in 1996. 
Obviously I let it slip, having worked on the legislation, 
which was an honor. The National Securities Market Improvement 
Act, as you recall, I am sure, provided for a significantly 
reduced transaction and registration fees with the expectation 
that these reduced fees would result in collections more in 
line with the cost of funding the agency's operations.
    As you described, that has not turned out to be the case. 
As our markets have continued to expand over the last couple of 
years, so too has the amount of fees collected. At the time 
NSMIA became law, the Dow hovered near 6,000; the Nasdaq 
composite had just reached 1,200, and about 900 million shares 
changed hands on the New York Stock Exchange and Nasdaq on an 
average day. Today, our market indices have roughly doubled 
with the share volume on the NYSE and Nasdaq averaging 3.5 
billion shares a day. As a result, the aggregate fees collected 
have increased from $774 million in 1996, which at the time was 
2.5 times the amount of our budget, to $2.27 billion in fiscal 
year 2000, which is more than 6 times the amount of our budget.
    The Competitive Market Supervision Act responded to this 
situation by significantly reducing the amount of fees that 
would be collected in future years. And I thought I would just 
mention a couple of ways it does this.
    First, the bill reduces fees in a comprehensive manner. By 
targeting all three types of fees that the Commission collects, 
the bill not only reduces costs to investors and other market 
participants, but also the costs to the capital raising process 
itself. I recall you, Mr. Chairman, calling it a tax on capital 
formation--so it would address that concern. It also has the 
effect of spreading the costs of regulation among those who 
benefit from the activities of the Commission.
    Second, the bill creates a mechanism to adjust that 
transaction fee on a yearly basis and to cap the collections 
each year, which addresses many of the difficulties in trying 
to predict or project future market growth. Although we have 
certain technical concerns with this particular mechanism, I do 
think it would result in more stable and predictable fee 
collections in the future.
    Third, the bill preserves the ability for the appropriators 
to fund the SEC's operations from offsetting collections. It 
does this by shifting the fee collections from general revenue 
to offsetting collections, increasing the likelihood that we 
will receive adequate funding in the future to protect 
investors and promote the integrity and efficiency of our 
Nation's market.
    I again want to commend you and the bill's other sponsors 
and the Committee's staff for the thought and the effort that 
went into developing this bill. And again, as I mentioned there 
were some technical concerns with the bill. In particular, one 
of them was the status of the CBO's projections, which I 
understand is being adjusted to reflect more current numbers. 
This critical improvement will reduce the possibility of a 
funding shortfall in future years. We look forward to 
continuing to work productively with the Committee and its 
staff on this bill.
    More important to the agency, Mr. Chairman, is the 
component of the bill that addresses pay parity and that 
addresses our staffing crisis. Currently, attorneys, 
accountants, and examiners at banking agencies earn anywhere 
from 24 to 39 percent more than their counterparts at the SEC. 
This has had a significant impact on our staff's morale, not to 
mention their pocketbooks. The pay discrepancy makes little 
sense for a number of reasons.
    First, with the Gramm-Leach-Bliley Act of 1999, the 
Commission staff will be working toe-to-toe with many of the 
bank regulators in examining and regulating complex financial 
firms.
    Second, the demographics of our markets have changed 
dramatically. I gave you some numbers in terms of volume and 
the level of the Dow indices, but the number of investors has 
changed as well. Twenty years ago, only 5.7 percent of 
Americans owned mutual funds. Today, there are 88 million 
shareholders, representing 51 percent of U.S. households, 
holding $7.4 trillion worth of mutual funds. This is more than 
double the amount of what is on deposit in commercial banks and 
$2 trillion more in assets than are held at commercial banks. 
Clearly, we need to have sufficient staff and resources to 
carry out our mission of ensuring fair and efficient markets 
and adequate investor protection.
    Finally, we believe that pay parity is simply good public 
policy. The issues that the Commission faces today are more 
complex and difficult than ever. No single business has been 
transformed more by technology than the securities industry. 
New technology, new market entrants, and new financial products 
are reshaping our markets. No less important, our markets today 
are becoming increasingly global--a trend that most expect to 
accelerate in the coming years.
    At such a pivotal time in our markets' development, we 
cannot afford to have a serious staffing crisis. I know all 
Government agencies have to struggle to hire and retain 
professionals in a world where base salaries for first-year 
associates at top area law firms average $125,000, but our 
attrition rate is nearly double the rest of the Government 
average. Over the last two fiscal years, we have lost 30 
percent of our attorneys, accountants, and examiners, including 
a number of our most experienced and skilled professionals who 
have left for better paying jobs. If this trend continues 
because of our inability to pay employees the money they fairly 
deserve, the Commission's mission will be severely threatened.
    The Commission greatly appreciates the Committee's 
recognition of the staffing crisis that we currently face. 
Together with the authorization and appropriation levels 
sufficient to make pay parity a reality, the bill should go a 
long way to ensuring that the Commission can continue its 
tradition of excellence as our securities markets enter the 
21st Century.
    In conclusion, this legislation is an important step toward 
reducing and reasonably allocating fees on market participants. 
It also attempts to ensure stable, long-term funding for the 
Commission, including pay parity for the Commission's staff. We 
look forward to working with the Committee and its staff on the 
bill, and I appreciate your indulging me a few extra minutes, 
Mr. Chairman.
    Thank you.
    Chairman Gramm. Well, Madam Chairman, let me thank you for 
your testimony. I have a chart over here on the left that shows 
the same thing you said, and that is, as you see the changes in 
the slope, on several occasions we have had legislation to try 
to limit the growth of fees to what we need to fund the SEC.
    This is a classic user fee. We tell people that these fees 
are going to be used to fund the SEC's operations from which 
they will benefit, so they are paying for what they get.
    But what has happened--as a result of the dramatic changes 
we have had in the market--is that while there has never been 
any question about the intent of Congress, these fees have 
become a general revenue source. The problem is we are now 
collecting six times as much as we need to fund the SEC, and 
this has become a tax on every saver, every investor, every 
mutual fund, every teacher retirement in the country.
    I have been trying to come up with figures to use as an 
example. Although it is virtually impossible to get inside 
mutual funds and look at this, just take some averages that 
might be applicable to a college professor or to an auto 
worker, say, who has an investment account and contributes to 
it each month for 45 years. Given that they are paying an 
average share of these excessive fees on trying to build up a 
retirement, they would pay $1,304.55 during their working 
lifetime in excessive fees that intended to fund the SEC but, 
in fact, now have become part of the general revenue stream of 
the Government.
    If that individual teacher invested that extra money at 6 
percent instead of paying these fees, they would have at 
retirement an additional $5,800.39. Or for a couple, if you had 
two teachers who were married who used a savings program, that 
would be worth $11,600 to them at retirement. So the point is, 
these fees, not on any individual transaction, but over time, 
become a fairly substantial tax burden as people try to 
accumulate wealth.
    Finally, I would argue that if you define the efficiency of 
a tax as the amount of money you collect relative to the cost 
you impose on society, this has to be one of the most 
inefficient taxes, because you are taxing the initial issue of 
stock, you are taxing transactions.
    We have pay parity for economists at the SEC. And I did not 
warn you in advance, so you may not have it. If you don't, just 
send it to me. But it would be interesting to compare the 
retention rate of economists at the SEC relative to lawyers.
    Ms. Unger. You are correct. I have everything but that. I 
have attorneys, accountants, and compliance examiners.
    Would you rather have Mr. McConnell, our Executive 
Director, answer that?
    Chairman Gramm. Why don't you just send it to me?
    Ms. Unger. Okay.
    Chairman Gramm. The point is, we have an anomaly in that 
the SEC actually has pay parity in one area but not in others. 
I think it is very important, as I told Chairman Levitt, this 
is something we do strongly support. Senator Sarbanes and I 
tried to put pay parity in our end-of-the-year bill in the last 
Congress. But there was an objection in the House, so it did 
not happen.
    I think it is good to pair pay parity in this bill along 
with a mechanism to guarantee we always have the money needed 
to fund the SEC, but not have a system which generates these 
huge, unintended levels of revenues and fees.
    I look forward to working with you, and I appreciate your 
support of this bill.
    Ms. Unger. Thank you.
    Chairman Gramm. Senator Miller.

                COMMENTS OF SENATOR ZELL MILLER

    Senator Miller. I am also proud to be a cosponsor of this 
bill. You have mentioned the two main parts of the bill that I 
think are very worthy goals, and I am glad that I can support 
it.
    You touched on this in your remarks, but I wish that you 
would amplify a little bit about the ramifications from an 
international perspective that you are concerned about that a 
lack of pay parity raises.
    Ms. Unger. We have a surplus of vacancies, and we cannot 
attract the people that we need to take care of our domestic 
agenda. And as technology brings us to a more global 
marketplace, we need some expertise and some very specialized 
people to consider more closely those global issues. We do have 
some limited staff persons devoting time to that now, but we 
don't really have sufficient resources to spend as much time on 
that as I believe the agency needs to, and as much of the rest 
of the world would like.
    Senator Miller. Thank you. I know you could talk a lot 
about this--but briefly, could you just sum up how you think 
this bill protects the integrity of our securities markets?
    Ms. Unger. I was a staff person at the SEC right out of law 
school. At that time, pay parity was an issue. I guess it was 
12 or 13 years ago. So it has been something that has been 
discussed for a long time.
    People don't work at the SEC because of the money, 
obviously, but we see people leave every day because they 
cannot afford to work there any longer. To the extent that we 
have compromised the level of people we can attract and retain 
at the Commission, it compromises our ability to carry out the 
function of the agency and the mission of the agency, which is 
to ensure investor protection and a fair and efficient 
marketplace.
    We are being challenged daily by what is going on in terms 
of technology and how it is impacting our market, market 
structure, retail online trading. . . . There are a whole host 
of issues--such as the global marketplace which was mentioned 
earlier--that we need to tackle today. Yesterday would have 
been even better.
    And so, to the extent we can be fully staffed and have the 
best people we possibly can to do that, everybody will be 
better off. As I mentioned, there are a significant number of 
households that are invested in the U.S. securities markets.
    Senator Miller. Thank you.
    Chairman Gramm. Senator Reed.

                 COMMENTS OF SENATOR JACK REED

    Senator Reed. Mr. Chairman, Ms. Unger, I want to thank both 
of you. There has always been an issued raised up here to what 
extent that these fees are passed through to the ultimate 
consumers, and as a result, to what extent the relief will be 
passed through to ultimate consumers. Can you comment on that 
or any studies you have or any anecdotal evidence?
    Ms. Unger. I have what I think is a combination of 
anecdotal evidence and industry statistics. I am not exactly 
sure of the source other than it was cited last year at this 
hearing. The percentage that was cited is that 87 percent of 
the Section 31 fees on New York Stock Exchange transactions are 
passed on to the individual investor, and approximately 82 
percent of Section 31 fees on Nasdaq securities are passed 
through to the individual investor.
    I read all of the testimony for the witnesses that follow 
me today, and the Securities Industry Association testimony 
spent most of the time discussing the cost to the investor of 
these fees and the fact that reducing the Section 31 fees would 
result in significant savings to investors. I presume, then, 
that the industry intends to pass this cost savings, should the 
bill become law, on to retail and other investors.
    Senator Reed. You are more familiar with the fee structure 
than I am. But typically, this is not itemized, any type of fee 
that is charged to a consumer, is it? I have heads shaking yes. 
Maybe I should wait for the industry representatives to come up 
here.
    Ms. Unger. They are behind me. I cannot see them.
    Senator Reed. There is a lot of head twitching going on in 
the audience.
    Ms. Unger. On the confirmation statement, there is a line 
that says ``SEC fees paid.'' So there is some disclosure.
    Senator Reed. Another quick question. There are provisions 
in which the fee schedule has to be adjusted based upon 
covering your revenues as we go forward. We will estimate how 
much is required, et cetera. The SEC is involved in that 
readjustment process?
    Ms. Unger. Well, my understanding is the estimate is based 
on the CBO's projections and the cap and floor have a role in 
determining exactly what the level is. The only thing that is 
uncertain is what happens after 2011, because we are capped at 
I think it was $884 million. I think that is right. Is that 
right? $884 million. So the question then will be whether our 
fees will be the exact amount of our appropriation. I think we 
would like to be involved in that very much.
    Senator Reed. Thank you.
    Thank you, Mr. Chairman.
    Chairman Gramm. Senator Stabenow.

              COMMENTS OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman.
    Commissioner Unger, you have spoken about I think and made 
a very compelling case for allowing the SEC to better compete 
for qualified professionals. And I notice that in your 
recommendations, you have laid out the need for $71 million per 
year in order to be able to accomplish your goals. I wonder if 
you could tell us how you reached that number and in this tight 
labor market whether or not, in fact, you feel that will allow 
you to reach the goal?
    Ms. Unger. Well, certainly we would take more if offered. 
But my understanding is that the number is based upon achieving 
pay parity agency-wide as is done at the FDIC. But those are 
where the numbers are in terms of the projections of the $70.9 
million cost.
    Senator Stabenow. It is your feeling based on experience at 
this point in reaching out and recruiting that would solve the 
problem?
    Ms. Unger. I think it would help substantially. I sent an 
e-mail to the entire Commission when I was designated Acting 
Chairman, and as part of that, being a former staff person who 
is now in a position to perhaps help, I mentioned that I would 
continue to work for pay parity, and I cannot tell you how big 
a stack of e-mails I have gotten in response. It is something 
that is very much talked about, especially since this 
legislation made it seem that we were getting very close to its 
being a reality. And it is something people would be very, very 
happy with.
    It doesn't sound like a lot of money, but when you are 
talking about the difference between being able to afford your 
children's school tuition and staying at a Commission where you 
love the work, it is a huge difference.
    Senator Stabenow. Okay, thank you.
    Thank you, Mr. Chairman.
    Chairman Gramm. Thank you.
    Senator Bayh.

                 COMMENTS OF SENATOR EVAN BAYH

    Senator Bayh. Thank you, Mr. Chairman. I had thought 
briefly about creating a stir today by announcing that Bayh 
agrees with Gramm on tax cuts.
    [Laughter.]
    But I did not want hearts to start palpitating around the 
Capitol.
    Chairman Gramm. Well, you can go ahead.
    [Laughter.]
    Senator Bayh. I will, however, say----
    Ms. Unger. Valentine's Day.
    Senator Bayh. That is right.
    Senator Schumer. It would be a better story if Gramm agreed 
with Bayh on a tax cut.
    [Laughter.]
    Senator Bayh. Thank you. I agree with that, Senator 
Schumer. I will say that I agree with you when it comes to 
reducing fees for the SEC, Mr. Chairman. And Ms. Unger, I want 
to thank you for your testimony today and for your good work 
for the Commission and just say it seems to me as if this is an 
opportunity to have a win-win situation. It is good for 
consumers, not only because it will reduce their cost of 
transactions, but also increase the protection afforded to 
those transactions.
    I know I probably reflect the experience of all of us up 
here when we hire good, dedicated staff people. And it is so 
difficult to see them have to choose between doing right by 
their families and continuing to serve the public that they 
love. So if we can help to make your task a little bit easier 
in that regard, I think we should.
    Mr. Chairman, I, too, am pleased to be a cosponsor of this 
legislation. I hope we can get it passed. I think we can do it 
in a way that is fiscally responsible and achieves two 
important public policy ends for the people of our country.
    Ms. Unger. Thank you.
    Senator Bayh. Thank you for your presence.
    Chairman Gramm. Thank you, Senator Bayh.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman. First, 
I want to welcome Laura Unger back before the Committee now as 
the Acting Chairman of the SEC. And as I have done in the past, 
remind all of the staff that are sitting behind us here that 
one day they can be the Acting Chairman of the SEC.
    [Laughter.]
    Ms. Unger. I might prefer to be behind you. Thank you.
    Senator Sarbanes. We remember your work here on the 
Committee with great appreciation. I am delighted to see you.
    As Chairman Gramm indicated, we worked together in an 
effort to get the pay parity for SEC employees, and I strongly 
support it, and I think the SEC ought to have it.
    I don't want to rain on the parade, and I know where the 
parade is going because it is marching through here at a rapid 
clip. But I think out of an abundance of responsibility, if 
that is the way to put it, I should point out that these SEC 
fees are going to be reduced by about $1 billion in 1 year, $8 
billion in 5 years, and $14 billion over 10 years. So it is not 
an inconsiderable sum of money.
    I appreciate the argument that says, well, they were put 
into place under a certain rationale and we should not drift 
away from that. But Jack Lew, the OMB Director, pointed out to 
the Committee last year that, and I quote him:

    Any additional reductions 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.

    I just simply want to note for the record, this is not cost 
free. And since it will in effect impact the fiscal situation, 
we need to recognize that.
    Now, of course, the individual cost of these transactions 
is tiny, although you can accumulate them over time and come to 
a figure that in and of itself is not tiny. I don't think it is 
deterred stock market activity. In fact, according to the CRS, 
in 2000, pretax profits in the securities industry reached $20 
billion, which was an increase of 59 percent from a year 
earlier when pretax profits totaled $12.6 billion, and 1999 was 
a 26 percent increase over 1998. I know the industry doesn't 
want these fees and they are obviously going to be markedly 
reduced. But the industry seems to be doing quite well, if I 
may make that observation.
    I have two substantive things I want to pursue. One is the 
statute which lays down the benchmark about these fees, which 
provides that the Commission shall in accordance with this 
subsection collect registration fees that are designed to 
recover the cost to the Government of the securities 
registration process and costs related to such process 
including enforcement activities, policy and rulemaking 
activities, administration, legal services, and international 
regulatory activities.
    I understand that there are a number of Federal agencies 
with which the enforcement division of the SEC cooperates on 
their investigations, which themselves therefore incur costs in 
meeting this statutory mandate of the costs related to such 
process including enforcement activities. Is that correct?
    Ms. Unger. Yes.
    Senator Sarbanes. So if we were really trying to define on 
a straight pass-through, as it were, those costs probably need 
to be entered into the calculation.
    Ms. Unger. The costs of cooperating with the other 
agencies?
    Senator Sarbanes. No, not your cost. The cost of the other 
agencies from cooperating with you and carrying out your 
enforcement activities.
    Ms. Unger. Well, I think one of the agencies we cooperate 
with most extensively is the Justice Department, which comes 
out of the same Commerce-State-Justice pool of money. They 
generally conduct a criminal investigation, whereas we conduct 
a civil investigation. If we had criminal authority, certainly 
we would be pleased to conduct both investigations. But in 
point of fact, generally they pick the most egregious cases, 
and there has been a lot of competition among the different 
attorneys general, State and Federal, in terms of who has 
jurisdiction over the securities cases, particularly in New 
York.
    Senator Sarbanes. But if the rationale of the fees, which 
is now argued we should adhere to as provided in the statute, 
so we do not make it a source of money for the general fund--if 
the rationale for the fees is to recover the cost to the 
Government--not to the SEC, to the Government--and I am reading 
from the statute, of the securities registration process and 
costs related to such process, including enforcement 
activities, wouldn't it be reasonable to calculate the costs 
which these cooperating agencies incur in order to help the SEC 
carry out its responsibilities?
    Ms. Unger. With all due respect, I don't think I agree with 
that. The SEC is a law enforcement agency. I think we are 
equipped to carry out our enforcement actions with or without 
the Justice Department. Again, we have different remedies 
available to us. So to the extent that we use our full array of 
remedies, we are carrying out our responsibility as charged by 
Congress in the 1934 Act, which is where we come from, which is 
where we were chartered.
    To the extent the Justice Department has taken a keen 
interest in prosecuting white collar crime cases to make a 
bigger point and provide greater deterrence and have a greater 
array of cases and expertise in their offices, we do work 
together. We give the Justice Department in New York a 
substantial sum of money in order to carry out our enforcement 
activities. So, I think what you are talking about already 
takes place.
    Senator Sarbanes. Now, that is an interesting point. Are 
you asserting that the other agencies are reimbursed by the SEC 
for any activities they carry out in the course of costs 
related to the enforcement activities related to the 
registration process? Is that your standard practice to 
reimburse all these various agencies? Not just Justice, but 
Treasury, FTC, and so forth and so on?
    Ms. Unger. For the entire time I worked in the enforcement 
division and the entire time I have been a Commissioner, I have 
the list that I think you are referring to. I have not seen a 
large number of cases where we have cooperated with these 
agencies to the extent where they would need to be reimbursed. 
Again, we are a law enforcement agency. We have a different 
mission than the bank regulators who are protecting safety and 
soundness.
    Senator Sarbanes. Does the SEC think that their budget is 
where it should be, or does the SEC think that your own budget 
should be larger?
    Ms. Unger. I think we had requested $567 million for our 
budget this year, and I believe we are getting in the area of 
$438 million, possibly $467 million. There is always room for 
expansion.
    But to the extent that we can, back to your other question, 
work with the Justice Department in delivering our efforts 
against fraud and making our point stronger, then we have 
devoted resources to that in terms of our budget.
    Senator Sarbanes. Mr. Chairman, let me just make this 
observation and I will close.
    Chairman Gramm. Sure. Go ahead.
    Senator Sarbanes. First of all, I think you had left the 
room. I see where the parade is going, and I appreciate that 
despite Jack Lew's warnings and others about the broader fiscal 
impact that, you know, this is proceeding down that course. 
However, I do think that if the rationale for doing that is to 
adhere to this link-up, that two things need to be very 
carefully considered. First, what is an appropriate level of 
budget for the SEC itself if we are going to drop the fees so 
we don't go down so far that we are not able to meet providing 
an appropriate SEC budget? Second, the extent to which we need 
to factor in other costs incurred by the Government in order to 
meet the charges or the responsibilities set out under the 
statute.
    Both of those I appreciate are a much lower order of 
magnitude with respect to the bigger question. But 
nevertheless, they both go to effectively carrying out the 
securities laws, and I think we need to keep that very much in 
mind in terms of what levels we go to.
    Chairman Gramm. Senator Sarbanes, I think that is something 
we should look at and we will try to look at it. Let me just 
ask a quick question related to this. Now the SEC imposes 
fines?
    Ms. Unger. That is correct.
    Chairman Gramm. Where does that money go?
    Ms. Unger. Into the general revenue.
    Chairman Gramm. I think that in terms of law enforcement, 
we have to look at the fines and try to get a measure. If you 
are paying the U.S. Attorney in New York for their 
participation, that is covered. To the extent that it is not 
covered, I think it is a legitimate question to look at. But we 
also have to take into account fines that you are collecting as 
part of the process.
    Ms. Unger. Just for a point of clarification, though, we do 
not generally refer cases to these agencies. They refer cases 
to us. We are the ones who carry out anything relating to the 
Federal securities laws. It would not be the Food and Drug 
Administration or anything like that.
    To the extent that they have a lead or a tip or something 
that they think we should pursue, yes. And to the extent that 
they might have some particular expertise in a case, then I 
would assume yes also. But it is really the exception more than 
the rule. We have tried to work more with the States and the 
SRO's to avoid duplicating enforcement cases and to make 
everybody's resources more effective.
    Chairman Gramm. I assume you would do the same. That if you 
saw something that looked criminal outside the securities laws.
    Ms. Unger. Absolutely.
    Chairman Gramm. It would be helpful to the Committee if you 
would get for us an annual, maybe go back 10 years of what the 
aggregate level of fines have been on an annual basis. I think 
that would help us.
    Senator Schumer.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. And I am part of 
the parade as the lead democratic sponsor on this bill. I would 
just make an observation about the bill before I ask a 
question.
    It is true what Jack Lew says in terms of money going to 
one fund or another. But if we wanted to tax securities 
transactions directly, then we should do it. In these days of 
international competition, where we really run into danger that 
the place where securities is traded ends up in London or 
Frankfurt or Hong Kong, or somewhere else, I think we should be 
really careful about that. That is one of the reasons I support 
this bill.
    I think later Mr. Forney will testify that he believes that 
this could be a real albatross in terms of our American 
market's renewed competition against foreign markets. And that 
is another reason to be for this proposal.
    I have one question on a somewhat tangentially-related 
matter, to be honest, but I would like your view while you are 
here. I have heard a lot of griping on Wall Street among 
traders, specialists, et al., about decimalization. In fact, I 
think the New York Stock Exchange is having a meeting to 
discuss it Friday. I, for one, was never sold on the great 
merits of decimalization, given some of the problems it might 
create.
    Are you content with how the implementation is going? Do 
you see any problems, particularly with finding sticking 
points? Is the consumer benefiting from decimalization the way 
he and she were supposed to?
    Ms. Unger. I am not sure if they are benefiting the way 
they were supposed to, and I think certainly there needs to be 
a little more time before we can definitively say what the 
impact is.
    There are two things that I have observed in the course of 
the implementation of decimals or decimalization. One is the 
multiple price points that decimals produces could result in 
higher transaction costs, I believe, for a retail investor. The 
other is what institutional investors are calling being 
pennied. That their orders are being stepped in front of by 
specialists or market makers at only one cent, when it is a lot 
cheaper to do than it was in the sixteenth environment.
    I think those are two issues that I will continue to look 
at closely. We have had a number of roundtables on decimals, 
and we are planning to have another one, when it is an 
appropriate time, probably after Nasdaq implements their 
decimals program, and we will report back to you.
    Senator Gramm. If the Senator would yield, I just want to 
tell my colleagues, we do have a vote on. It is my 
understanding from the cloakroom that this is going to be an 
extended vote; that they are holding it for people who are off 
the Hill. I would suggest that we have the two Members who have 
not questioned go ahead and do their questioning. Senator 
Corzine, you will be the last questioner on this panel. Then 
what I would like to do is just recess the Committee at that 
point and I would have Senator Corzine do that, and then our 
second panel can come up, and as soon as I get back, we will 
start that second panel.
    Senator Schumer. I want to do one follow-up, Mr. Chairman.
    I guess it is fair to say right now that decimalization or 
decimals, I guess is the easier way to put it, is not a 
smashing success. There are some questions out there about how 
it is working?
    Ms. Unger. Again, I think we need to take more time to see 
exactly what the impact will be. I don't know how smashing a 
success it was; it would depend on your expectations, I 
believe. I think it is fine, and there are some issues that we 
need to look at closely to make sure it is better.
    Senator Schumer. Thank you, Mr. Chairman.
    We are paralyzed.
    Ms. Unger. Who's in charge?
    Senator Carper. Why don't we pass something while we are 
here, Jon?
    [Laughter.]
    Ms. Unger. This bill would be okay.

              COMMENTS OF SENATOR THOMAS R. CARPER

    Senator Carper. Some of us are newer Members around here 
than others. In your testimony, you speak of your gratitude to 
the Committee for their understanding of the challenges that 
you face with respect to compensation and being able to attract 
and retain qualified staff. I am new on this side of Capitol 
Hill, and would appreciate it if you would just take a minute 
or so, for my benefit, and talk to me about the difficulty you 
have had in attracting and keeping good people.
    Ms. Unger. I mentioned in my oral testimony that while most 
of the Government has experienced about a 7 percent attrition 
rate, the SEC has experienced a substantial amount more, and I 
do have a chart actually, which if you want me to can be made a 
part of the record.
    Senator Schumer. Without objection.
    Ms. Unger. I would be happy to.
    For fiscal year 2000, we lost 17.47 percent of our 
attorneys while the rest of the Government lost about 6.7 
percent. Again, we are seeing a large number of the attorneys 
who are specialized in the area of securities law move 
sometimes to other governmental agencies, which are paying, as 
I said, 24 to 39 percent more. Certainly it is also hard to 
compete with what a lot of the law firms are paying for first 
year salaries.
    I did say that I do not think people work at the SEC for 
the money, and obviously, no one who works in the Government 
works for the money. But, when there is such a disparity as 
exists between the SEC and the rest of the Federal financial 
regulators, not only do we have a hard time attracting the 
talented and qualified people that we need, there is a morale 
problem with the people who are at the agency in terms of 
seeing what their colleagues elsewhere are making, and I 
wouldn't say they are feeling like second class citizens, but, 
you know, we feel that we are a very qualified agency and that 
we have a very important mission to fulfill. And so to be 
compensated accordingly would mean a great deal to these 
individuals who are there now, and also it would really help 
attract additional talent. We have a number of vacant positions 
open now for that very reason, and I have the number here. We 
have a total of 3,037 full time employees, but we have 3,285 
slots. We are having a hard time filling those slots.
    Senator Carper. Help me again with the numbers in terms of 
the impact on the budget, revenues to the Federal Government 
that the passage of this bill would create. Did I hear someone 
say $14 billion over the next years? Did someone say that?
    Ms. Unger. Senator Sarbanes was talking about the fact 
that, right now, the offsetting collections that the Commission 
generates are substantial, and we are funded out of offsetting 
collections. A portion of our fees go into general revenue, and 
a portion go into offsetting collections. At the end of this 
bill cycle, we will be fully funded from offsetting 
collections, and none of the fees will be going into general 
revenue. And so we are going from substantial amounts of money 
into general revenue to eventually zero.
    But that is at the out years of this bill. This bill goes 
through 2011, and I did mention to Senator Sarbanes, after 
2011, we will be fully funded at an authorization level set by 
this Committee that would equal the amount of offsetting 
collections, so we would have to set our fees according to our 
authorization.
    The objection is that the money, the excess fees that we 
have been producing since 1983 will no longer be going into the 
general pot of money for Commerce-State-Justice that have been 
used to fund, in part at least, some other programs.
    Senator Carper. Right. I don't recall exactly how many 
other Committees there are, but there must be a dozen or so 
Committees, and if every Committee would pass legislation that 
would change, really net the revenue to the Federal Government 
by $14 billion over the next 10 years, that would be $140 
billion.
    My sense in listening to the questioning of some of the 
other Members is that this bill's likely to be adopted, and 
likely to be passed. My hope is that we are the only Committee 
that tries this because, if not, we are going to have a much 
smaller piece of pie to use for a tax cut than a lot of people 
are talking about. That is not your worry here, but that is 
something that needs to be said on the record.
    Ms. Unger. It is a concern. I think the optics of the bill 
from that perspective make it somewhat difficult but if you 
consider that this is a tax on capital formation and investors, 
then it is a tax cut in a different way. If you go back to the 
statutory language that sets our fees to cover the costs of 
securities transactions and preventing fraud and everything 
else, then there is certainly an equity argument to be made.
    Senator Carper. If even eight Committees were to pass 
legislation that had a similar kind of impact, ironically, that 
would add up to the same amount of money that we are talking 
about using on these extenders, the R&D tax credit and a 
variety of others that need to be extended that are about to 
expire, so it adds up to be real money, we have to be mindful 
of it.
    Ms. Unger. I wonder how many other agencies bring in so 
much in terms of revenue?
    Senator Carper. I honestly don't know. Good question. That 
having been said, you mentioned that most people don't work 
here in Government for the salary. This guy does. And we are 
delighted that he is here.

              STATEMENT OF SENATOR JON S. CORZINE

    Senator Corzine. Let me just say this is like most of my 
meetings at Goldman, Sachs. Everybody just left.
    Also I will be recusing myself on this because there might 
be the perception of misinterpretation of why I might be voting 
for something. In addition, I want to make a couple of 
observations and make them quickly, because we have to go vote.
    I embrace this pay equity element enormously. I think the 
kind of turnover rates that you cited, 16 and 17 percent and 
the number of vacancies is a real potential tax on investors 
from the lack of ability to fulfill the mission of the SEC, 
which I have great admiration for.
    I think the point that Senator Sarbanes was drawing out 
with regard to the appropriate level of the budget to fulfill 
the SEC's mission effectively for investor protection and to 
make sure that you carry out all the various missions, I think 
could be questioned whether we have that set right, the $100 
million that you talked about relative to your request versus 
appropriations and whether there is timely and effective 
ability to deliver on the mission just because of the lack of 
resources.
    Some of it because of parity, some of it just because of 
maybe there is not as broad an investment in the role of the 
SEC that I think might be necessary.
    Occasionally I felt that when audits or other things were 
going on from firsthand experience.
    If I look at that chart, it looks like some of the budget 
projections I also think I have seen at an old firm that I 
worked at and I would have called that a trees grows to the sky 
chart. I question because if you look at where SEC fee 
collections are relative to the budget, up until about 1995, 
some gap, but not the kind that produce $14 billion over 10 
years, we have had an extraordinary period in securities 
markets both in the underlying transactions and the new issue 
market mergers. And one could wonder whether we have gauged 
this properly for a more normalized event, and I certainly 
wouldn't plan my business looking at a chart like this without 
wondering whether historical relationships might be more 
appropriate and looking at the 1995 issue might be one of 
those.
    Finally, just for all of those that would make the case 
that sort of what it is turned into, a transaction tax is an 
albatross, I wonder why we have had so much volume occur in the 
marketplace, and whether there is sometimes stretching of what 
the argumentation would be.
    As I said, I am recusing myself, and I probably would come 
out very favorably in that, but I do think there are some 
observations in here about carrying out the mission that go 
beyond the parity question.
    And if you don't mind----
    Ms. Unger. Do you want me to respond to any of that?
    Senator Corzine. I would love to except they tell me I am 
going to miss a vote. Then I won't be back here to hassle you 
the next time.
    Ms. Unger. Certainly if you have any questions that you 
want to submit, I can send you a written response.
    Senator Corzine. Right. I really do think you need, if I 
had the time to be here, I would like to deal with, we have 
gone through a clearly attractive period in securities markets 
and is the adjustment, does it take into account the 
consideration that you might have a dramatic falloff in volume 
which might not be supported over a longer period of time, 
which I think any practical business approach to this would 
want to see one do, not just collect the dough for the general 
revenues.
    Ms. Unger. The short answer is yes. There is a mechanism 
built in to take care of that.
    Senator Corzine. Good.
    Ms. Unger. Thank you.
    Senator Carper. The Committee is in recess. We did it 
together.
    Senator Enzi [Presiding]. We will begin again, and I will 
begin by welcoming the second panel. We will change the order 
just a little bit because of airline connections.
    First will be Mr. James Burton, who is the CEO of 
California Public Employees Retirement System. Then Mr. Marc 
Lackritz, who is the President of the Securities Industries 
Association and then Mr. Leopold Korins, who is the President 
and CEO of Security Traders Association.
    Mr. Burton.

                  STATEMENT OF JAMES E. BURTON

                    CHIEF EXECUTIVE OFFICER

    CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM (CalPERS)

    Mr. Burton. Thank you, Mr. Chairman and Members of the 
Committee.
    My name is James Burton. I am the Chief Executive Officer 
of CalPERS. I do appreciate the opportunity to testify before 
the Committee today. We are the largest public pension fund in 
the United States with assets of $165 billion. Our plan has 
864,000 active workers and 356,000 retired employees. We pay 
approximately $4.8 billion in annual CalPERS retirement 
benefits.
    We administer this plan on behalf of 2,480 governmental 
entities in California. We have a well-diversified portfolio 
and we are represented in every conceivable asset class.
    I am here to support S. 143, the Competitive Market 
Supervision Act. We believe this measure would benefit large 
and small investors alike by reducing the cost of securities 
transactions that both types of investors must pay. We also 
support S. 143 because it would enhance the ability of the SEC 
to attract and retain expert staff that is responsible for 
protecting investors and ensuring accountability and integrity 
in our markets.
    We understand that the Commission staff turnover rate is 
considerably higher than that of other financial regulatory 
agencies. The Committee heard testimony last year that the 
attrition rate at the SEC is about 13 percent, while the 
Federal Reserve Board and others only lose about 5 percent of 
their staff each year.
    Today, Acting SEC Chair Laura Unger told the Committee that 
the Commission has lost 30 percent of its attorneys and 
accountants over the past 2 years. As a large institutional 
investor, CalPERS is troubled by this kind of turnover of the 
SEC's professional staff. As a CEO, I can understand the added 
pressure it places on other staff members who must pick up the 
slack, even as essential responsibilities are unmet. CalPERS is 
pleased to support a measure that would help the SEC solve this 
problem.
    We also urge the Committee to be certain that there is a 
stable funding source for the SEC. This, too, is crucial for 
the agency to attract and retain talented people.
    Next, I would like to address the securities transaction 
fees reduction element of S. 143. Our internally managed U.S. 
equity portfolio turnover rate is approximately 10 percent a 
year. This lower-than-average rate is based on our passive 
investment strategy which seeks to replicate the Wilshire 2500 
Index.
    We also allocate a portion of our U.S. equity portfolio to 
external managers whose turnover rate is much higher. Because 
we do not trade as frequently as mutual funds, or even as often 
as other public pension plans, our savings and transaction fees 
from S. 143 won't be as great as others. It will be about 
$342,000 annually. But what is important to us is that this 
becomes essentially reduction in taxpayer costs.
    Let me explain. CalPERS' actuaries make a number of 
projections to determine how much the plan needs in 
contributions today in order to pay beneficiaries in the 
future. While employee contributions remain constant, employer 
contributions are adjusted based on actuarial estimates. To the 
extent CalPERS' administrative costs are reduced, through fee 
reductions, for example, actuarial guidelines require employer 
contributions to be decreased. Dollars not spent on 
administrative costs are invested. For California taxpayers who 
fund State and local public agencies, these savings translate 
into a smaller tax burden.
    Mr. Chairman, the CalPERS' Board of Administration passed a 
resolution in support of last year's bill and remains strongly 
supportive of both transaction fee reductions and SEC pay 
parity.
    I am pleased to testify in support of S. 143 and urge the 
Committee to move the bill as quickly as possible. Thank you.
    Senator Enzi. Thank you for providing your testimony. I 
know that you do have to leave. We appreciate the effort that 
you have gone to, to help us build this part of the record, 
which is a crucial part of getting any of the bills passed.
    I am sure that there will be some questions for you, but we 
will get those to you, if you would respond to them and get 
them back to us, we would appreciate that so that they can be a 
part of the record.
    Mr. Burton. Yes, sir. Thank you for the accommodation and 
we will respond fully for the record.
    Senator Enzi. Thank you.
    Mr. Lackritz.

             STATEMENT OF MARC LACKRITZ, PRESIDENT

                SECURITIES INDUSTRY ASSOCIATION

    Mr. Lackritz. Thank you, Senator Enzi.
    If I could start off by borrowing a line from the old 
broadway play, ``I am Not Rappaport,'' and I am not Gorman. 
Unfortunately our witness today was going to be our Vice 
Chairman of SIA, Lon Gorman, who is a Vice Chairman of Schwab 
and President of Schwab Capital Markets, and is an expert in 
trading and market structure. He is our Vice Chairman and also 
a Cochairman of our Market Structure Committee. With the 
closing of the airports, unfortunately his plane was diverted 
back to New York, so he sends his apologies. Unfortunately, you 
don't have the varsity in front of you today, but I will do the 
best I can to testify in terms of our position on this.
    We strongly support S. 143, the Competitive Market 
Supervision Act of 2001, which was recently introduced by 
Senator Gramm and Senator Schumer. We believe the time has come 
for Congress to reexamine the issue of SEC fees, because the 
basic assumptions underlying the current fee structure have 
changed dramatically. The fees were implemented several years 
ago to fund the cost of regulating the securities markets-- 
essentially to ensure that the SEC had enough funding to 
adequately perform its regulatory duties, hire and retain the 
best staff, and cover the agency's operating expenses. Today, 
of course, the fees collected exceed that cost by 500 percent 
or more. It is time to bring securities transaction fees back 
in line with the cost of regulation.
    Whenever an individual sells shares, the brokerage firm 
puts a line item on the trade confirmation for securities 
transaction fees. As you know, the fee is charged on sell 
transactions, so that every time an investor sells shares, a 
debit appears on their confirmation reflecting the amount of 
the fee. To the individual investor, the fees may seem 
relatively insignificant-- on a small trade, they can amount to 
just pennies, maybe a few dollars on a larger trade. But do 
they ever add up, Mr. Chairman. Last year, so-called Section 31 
fees and other securities transaction fees provided an 
estimated $2.27 billion in revenue to the Federal Treasury. The 
budget of the SEC, however, was $377 million, meaning that 
investors paid $1.9 billion more in fees than was necessary 
just last year.
    The securities industry strongly supports adequate funding 
of the SEC. Our U.S. capital markets are the envy of the world, 
in no small part because we have the most sophisticated and 
professional regulatory system in the world. Proper oversight 
of the securities markets is absolutely critical to investor 
confidence. The industry agreed several years ago to pay 
additional transaction fees in order to provide Congress with a 
more reliable source of funding for the SEC. But no one 
expected the staggering growth in market activity in the years 
since 1996 legislation that established the current fee system. 
Trading volume on the New York Stock Exchange and on the Nasdaq 
has roughly doubled in the last 4 years, sending transaction 
fees skyrocketing. These securities transaction fees should 
continue to be collected to the degree necessary to ensure that 
the SEC is fully funded and able to carry out its very 
important responsibilities.
    But it is clearly not in the interest of investors for 
these fees to so grossly surpass the cost of regulation. These 
fees drain capital from the markets, and from the pockets of 
individual investors. Last year, that surplus amounted to $1.9 
billion that could have been reinvested to stimulate economic 
growth and create jobs. It is money that could and should 
remain in the hands of investors.
    It is important to point out that a reduction in securities 
transaction fees will benefit the broad spectrum of investors. 
As recently as 1992, about one-third of all U.S. households 
owned stock, either directly or indirectly. Last year, that 
number had risen to roughly half of all U.S. households 
invested directly or indirectly in the markets. Every single 
American who owns stock, directly or indirectly, through their 
investments in mutual funds and pension funds pays these fees, 
as was pointed out earlier. Regardless of their investment 
choices, reducing the fee would benefit investors of all types.
    Mr. Chairman, this legislation is really the right answer. 
It brings the fees more in line with the actual costs of 
regulation, and ensures that investors are not taxed beyond 
that which is necessary for that purpose. It ensures that the 
SEC will have adequate funding, not only this year, but into 
the future, to perform its critical functions. And, 
importantly, it ensures that the SEC can recruit and retain the 
best-qualified regulators by creating pay parity between the 
SEC and Federal financial regulators. The SEC is losing top 
staff at an alarming rate to the private sector, as well as to 
other financial regulatory agencies that can offer much better 
pay. Experienced and well-qualified, competent and 
sophisticated regulators are critical to the long-term 
stability of our financial markets. By bringing SEC pay in line 
with other agencies, such as the Federal Reserve Board and the 
FDIC, we can be certain that talented professionals will 
continue to offer their skills and experience to the SEC. So we 
strongly support pay parity for the SEC staff, and always have, 
Mr. Chairman. We support preserving fee revenues from Nasdaq 
transactions as offsetting collections up to the latest CBO 
baseline numbers. We strongly endorse S. 143, and urge Congress 
to move quickly to pass this important legislation.
    Finally, we are all keenly aware of the impact the current 
economic slowdown has had on our capital markets and on the 
American public in general. The market's downward move has had 
a profound impact on the savings of the vast majority of 
investors. After several years of unprecedented growth, the 
current situation is particularly frustrating to the millions 
of investors who have come into the markets in just the last 3 
or 4 years, and, in fact, have not seen a downturn like this. 
By returning to investors some of the $1.9 billion in excess 
fees that were collected last year on transactions, Congress 
can help alleviate at least a small portion of the losses of 
the current market situation.
    Passing the Competitive Market Supervision Act is the right 
thing to do, and we urge this Committee to move the bill to the 
Senate floor at its earliest opportunity.
    Again, Mr. Chairman, thank you very much for the 
opportunity to testify.
    Senator Enzi. Thank you for the excellent job of standing 
in on short notice.
    Mr. Lackritz. Thank you.
    Senator Enzi. Mr. Korins.

                  STATEMENT OF LEOPOLD KORINS

              PRESIDENT & CHIEF EXECUTIVE OFFICER

                  SECURITY TRADERS ASSOCIATION

    Mr. Korins. Senator Enzi and Members of the Committee, 
thank you for the invitation to testify before you today on 
SEC's transaction fees. I am Lee Korins, President and CEO of 
the Security Traders Association. I appreciate this opportunity 
to present the views of the STA, and I applaud all of you for 
scheduling a hearing on this important issue in the first weeks 
of the 107th Congress.
    I have also submitted a longer written statement for 
inclusion in the record.
    I wanted to thank you, Senator Enzi, and the other 
cosponsors of S. 143 for your efforts to enact legislation to 
provide meaningful and equitable fee relief. STA supported S. 
2107, the Competitive Market Supervision Act, last year, and 
was heartened to see that you, the Chairman, and Senator 
Schumer reintroduce the bill this past month.
    In 1996, the Congress enacted the National Securities 
Market Improvement Act, NSMIA, which modified the SEC fee 
structure--including extension to Nasdaq trades of the 
transaction fees imposed by Section 31. NSMIA was supposed to 
reduce the amount of SEC fees collected. Unfortunately, 
however, the 1996 legislation has not functioned as intended, 
as the fees generate about six times the SEC's funding needs 
and continue to increase.
    Actual fee collections have significantly outpaced NSMIA's 
projections because the Congressional Budget Office and the 
Office of Management and Budget used very conservative 
estimates of stock market growth that were relied on by this 
Committee and Congress in drafting NSMIA.
    In fiscal year 2000, actual collections from all sources 
grew to $2.27 billion, over six times the SEC's budget, as has 
been mentioned. The latest CBO estimate shows runaway growth in 
the fees from $2.47 billion in fiscal 2001 to $3.76 billion in 
fiscal 2005. In other words, total SEC fees are projected to 
raise over $15 billion over the next 5 years, while the SEC 
budget will require only a fraction of that amount over the 
same period.
    In my written testimony, I have included a chart that 
illustrates this trend, showing how the fees will collect over 
$16 billion in excess of what Congress intended in NSMIA over 
just the 7 year period of fiscal 2001 to fiscal 2007.
    Another defect in the NSMIA's fee structure is that it 
fails to accommodate changes in the securities markets. For 
example, unless Congress restructures SEC's fees this year, the 
pending Nasdaq conversion to an exchange will redirect to the 
general fund a significant portion of the fees that are 
currently made available to the appropriators to fund the SEC. 
Thus, we face the possibility of a fee structure that generates 
billions of dollars in unanticipated collections while at the 
same time creating a funding crisis for the SEC.
    Clearly, this is not the scenario the Committee intended 
when it fought to redesign the SEC's funding structure in 1996, 
and reduce the amount of the fee surplus.
    I want to emphasize here that the issue is not SEC funding. 
Indeed, Mr. Chairman, the legislation that has been sponsored 
with the Senators that have cosponsored it, protects and 
enhances the SEC's funding.
    For the record, let me state unequivocally, that the 
industry and all investors consider it their duty to continue 
the funding of the SEC. The discussion here is over the amount 
of the fees, not whether we should have user fees.
    Section 31 transaction fees operate as a tax on the gross 
trading revenue of securities professionals. One STA member 
firm which makes markets in about 100 Nasdaq stocks estimated 
that its Section 31 fee payments amounted to 40 percent of its 
net OTC trading profits before the allocation of overhead. 
Another firm found that its Section 31 fee payments were twice 
the amount of its rental payments for the building, housing, 
and trading activities. Section 31 fees operate as a gross 
receipts tax, meaning that fees are paid before Federal and 
State taxes, before salary, and before all other allocations 
for overhead. This is a perverse scenario, an onerous burden on 
the very traders who provide liquidity in the markets for 
hundreds of stocks.
    A letter I received today, that will be entered into the 
record, comes from Coastal Securities, a Nasdaq market maker in 
Dallas, Texas. I will just read a portion of it. They indicate 
that:

    The burden of the Section 31 fee on Coastal Securities is 
clearly reflected in its financial numbers. For the 4 years the 
fee has been in effect, approximately 6 percent of our gross 
equity trading revenues have been paid to the U.S. Government 
under the guise of this charge. Even more dramatic, this fee 
amounted to approximately 29 percent of our net Nasdaq profits 
before allocation for such things as compliance, human 
resources, accounting, etc. The Section 31 fee is in all 
practical respects an additional tax that broker-dealers in the 
Nasdaq market must pay. . . . The effective Federal Income Tax 
rate for Coastal Securities is approximately 63 percent after 
considering the Section 31 fee.

    But ultimately, it is the investing public that shoulders 
this burden. Section 31 fees are a tax on personal savings and 
investment in the form of lower returns. And as more Americans 
invest, more people pay this tax. Indeed, the percentage of 
households owning equities, as has been mentioned, is now up 
over 50 percent in the year 2000.
    It is important to note that Americans of all income levels 
are increasing their savings through equity ownership. 
According to some of the most recent statistics, 29 percent of 
households with incomes between $15,000 and $25,000 per year 
own stock. Therefore, this is not just a tax on the wealthy. It 
is paid by the smallest, as well as the largest market 
participants.
    Section 31 fees also hurt those who participate in pension 
plans, including public pension plans. For example, over a 5 
year period, the many State public pension plans will pay 
millions of dollars in Section 31 fees. Some examples are New 
York, over $13 million; New Jersey, over $2.5 million; 
Connecticut, over $1 million; Michigan, nearly $5 million; and 
Pennsylvania, approximately $6.5 million. At a time when the 
Government is encouraging savings, we think it is inconsistent 
to levy this pernicious tax on investment.
    Finally, as Chairman Levitt explained during testimony last 
year, 87 percent of the transactions on the New York Stock 
Exchange, which include this fee, are paid by individuals, not 
traders or firms. This clearly illustrates who ultimately bears 
the burden of excess fee collections.
    The STA strongly supports S. 143. This legislation provides 
meaningful fee relief while ensuring that the SEC continues to 
have the resources necessary to supervise and regulate 
securities markets. Indeed, the fee level set in S. 143 will 
accommodate the recent significant increases in the SEC's 
budget and will pay and will include pay-parity provision as 
part of this legislation.
    Furthermore, S. 143 addresses concerns raised by Members of 
the Appropriations Committee by ensuring that they will 
continue to receive the same level of fees designated as 
offsetting collections as included in the most recent budget 
baseline. Indeed, without a change in current law, the 
conversion of Nasdaq to an exchange will automatically deprive 
these appropriators of nearly all the offsetting collections 
they now receive.
    We applaud the inclusion of the fee cap and the floor in 
Section 5 that ensures against the unintended over-collection 
of fees, while protecting the SEC from any shortfall. Given the 
recent track record of budget projections, this is a prudent 
safeguard to ensure that the legislation fulfills its intent.
    In sum, S. 143 would move the fees collection system toward 
its original purpose--providing a stable source of funding for 
the SEC, derived from a constituency that benefits from its 
oversight and regulation. The STA applauds the scheduling of 
this prompt hearing on an issue of great importance to our 
members across the United States.
    Thank you very much for your interest, and I will be happy 
to answer any questions.
    Senator Enzi. Thank you.
    We want to thank both of you for your excellent testimony. 
I am glad that we were able to have a hearing this early on 
this important issue. We are talking about a revenue surplus 
again. That means an overcharge. Any time we have an 
overcharge, we want to stop the overcharge and give it back to 
the people that overpaid.
    We are nearing Abraham Lincoln's birthday right now, and he 
is legendary in his efforts to return money that was not his. I 
think that is the case that we have here, too, and, while we 
are doing it, we are being responsible for, not only reducing 
the excess fees paid by the investors, but at the same time we 
are providing an adequate level of funding for the SEC and 
providing for an ability to attract and retain quality 
employees. And I am pleased with the unanimity of the testimony 
that has gone into the record today.
    I do have a couple of questions for either or both of you, 
and this relates to our international competitiveness. We do 
want to assure that the U.S. markets do remain competitive. 
Could you explain how the existing fee structure compares to 
those of other international markets? Do other countries assess 
a similar fee? And do either of you have any knowledge?
    Mr. Korins. It is difficult to assess the fee structure 
from one country to another, because of the various expenses of 
transacting business in different countries. For instance, the 
clearing costs in most European countries are much more 
significant than the clearing costs of transacting business 
here in the United States because of things like centralized 
depositories and things that we have put in place over many 
years.
    But as far as transaction fees, per se, I do not know of 
any country that exacts an actual tax on each transaction going 
through its exchange. There are some other countries that levy 
a securities transaction excise tax. It is not to fund the 
regulators, for the most part. It is a tax. In fact, most of 
them are repealing those taxes, because they realize that it is 
disadvantaging them from an international competitiveness 
point.
    Your point about international competitiveness, I think, 
also goes to the SEC pay-parity issue, which is that, as the 
markets become globalized, it is really critical that we have 
the most competent professional and understanding staff at the 
SEC. To the extent that they are losing staff at the rate of 30 
percent a year, that is not good from the standpoint of the 
sophistication that is necessary to deal internationally with 
other regulatory agencies.
    Senator Enzi. Thank you.
    Former SEC Chairman Levitt stated last year that 82 percent 
of the fees collected on Nasdaq market transactions and 87 
percent of the fees collected on the New York Stock Exchange 
transactions are paid directly by the investors.
    I am the accountant in the Senate, so one of the things 
that I was interested in was who pays the remaining 18 percent 
or 13 percent of the transaction fees collected. Even if this 
fee is not paid directly by the investor, will it not be passed 
on to the investor in some fashion?
    Mr. Lackritz. Mr. Chairman, the remaining part is paid by 
either market makers or specialists who are the intermediaries 
in the transactions. As you know, costs--money is fundable, and 
so costs get passed on that way. Absolutely.
    Senator Enzi. Can you quantify the loss to investors from 
what they would otherwise receive in returns because of the 
fees? This 82, 87 percent?
    Mr. Lackritz. Lee may want to address that. What we can 
quantify is the amount of surplus that has gone into Government 
as a result of the fees being too high. You can, obviously, 
back that up and do some calculations and do the compounding 
and the discount back to present value to come up with some 
number. If you think about how much investments have 
appreciated in the last couple of years up until 2000, it would 
be an addition to that. For example, in 2000, the Nasdaq index 
was down 39 percent for the year. That was the worst 
performance Nasdaq had had since 1971. The Dow was down 6 
percent, which was the worst performance it had had since 1981. 
The S&P 500 was down about 10 percent, so, obviously, any part 
of those returns or those fees that are going back to investors 
would help ameliorate that loss that they experienced this last 
year.
    Mr. Korins. I think there was some testimony entered into 
the record to the effect--and the Chairman indicated it--that a 
member of a public pension plan who had over a thousand dollars 
exacted in fees would, in fact, with a normal rate of return, 
that money would end up being over $5,800 during the period for 
an individual. This is a very meaningful amount of money that 
is going out of public investors, as well as private investors.
    Senator Enzi. That is what I was hoping for.
    Mr. Korins. Yes, it was entered into the testimony earlier.
    Senator Enzi. A little harder to put a handle on. Mr. 
Korins, in your testimony, you mentioned the drain that 
excessive fees have on the market and the way it reduced 
liquidity, and that the major impact falls on small companies. 
Could you expound on that a little bit more for me?
    Mr. Korins. As market makers, and to some degree 
specialists on an exchange, find that their expenses of staying 
in the market keep increasing, that leads them to be more 
attentive to the more liquid securities, which, of course, are 
the larger issues that they trade. As a result, a certain 
amount of capital is drained away from making markets in the 
smaller, less active issues, because those require, usually, 
capital commitments over an extended period of time. The 
typical small issue does not turn over every hour or even 
everyday. It sometimes means that you are tying up capital for 
an extended period of time.
    As people lose the ability to have an effective return from 
the capital that they commit to these areas because of the 
expenses that they incur, then it is detrimental to the smaller 
issues. They will concentrate their capital and their talent on 
the larger issues where the liquidity is.
    Senator Enzi. I want to thank each of you for providing 
this testimony and building the record for us and your 
attentiveness in spite of the delay and the vote that we had 
that created quite a disruption. We appreciate the testimony 
and hope that that will wrap things up to get this bill 
expedited.
    There may be additional questions provided in writing. We 
ask that you answer those as quickly as possible.
    Mr. Lackritz. We would be happy to.
    Mr. Korins. We would be happy to respond.
    Senator Enzi. We would appreciate it, and so we will keep 
the record open.
    [Whereupon, at 4:10 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]

                PREPARED STATEMENT OF SENATOR PHIL GRAMM

    The Competitive Market Supervision Act of 2001, S. 143, was 
introduced January 22, would reduce the fees collected on securities 
registration and transactions while assuring adequate funding for the 
operation of the Securities and Exchange Commission. The bill would 
also allow the SEC to bring the pay of its employees in line with the 
pay of other Federal financial regulators.
    The bill we have before us does two things. First, it seeks to 
change the law to assure that we have a system whereby there will 
always be enough money to fund the SEC, but the fees on new stock 
issues and transactions won't continue to be a general revenue source 
for the Federal Government.
    Thanks to the growth in the economy, these fees are now generating 
six times as much as we need to fund the SEC. And these fees, over 
time, become a fairly substantial tax burden as people try to 
accumulate wealth. I have been trying to come up with figures that 
would help us understand the problem. By taking some estimates that 
might be applicable to a college professor or an auto mechanic, saving 
for retirement, we find that they will pay $1,304.55 in excessive fees 
over their lifetimes. And if that money were invested for retirement 
over a 45 year working lifetime, with a conservative 6 percent return, 
that grows to $5,800, or $11,600 for a two-wage family. That shows that 
the fees are a very heavy tax on people who try to build up savings, to 
send their children to college, to retire, or to provide for their 
future.
    The second thing we want to do is establish pay parity for the SEC, 
giving the SEC the ability to pay wages that are competitive with what 
we now allow in financial regulatory agencies. I think this is very 
important. There are few people who love Government less than I do. But 
I believe that if you are going to do things in Government, and 
Government has a role in a free society, then you need to have the best 
people you can get performing those functions, and having more 
competitive pay is very important.

                               ----------

               PREPARED STATEMENT OF SENATOR JIM BUNNING

    Mr. Chairman, I would like to state my strong support for S. 143, 
the Competitive Market Supervision Act.
    I am a cosponsor of S. 143, and commend you, Mr. Chairman and the 
Ranking Member of my Subcommittee, Senator Schumer, for your hard work 
on this important issue. User fees should be used only for the purpose 
for which they were collected. They should not be used to balance the 
budget. The budget is not only balanced, but also we are running a 
surplus. We are currently collecting way too much money in user fees--
more than the Securities Exchange Commission (SEC) needs to offset its 
budget. This backdoor tax on capital is an unfair burden to investors 
and brokers. I think it would be a nice Valentine to the American 
investor, both large and small, to pass S. 143 in an expeditious 
manner.
    With more and more people investing in the markets, fee collections 
have boomed to outrageous levels and these fees are passed on to 
investors in terms of higher investment costs. Many of these folks are 
small, first-time investors. Although the fees are a small percentage 
and that percentage will decrease over the next 8 years, the SEC is 
still collecting much more money than it needs. We tried to move this 
legislation last year, but we were unsuccessful. It is time to cut this 
tax. This money belongs to the taxpayers and should be given back to 
them.
    I also support the pay parity provisions of the bill. If we are 
going to continue to have a strong SEC to ensure our markets remain the 
envy of the world, the SEC must be able to hire and retain good people. 
This bill will help ensure we keep good people to oversee our 
securities markets. It will put their salaries in line with those paid 
by the Federal Reserve and other Federal agencies. It won't pay what 
Wall Street does, but it will help us keep those people who have chosen 
to serve the public to continue in their jobs.
    Again, I thank the Chairman for bringing this important legislation 
before us.

                  PREPARED STATEMENT OF LAURA S. UNGER

         Acting Chair, U.S. Securities and Exchange Commission
                           February 14, 2001
    Chairman Gramm, Ranking Member Sarbanes, and Members of the 
Committee: I appreciate the opportunity to testify before you today on 
behalf of the Securities and Exchange Commission (``SEC'' or 
``Commission'') regarding S. 143, the proposed ``Competitive Market 
Supervision Act of 2001'' (the ``CMSA'' or the ``bill'').
    The CMSA addresses two issues of great importance to the 
Commission. First, the bill aims to improve the current system of SEC 
fee collections. The Congressional Budget Office (``CBO'') estimates 
that fees required to be collected by the SEC from all sources will 
total over $2.47 billion in fiscal 2001.\1\ This represents more than 
five times the SEC's fiscal 2001 appropriation of $422.8 million.\2\ 
The Commission shares the Committee's concerns regarding these excess 
fee collections.
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    \1\ CBO January 2001 Baseline.
    \2\ Pub. L. No. 106-553, 114 Stat. 2762 (2000).
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    The CMSA attempts to rectify this situation by significantly 
reducing fees for investors, market participants, and companies making 
filings with the Commission, while preserving offsetting collections 
that will be available to our appropriators to fund the agency in 
coming years. It also spreads the costs of regulation among those who 
benefit from the activities of the Commission. We commend Chairman 
Gramm, Senator Schumer, and the bill's other cosponsors for this effort 
to achieve significant fee reductions in a comprehensive manner.
    Second, the CMSA addresses what is perhaps the greatest challenge 
facing the Commission today: The SEC's severe difficulties in 
attracting and retaining a sufficient number of qualified staff. The 
CMSA addresses the SEC's staffing crisis by giving us the much-needed 
ability to match the pay and benefits of the Federal banking agencies. 
In the wake of the historic Gramm-Leach-Bliley Act of 1999, pay parity 
is more imperative than ever. The Commission greatly appreciates the 
Committee's recognition of the ongoing staffing crisis we currently 
face. The CMSA, together with authorization and appropriation levels 
sufficient to make pay parity a reality, should go a long way to 
ensuring that the Commission can continue to carry out its statutory 
mandate of protecting investors and maintaining market integrity by 
remaining an institution that can attract and retain dedicated 
professionals.
    Given the complexity of the issues involved in fee reduction, we 
will first briefly review the current fee collections required by the 
Federal securities laws and their relationship to the SEC's funding 
before addressing the specifics of the bill. We will then address our 
need for pay parity. Although we have several technical concerns with 
the fee reduction portion of the bill's impact on the stable, long-term 
funding of the agency, we are confident that we will be able to 
continue to work together with the Committee to resolve these issues. 
We look forward to a thorough and inclusive dialogue with you and other 
interested parties.

Current Fee Collections and SEC Funding Structure
    In previous testimony before the Securities Subcommittee, we gave 
an overview of the history of SEC fees, the fee agreement contained in 
the National Securities Markets Improvement Act of 1996 (``NSMIA''), 
the impact of the Budget Enforcement Act on the fee debate, and the 
SEC's own efforts to reduce fees.\3\ Today, we would like to focus on 
the current fee collections situation and its relationship to the SEC's 
funding structure.
---------------------------------------------------------------------------
    \3\ See Testimony of Arthur Levitt, Chairman, U.S. Securities and 
Exchange Commission, Concerning Fee Collections, Before the 
Subcommittee on Securities, Senate Committee on Banking, Housing, and 
Urban Affairs (March 24, 1999).
---------------------------------------------------------------------------
    The Federal securities laws direct the Commission to collect three 
different types of fees:

 Securities registration fees required to be collected under 
    Section 6(b) of the Securities Act of 1933 that are paid when 
    companies register their securities with the Commission (``Section 
    6(b) fees'').
 Securities transaction fees required to be collected under 
    Section 31 of the Securities Exchange Act of 1934 (``Exchange 
    Act'') that are paid when securities are sold on exchanges and in 
    the over-the-counter (``OTC'') market (``Section 31 fees'').
 Fees on mergers and tender offers (and other significant 
    transactions) required to be collected under various provisions in 
    Sections 13 and 14 of the Exchange Act that are paid when 
    transaction documents are filed with the Commission.

    The majority of the fees collected from these three sources--a 
large portion of Section 6(b) fees, Section 31 fees on transactions 
involving exchange-listed securities, and all fees collected on mergers 
and tender offers--goes to the U.S. Treasury as general revenue. The 
remaining portion of fee collections--a small portion of Section 6(b) 
fees and Section 31 fees on Nasdaq transactions--goes to ``offsetting 
collections.''
    The distinction between the general revenue portion and the 
offsetting collections portion of fee collections is central to 
understanding the SEC's funding structure. Because our appropriators 
use offsetting collections to fund SEC operations, offsetting 
collections are crucial to full and stable long-term funding for the 
SEC. The SEC has not received an appropriation from the general revenue 
portion of fee collections, which CBO projects to be more than $1.5 
billion in fiscal 2002,\4\ for the last 5 years.
---------------------------------------------------------------------------
    \4\ CBO January 2001 Baseline.
---------------------------------------------------------------------------
    Although some anticipated that NSMIA would lead to gradual 
increases in general revenue funding for the SEC, this has not 
occurred.\5\ Because the tremendous growth in transaction volume and 
market capitalization we have witnessed in the last few years has far 
exceeded the 1996 estimates on which NSMIA was based, current fee 
collections are well in excess of original estimates.
---------------------------------------------------------------------------
    \5\ NSMIA contemplated that the increases would be gradual because 
of the practical realities of the budget process--it is difficult to 
maintain full and stable funding for the SEC in the context of a sudden 
shift to general revenue.
---------------------------------------------------------------------------
    The following chart shows current CBO estimates of SEC fee 
collections broken down between those that go directly to general 
revenue and those that go to offsetting collections:
                   Estimated SEC Fee Collections \6\
---------------------------------------------------------------------------
    \6\ The numbers in this chart are based on the CBO January 2001 
Baseline.
---------------------------------------------------------------------------
                     (by fiscal year, in millions)

      
    As the chart illustrates, total fee collections are currently 
projected to increase through fiscal 2006, and then fall sharply in 
fiscal 2007. This is because under current law both the general revenue 
portion of Section 6(b) fees and all Section 31 fees will be reduced 
dramatically in fiscal 2007--the Section 6(b) fee rate will be reduced 
from the current $200 per million of the aggregate offering price of 
the securities to $67 per million and the Section 31 fee rates will be 
reduced from their current 1/300th of 1 percent of sales to 1/800th of 
1 percent. In addition, the offsetting collections portion of Section 
6(b) fees are gradually being eliminated over a multiyear period ending 
in fiscal 2006.

``Competitive Market Supervision Act of 2001''
    The proposed ``Competitive Market Supervision Act of 2001'' 
achieves meaningful reductions in fee rates in a comprehensive manner. 
It significantly reduces the burden of excess fees not only on 
investors and the Nation's securities markets, but also on the capital-
raising process. By targeting all three types of SEC fees for 
reduction, the bill spreads the benefits of fee reduction among all 
those who pay for the costs of regulation. Specifically, the bill would 
further reduce the Section 6(b) fee rate on the registration of 
securities from the scheduled reductions under current law. In fiscal 
2002, the Section 6(b) fee rate would be reduced by 73 percent--from 
the current $250 per million to $67 per million. The bill would reduce 
this rate by another 50 percent in fiscal 2007--to $33 per million.
    The bill imposes similar rate reductions on the fees associated 
with merger and tender offers. Specifically, the fee rate on mergers 
and tender offers would be reduced by 67 percent in fiscal 2002--from 
the current $200 per million to $67 per million. The bill also reduces 
this rate by another 50 percent in fiscal 2007--to $33 per million. The 
collections resulting from the Section 6(b) fees and the fees on 
mergers and tender offers are reclassified as offsetting collections 
that would be available to the SEC's appropriators to fund the 
Commission.
    The bill proposes a more complex approach to reducing Section 31 
transaction fees. The bill puts in place a mechanism by which the 
Congress would set the Section 31 fee rate on a yearly basis. The rate 
would be determined by taking a fixed dollar amount specified in the 
bill for that year and dividing it by the estimated dollar volumes of 
transactions on the exchanges and in the over-the-counter market for 
that year. The fixed dollar amount for each year is calculated by 
taking the total amount of offsetting collections available to the 
Commission's appropriators under CBO's December 1999 baseline and 
subtracting the anticipated Section 6(b) and merger and tender offer 
fee collections for that year under the reduced rates discussed above.
    In fiscal 2002, this mechanism could result in a Section 31 fee 
rate of approximately $14 per million--less than half the current rate 
of 1/300th of 1 percent (or $33 per million). Moreover, by resetting 
the Section 31 fee rate on a yearly basis, the bill should avoid the 
potential for excess collections or shortfalls inherent in an activity-
based fee. Instead, this approach should cause the amount of total fees 
collected to approximate those in the CBO's December 1999 baseline 
projection of offsetting collections through fiscal 2010.\7\ The bill 
also designates all of the fees collected under this mechanism as 
offsetting collections.
---------------------------------------------------------------------------
    \7\ The bill currently uses CBO's baseline projections from 
December 1999. We understand from the Senate Banking Committee staff 
that these numbers will be updated with CBO's most recent 10-year 
projections. We encourage this amendment as it will lessen the 
possibility of shortfalls in offsetting collections in fiscal 2007 and 
after fiscal 2010.
---------------------------------------------------------------------------
    The CMSA reduces fees by eliminating the general revenue portion of 
collections, which currently accounts for the majority of all SEC fees 
and is estimated to reach more than $1.5 billion in fiscal 2002,\8\ and 
redefining the make-up of offsetting collections. Going forward, all 
Section 31 fees, all Section 6(b) fees and, for the first time, merger 
and tender offer fees are shifted to offsetting collections. Because 
our appropriators fund agency operations out of offsetting collections, 
these changes ensure that the costs of Federal securities regulation 
are shared more evenly. These changes also should help to preserve the 
ability of our appropriators to fund SEC operations out of offsetting 
collections, and, therefore, increase the likelihood that the SEC will 
receive adequate funding in the future.\9\ We appreciate your efforts 
to take into account SEC funding issues when crafting this bill. By 
taking this approach, your bill facilitates the Commission's continuing 
efforts to protect investors and promote the integrity and efficiency 
of the Nation's securities markets.
---------------------------------------------------------------------------
    \8\ While we understand that there are rather complex Pay-As-You-Go 
(``PAYGO'') budget scoring rules that may affect the ability of 
Congress to reduce the general revenue portion of fee collections, the 
Commission believes that it would be difficult to achieve truly 
meaningful reductions in fees, as well as to provide full and stable 
long-term funding for the SEC, without addressing the general revenue 
portion of fee collections. We take no position on the larger tax 
policy issues raised by the bill.
    \9\ We are concerned, however, with the long-term impact on our 
funding of the fixed dollar cap on Section 31 fee collections, as well 
as the overall fee cap and floor, after fiscal 2010. By freezing the 
transaction fee cap after fiscal 2010, the bill does not allow 
offsetting collections to continue to grow in tandem with the 
Commission's budget needs. In addition, it is unclear how the overall 
fee cap and floor, which are both based on the Commission's 
authorization level, would work in years after 2010. Historically, this 
level has not been set, if at all, until the latter part of the 
appropriations process. This creates a potential timing problem 
because, under the bill, the authorization would, in fact, be needed at 
the beginning of the legislative process to allow CBO to estimate 
available collections. We hope to continue working with the Committee 
on these issues and believe they can be addressed without undermining 
the stated benefits of the bill.
---------------------------------------------------------------------------
    The bill also eliminates the possibility of drastic excess 
collections or shortfalls in one year by setting an overall fee cap and 
floor and by creating a mechanism to make intra-year adjustments in the 
Section 31 fee rate to steer collections to a level between the cap and 
floor. The Commission believes the concept of a cap and floor on fee 
collections provides a workable way of avoiding the shortcomings of 
previous attempts at fee reductions. The Commission does have some 
concerns with the way the floor is set in the bill's current version. 
The Commission believes a change to the way the floor is set will allow 
the floor to continue to approximate the minimum necessary for the 
Commission to operate. Revising the floor should also prevent future 
CBO projections of offsetting collections from being skewed downward, 
which would have the effect of reducing the amounts actually available 
to our appropriators to fund the agency.
    In addition, as a practical matter, the feasibility of this bill's 
approach depends on the Commission receiving an up-front appropriation 
each year that would be reduced by offsetting collections as they are 
collected. The Commission would need such an up-front appropriation 
purely for cash-flow reasons; it will not ``cost'' anything in terms of 
general revenue. It is our understanding that most Government agencies 
receive such an up-front appropriation and, until the last few years, 
the Commission received one as well. Although we do not believe that 
this ultimately will be a problem, the need for an up-front 
appropriation underscores the need for an inclusive dialogue on these 
complex issues.
    Finally, we note that the bill should be modified to reflect 
Congress's recent adoption of the Commodity Futures Modernization Act 
of 2000 (``CFMA''). As the Committee is aware, the CFMA for the first 
time allows the trading of a new class of securities--futures contracts 
on single stocks and narrowly based stock indices. The CFMA provides 
for ``assessments'' on these security futures products comparable to 
the Section 31 transaction fees payable on stock option transactions. 
We would be pleased to work with the Committee's staff in making the 
technical changes necessary to include these CFMA assessments in the 
bill's fee reductions, as well as to avoid any unintended negative 
impact on the bill's funding structure.

Pay Parity with Banking Regulators
    The second issue that the CMSA addresses is the Commission's severe 
difficulties in attracting and in retaining a sufficient number of 
qualified staff. At present, the Commission is unable to pay its 
accountants, its attorneys, and its examiners what their counterparts 
at the Federal banking agencies earn. Since all of the Federal banking 
regulators are not subject to the Government-wide pay schedule, they 
are able to provide their staffs with appreciably more in compensation 
and in benefits than we can.
    This disparity is a significant drain on morale. It is difficult to 
explain to SEC staff why they should not be paid at comparable levels, 
especially when they are conducting similar oversight, regulatory, and 
examination activities. It is one thing for staff to make salary 
comparisons with the private sector, but quite another for them to see 
their Government counterparts making anywhere from 24 to 39 percent 
more than they are.
    This is particularly true in the wake of the landmark Gramm-Leach-
Bliley Act of 1999 (``GLBA''). As this Committee is well aware, the 
GLBA demands that the Commission undertake additional examinations and 
inspections of highly complex financial services firms both to fulfill 
our own oversight responsibilities and to provide the Federal Reserve 
and other banking agencies with the information and analyses needed to 
fulfill their missions. Moreover, by allowing securities firms, banks, 
and insurance companies to affiliate with one another, the GLBA 
requires increased coordination of activities among all the financial 
regulators. Even more so than in the past, Commission staff will work 
side-by-side with their counterparts from the banking regulatory 
agencies, including the Federal Reserve, the Office of the Comptroller 
of the Currency, and the Federal Deposit Insurance Corporation. 
However, we cannot match the salaries that these regulators pay.
    The Commission has already seen several staff leave to take 
positions with these agencies, primarily because of pay. Unless we are 
put on equal footing, this trend will continue and most likely 
intensify. Given the complexities of our markets and the new business 
affiliations we are likely to see, the SEC does not believe it is at 
all beneficial to have the financial regulators poaching from one 
another based on pay. Instead, we should be working together from the 
same starting point.
    Pay parity will help resolve the Commission's staffing crisis. 
Since 1996, our attrition rate has been increasing, particularly among 
our more senior professionals. Over the last 2 fiscal years, the 
Commission has lost 30 percent of its attorneys, accountants, and 
examiners. These losses are adversely affecting the Commission's 
continuing efforts to protect investors and promote the integrity and 
efficiency of the Nation's securities markets. The Commission is losing 
staff before they become fully productive because we cannot pay them 
enough. In a world where first-year associates are making six-figure 
salaries in Washington, DC law firms, the salaries the SEC can provide 
are simply not competitive to attract and to retain a sufficient number 
of talented professionals to reduce high turnover and fill open 
positions. We recognize that the SEC cannot completely match the higher 
salaries offered by brokerages, law firms, self-regulatory 
organizations, and other securities-related businesses. Something needs 
to be done, however, to close the pay gap and reduce the turnover 
problems we face.

Recruitment
    The lack of pay parity creates enormous difficulties in recruiting 
attorneys and accountants. We have used recruitment bonuses where 
possible, but have not met with much success. A typical first-year 
associate in a top-tier New York or Washington, DC law firm makes 
double, if not more, than a comparable staff attorney at the SEC. The 
costs of 3 years of law school leave most graduates entering the job 
market with significant amounts of student loan debt. It is not 
difficult to understand why the private sector looks so appealing.
    Our problem is even worse for accountants, who need to be 
experienced when they walk in the door. Experienced accountants are 
difficult to find and expensive to hire because their ability to 
analyze complex financial statements is highly prized. We do not have 
the luxury, if you can call it that, of being able to take someone 
directly out of school. The Commission has attempted to ameliorate this 
problem by developing an ``in-service'' placement program that allows 
certain Securities Compliance Examiners to be reassigned as accountants 
if they meet specific criteria, but even this effort has fallen short. 
In fact, in fiscal 1999 only 46 percent of our available positions for 
accountants were filled. This hiring rate is not sustainable. The 
Commission needs the ability not only to keep staff longer, but also to 
bring them to the Commission in the first place.

Retention Efforts
    The SEC has also lost far too many of its most talented and 
experienced staff. Over the past several years the Commission has 
explored virtually every available approach to keeping staff longer. In 
1992, we petitioned and received from the Office of Personnel 
Management (``OPM'') the authority to pay the majority of our attorneys 
and accountants approximately 10 percent above their base pay. While 
special pay was a step in the right direction, it proved to be a short-
term solution. This is because staff that receive special pay do not 
receive the Government-wide locality increase each year, which means 
that their special pay becomes less valuable over time and hence 
becomes less effective as a retention tool. Our appropriation last year 
included funds to reinstate special pay rates for certain 
employees.\10\ While this should help, based on our experience, we know 
this is at most a temporary and partial remedy to the SEC's staffing 
crisis.
---------------------------------------------------------------------------
    \10\ We submitted our special pay justification package for certain 
attorneys, accountants, and examiners to OPM on December 21, 2000 and 
are waiting their approval of our proposed special pay rates.
---------------------------------------------------------------------------
    The Commission has also used retention allowances and economist 
special pay to help alleviate our retention problem. While these tools 
have proved somewhat effective when targeted to specific staff and 
situations, we believe they are incapable of providing the broad relief 
that we need to combat the Commission's losses and treat all staff 
fairly.

The Agency and Its Staff
    Our inability to attract qualified staff and the current level of 
turnover is threatening our ability to oversee the Nation's securities 
markets and to respond in a timely manner to the changing events and 
innovations in our markets by:

 Hampering our ability to bring cases to trial and disrupting 
    the continuity we need when pursuing cases.
 Hindering us from responding to changing markets in a timely 
    fashion, including through targeted deregulatory efforts.
 Limiting our institutional memory, which is a crucial 
    component of our long-term effectiveness as a regulator.
 Lowering employee morale, which in turn reinforces the 
    staffing crisis.

    SEC staff work hard to handle the Commission's increasing, and 
increasingly complex, workload. The time that our managers and senior 
staff have to devote to this workload is, however, reduced by the time 
it takes to recruit and train new staff. The SEC conservatively 
estimates that it takes approximately 2 years for new staff to become 
fully productive. During this period, new staff is somewhat of a drag 
on the efficiency of the agency because they are still moving up the 
learning curve. If these staff leave just as they become fully 
productive to the agency, we do not break even on our investment in 
training them. That is a loss not only for us, but also for the 
investing public and our markets.
    The SEC should be a place where highly motivated people come to 
hone their skills and perform public service, both before entering the 
private sector and after a stint in the private sector. Such career 
paths speak highly of the Commission's professionalism and the 
industry's regard for the agency and its staff. However, the Commission 
should be able to keep staff for a minimum of 3 to 5 years. The SEC can 
ill afford to have its future walk out the door. We need to ensure that 
the Commission has the staffing resources to meet the regulatory 
challenges that lie ahead as technology in general, and the Internet in 
particular, continue to reshape our markets.

The Need for Commensurate Authorization
    Resolving the Commission's staffing crisis requires the statutory 
changes contained in the CMSA that would allow the agency to pay its 
employees outside of the Government-wide pay scale, and it also 
requires Commission authorization and appropriation at a level that 
allows the agency to implement pay parity. Without the authorization to 
be appropriated sufficient funds to implement pay parity, having the 
authority to provide our employees with pay parity will do little to 
address the staffing crisis we face. By our estimates, implementing pay 
parity with the banking regulators, as the CMSA proposes, would require 
a net funding increase of approximately $70.9 million in fiscal 2002, 
with yearly adjustments for inflation thereafter.\11\ Although this is 
a significant amount of money, it is crucial for the Commission to have 
the resources it needs to fulfill its mission. The most vital resource 
we have, ultimately, is our highly professional and well-regarded 
staff. This is the one area we can least afford to jeopardize.
---------------------------------------------------------------------------
    \11\ This assumes full-funding of special pay and no new staff in 
fiscal 2002.
---------------------------------------------------------------------------

Conclusion
    The proposed ``Competitive Market Supervision Act of 2001'' 
addresses two important challenges to the Commission's continuing 
efforts to protect investors and promote the integrity and efficiency 
of the Nation's securities markets. First, the bill achieves 
significant reductions in excess fee collections, while preserving 
offsetting collections that can be used to continue to fund SEC 
operations. While the Commission does have technical concerns with the 
bill, as noted above, we hope that we can continue to work with the 
Committee and its staff to iron these out. Second, the bill addresses 
the SEC's serious staffing crisis by providing the SEC pay parity with 
Federal banking regulators. We appreciate your recognition of these 
challenges and commend the comprehensive manner in which you address 
them. We look forward to continuing a thorough and inclusive dialogue 
with you and other interested parties on this bill.
                               ----------

                 PREPARED STATEMENT OF JAMES E. BURTON

                        Chief Executive Officer
        California Public Employees' Retirement System (CalPERS)
                           February 14, 2001

    My name is James E. Burton and I am the Chief Executive Officer for 
the California Public Employees' Retirement System (CalPERS).
    CalPERS is the largest public pension system in the United States 
with an investment portfolio of more than $165 billion, held in trust 
for its 1.2 million members. Among the members are 864,000 active duty 
police officers and fire fighters, college professors and school 
custodians, and other public employees. And some 356,000 retired public 
employees receive $4.8 billion in annual CalPERS retirement benefits.
    In short, CalPERS provides retirement plan administration for the 
State of California and most of its cities, counties, and special 
districts. In all, CalPERS administers the retirement system for 2,480 
governmental entities.
    Our $165 billion in assets are allocated among fixed-income 
instruments, equities, real estate, and other investments. Our 
investments in domestic equities are currently valued at some $67 
billion.
    I am here to support S. 143, the Competitive Market Supervision 
Act. We believe this measure would benefit large and small investors 
alike by reducing the cost of securities transactions that both types 
of investors must pay. We also support S. 143 because it would enhance 
the ability of the SEC to attract and keep expert staff that is 
responsible for protecting investors and ensuring accountability and 
integrity in our markets. This is a matter of great significance to all 
Americans.
    According to the testimony of SEC Chairman Levitt last year, the 
Commission staff turnover rate is considerably higher than that of 
other similar regulatory agencies. I believe he estimated the attrition 
rate for the SEC at about 13 percent, while the Federal Reserve Board 
and others only lose about 5 percent of their staff per year. The pay 
parity provisions in the bill would put the SEC on par with the Federal 
Reserve Board and other regulators. We also urge the Committee to be 
certain that there is a stable funding source for the SEC. This, too, 
is crucial for the agency to attract and retain talented people.
    We have worked with the SEC and we know that when key personnel 
leave, they take their institutional knowledge with them. This results 
in inefficiencies as replacement staff go through learning curves. S. 
143 will give the SEC the flexibility it needs to bring salaries in 
line with other financial regulatory agencies.
    Next, I would like to address the securities transaction fees 
reduction element of S. 143 and how it will affect the 2,211 public 
employee retirement systems in the Nation. The Federal Reserve Board 
says that these plans own approximately $2 trillion in equities.
    Wilshire Associates, a pension plan consulting and research 
organization, estimates that the average annual turnover of equity 
portfolios of public pension plans is 30 to 40 percent. This totals 
$600 billion to $800 billion annually. Based on these estimates, the 
fee reduction formula in the bill would save public pension plans 
approximately $10 million per year in transaction fees.
    CalPERS' domestic equity portfolio turnover rate is 10 percent per 
year. This lower-than-average rate is based on our view that the long-
term investor performs better. The following table illustrates our 
historical rates of return since 1991:

------------------------------------------------------------------------
                        Year                             Through June
------------------------------------------------------------------------
1991...............................................         6.5 percent
1992...............................................        12.5 percent
1993...............................................        14.5 percent
1994...............................................         2.0 percent
1995...............................................        16.3 percent
1996...............................................        15.3 percent
1997...............................................        20.1 percent
1998...............................................        19.5 percent
1999...............................................        12.5 percent
2000...............................................        10.5 percent
------------------------------------------------------------------------

    Because we don't trade as frequently as mutual funds--or even as 
often as other public pension plans--our savings in transaction fees 
from S. 143 won't be as great as others. It will be about $342,000 
annually. But what is important to us is that this becomes essentially 
a refund to taxpayers.
    I will explain. CalPERS actuaries make a number of projections and 
assumptions to determine how much the plan needs in contributions today 
in order to pay the beneficiaries in the future. While employee 
contributions remain fairly constant, employer contributions are 
adjusted based on actuarial estimates.
    To the extent CalPERS' administrative costs are reduced, through 
fee reductions for example, actuarial guidelines require employer 
contributions to be decreased. Dollars not spent on administrative 
costs are invested. For California taxpayers who fund both the State 
and the local public agencies, these savings translate into a smaller 
tax burden.
    Mr. Chairman and Members of the Committee, the CalPERS Board of 
Administration passed a resolution last year in support of S. 2107, 
last year's version of the Competitive Market Supervision Act. This 
action followed a presentation to the Board on the merits of S. 2107 by 
Geof Gradler, your very capable Committee economist. We want you to 
know that we appreciate Mr. Gradler's assistance.
    Finally, we are pleased to testify in support of S. 143. We urge 
the Committee to move the bill as quickly as possible.
    Thank you.
                               ----------

                  PREPARED STATEMENT OF MARC LACKRITZ
               President, Securities Industry Association
                           February 14, 2001

    Chairman Gramm, Senator Sarbanes, and Members of the Committee, I 
am Marc Lackritz, President of the Securities Industry Association, 
which comprises nearly 750 securities firms, including investment 
banks, broker-dealers, and mutual fund companies. SIA deeply 
appreciates the opportunity to present the views of the securities 
industry on the issue of securities transaction fees.
    Mr. Chairman, we strongly support the Competitive Market 
Supervision Act of 2001, which you recently introduced with Senator 
Schumer. We believe that the time has come for Congress to re-examine 
the issue of SEC fees, because the basic assumptions underlying the 
current fee structure have changed dramatically. The fees were 
implemented several years ago to fund the cost of regulating the 
securities markets-- essentially to ensure that the SEC had enough 
funding to adequately perform its regulatory duties, hire and retain 
the best staff, and cover the agency's operating expenses. Today, of 
course, the fees collected exceed that cost by 500 percent or more. It 
is time to bring securities transaction fees back in line with the cost 
of regulation.
    Whenever an individual sells shares, the brokerage firm puts a line 
item on the trade confirmation for securities transaction fees. As you 
know, the fee is charged on sell transactions, so that every time an 
investor sells shares, a debit appears on their confirmation reflecting 
the amount of the fee. To the individual investor, the fees may seem 
relatively insignificant-- on a small trade, they can amount to just 
pennies, maybe a few dollars on a larger trade. But do they ever add 
up. Last year, so-called Section 31 fees and other securities 
transaction fees provided an estimated $2.27 billion in revenue to the 
Federal Treasury. The budget of the SEC, however, was $377 million, 
meaning that investors paid $1.9 billion more in fees than was 
necessary last year.
    The industry strongly supports adequate funding of the SEC. The 
U.S. capital markets are the envy of the world, in no small part 
because we have the most sophisticated regulatory system in the world. 
Proper oversight of the securities markets is absolutely critical to 
investor confidence. The industry agreed several years ago to pay 
additional transaction fees in order to provide Congress with a more 
reliable source of funding for the SEC. But no one expected the 
staggering growth in market activity in the years since the 1996 
legislation that established the current fee system. Trading volume on 
the New York Stock Exchange and on the Nasdaq has roughly doubled since 
1996, sending transaction fees skyrocketing. Securities transaction 
fees should continue to be collected to the degree necessary to ensure 
that the SEC is fully funded and able to carry out its important 
responsibilities.
    But it is clearly not in the interest of investors for these fees 
to so grossly surpass the cost of regulation. These fees drain capital 
from the markets, and from the pockets of individual investors. Last 
year, that amounted to $1.9 billion that could have been reinvested to 
stimulate economic growth and create jobs. It is money that could--and 
should--remain in the hands of investors.
    It is very important to point out that a reduction in securities 
transaction fees will benefit the broad spectrum of investors. In 1992, 
about 37 percent of all U.S. households owned stock, either directly or 
indirectly. Last year, that number had risen to roughly half of all 
U.S. households. Every American who owns stock either directly, or 
indirectly through their investments in mutual funds and pension funds, 
pays these fees. Regardless of their investment choices, reducing the 
fee would benefit investors of all types.
    Mr. Chairman, the legislation you and Senator Schumer introduced 
last month is the right answer. It brings the fees more in line with 
the actual cost of regulation, and ensures that investors are not taxed 
beyond that which is necessary for that purpose. It ensures that the 
SEC will have adequate funding, not only this year, but also into the 
future, to perform its critical functions. And, importantly, it ensures 
that the SEC can recruit and retain the best-qualified regulators by 
creating pay parity between the SEC and the Federal financial 
regulators. The SEC is losing top staff at an alarming rate to the 
private sector, as well as to other financial regulatory agencies that 
can offer better pay. Experienced and well-qualified regulators are 
critical to the long-term stability of our financial markets. By 
bringing SEC pay in line with other agencies, such as the Federal 
Reserve Board and the FDIC, we can be certain that talented 
professionals will continue to offer their skills and their experience 
to the SEC. Finally, we support preserving fee revenues from Nasdaq 
transactions as offsetting collections up to the latest CBO baseline 
numbers. We strongly endorse S. 143, and urge the Congress to move 
quickly to pass this important legislation.
    Finally, we are all keenly aware of the impact the current economic 
slowdown has had on our capital markets and on the American public in 
general. The market's downward move has had a profound impact on the 
savings of the vast majority of investors. After several years of 
unprecedented growth, the current situation is particularly frustrating 
to the millions of investors who have come into the markets in just the 
last 3 or 4 years. By returning to investors some of the $1.9 billion 
in excess fees that were collected last year on transactions, Congress 
can help alleviate at least a small portion of the losses of the 
current market situation.
    Passing the Competitive Market Supervision Act is the right thing 
to do, and we urge this Committee to move the bill to the Senate floor 
at its earliest opportunity.
    Thank you very much for the opportunity to testify today.
                               ----------

                  PREPARED STATEMENT OF LEOPOLD KORINS

                  President & Chief Executive Officer
                      Security Traders Association
                           February 14, 2001

Introduction
    Chairman Gramm, Members of the Committee, thank you for the 
invitation to testify before you today on the subject of the Securities 
and Exchange Commission (SEC) transaction fees. I appreciate this 
opportunity to present the views of the Security Traders Association 
(STA), and I applaud you for scheduling a hearing on this important 
issue in the first weeks of the 107th Congress.
    I also want to thank you, Mr. Chairman, for your efforts to enact 
legislation to provide meaningful and equitable fee relief. STA 
supported S. 2107, the Competitive Market Supervision Act, last year, 
and was heartened to see you, Mr. Chairman, and Senator Schumer 
reintroduce this legislation as S. 143 last month. S. 143 is a balanced 
and workable proposal, which I will discuss later in my testimony.
    I am Lee Korins, President and CEO of the Security Traders 
Association--the STA is composed of 30 regional affiliates and over 
7,000 individual members throughout North America and Europe. It is the 
largest group of its kind in the world. Our membership represents all 
facets of the securities industry. While many members are traders for 
securities firms and institutions, others are partners, specialists, 
floor traders, proprietors or registered representatives--all of whom 
are charged with the responsibility of executing orders at the fairest 
prevailing prices. The fact is that no one speaks for individual 
professionals in the securities industry with more credibility than 
STA.
    Today, I want to briefly discuss:

 The history and evolution of SEC fees.
 How the fee collections have consistently and substantially 
    outpaced budget estimates, Congressional intent, and the SEC's 
    funding needs.
 How the fees act as a tax on savings, investment, and capital 
    formation.
 STA's support for S. 143, which fairly reduces the fees while 
    preserving adequate funding for the SEC and maintaining offsetting 
    collections for the appropriators.

History of the SEC's Funding Structure
    In 1996, Congress enacted the National Securities Markets 
Improvement Act (NSMIA) reforming regulation of the securities and 
mutual fund markets. NSMIA also modified the SEC's fee structure --
including extension to Nasdaq trades of the transaction fees imposed by 
Section 31 of the Securities Exchange Act of 1934. The SEC 
reauthorization was the result of a complex deal worked out between 
House and Senate authorizers and appropriators, the Office of 
Management and Budget (OMB), and the SEC, following years of 
Congressional wrangling over a new SEC funding mechanism. 
Unfortunately, however, the 1996 legislation has not functioned as 
intended.

Background
    Since the 1930's the Federal Government has levied SEC fees on the 
regulated community, including registration fees authorized by Section 
6(b) of the Securities Act of 1933, and transaction fees authorized by 
Section 31 of the Securities Exchange Act of 1934. These fees were 
deposited in the Treasury's General Fund as general revenues. The SEC 
received no credit for collected fees and could not directly use the 
funds, but rather was funded through an annual appropriation. Since 
1983, the SEC has been a net contributor to the Treasury, collecting 
far more fees than necessary to cover its budget.
    In 1990, budget rules were significantly changed. Specifically, the 
1990 Budget Enforcement Act set limitations on specific spending 
categories and created ``pay-as-you-go'' procedures to require offsets 
for decreases in revenue or increases in entitlement spending. These 
rules put severe restraints on discretionary spending, forcing 
appropriators to choose among competing programs. The SEC was thus 
forced to compete for discretionary funding with the Departments of 
Commerce, Justice, and State, which are funded in the same annual 
appropriations legislation as the SEC.
    Beginning in 1990, the appropriators decided to respond to the 
problem of insufficient resources to fund competing programs by 
imposing annual rate increases in the Section 6(b) registration fee in 
each year's Commerce, Justice, and State Appropriations Bill. The 
amounts attributable to such increases were credited against the 
agency's appropriation account as an offsetting collection. Offsetting 
collections are deposited in special appropriations accounts, as 
opposed to the General Fund, and are available to appropriators to 
finance agency activities. This funding mechanism increased the overall 
funds available to the Appropriations Committees. This practice 
eventually led to objections by various Members of Congress on both 
jurisdictional and policy grounds. Since the agency was collecting far 
more in fees than its budget required, opponents argued that the annual 
SEC fee increases contained in appropriations bills constituted a tax. 
Members began to call for a new SEC funding structure that allowed the 
Government to cover the costs of the SEC's regulatory activities 
without artificially inflating the cost of raising capital in the 
markets. In 1993, the House Energy and Commerce Committee, under the 
leadership of then-Chairman Dingell and Representative Bliley, crafted 
a bill which would have established a mechanism by which the SEC would 
set and collect fees solely to recover the costs of its regulatory 
activities. The House unanimously passed this bill.
    During that same year, the House and Senate again passed an SEC 
appropriations measure which raised registration fees and credited the 
amount as an offsetting collection. Both House Ways and Means and House 
Energy and Commerce Committee members lodged complaints, and language 
was included in the conference report on the Commerce, Justice, and 
State Appropriations Bill indicating that the practice would be ended.

Funding Crisis
    When the Commerce, Justice, and State Appropriations Bill for 
fiscal year 1995 came to the floor of the House on June 28, 1994, the 
bill again contained a provision that would have imposed additional 
registration fees as offsetting collections. House Members succeeded in 
striking the provision from the House bill on procedural grounds, and 
subsequently prevailed in an effort to keep the provision out of the 
conference agreement. This move left the SEC with an appropriation of 
$60 million, significantly below the $297 million originally provided 
by appropriators. The agency indicated that it would have to severely 
restrict its operations beginning in October 1994 absent Congressional 
action.
    This funding crisis prompted Congress, to pass a stop-gap measure 
(P.L. 103 -352), authorizing a registration fee increase for another 
year, in order to fund the Commission through 1995. House Report 103 -
739 indicated that this was done as a one-time fix to avert an SEC 
shutdown, and contemplated passage in the next Congress of an SEC 
reauthorization that would ``eliminate the need for one-year-at-a-time 
increases in registration fees.'' The stage was thus set for an SEC 
reauthorization that would establish a predictable and adequate fee 
structure to recover funds solely to offset the cost of the 
Commission's regulatory activities.

Action in the 104th Congress
    In 1995, control of Congress shifted to the Republican Party and 
the legislative agenda was crowded, leaving unaddressed the SEC fee 
issue. However, in light of the prior year's funding crisis, the 
Administration's fiscal year 1996 budget proposal stressed the need for 
a sound, stable, and long-term funding structure for the SEC. The 
fiscal year 1996 Commerce, Justice, and State Appropriations Bill (H.R. 
2076), was vetoed by the President due to unrelated policy disputes, 
and the SEC's fiscal year 1996 budget was funded by a series of 
continuing resolutions. Ultimately, Congress and the President agreed 
to an omnibus spending bill (H.R. 3019) that funded the SEC for the 
remainder of the year.
    In 1996, then-House Commerce Committee Chairman Bliley (R-VA) 
introduced H.R. 2972, the SEC Reauthorization Act. The bill was 
designed to end the appropriators' practice of funding SEC activities 
through the yearly ritual of raising registration fees as offsetting 
collections. The proposal would have: Reduced Section 6(b) registration 
fees over a 6 year period; incrementally extended the Section 31 
transaction fees to Nasdaq trades; and reduced the rate for all 
transaction fees beginning in 2002. In total, the package was projected 
to reduce fee collections by $751 million by 2002. Initially, a portion 
of the fees was to be deposited as offsetting collections. Beginning in 
2002, all fees would be deposited in the General Fund and no fees would 
be allotted as offsetting collections.
    Mr. Chairman, in 1996 you introduced S. 1855, a bill that would 
have also reduced SEC fees. However, in response to concerns by the 
Clinton Administration you and then-Senate Banking Committee Chairman 
D'Amato (R-NY) agreed to postpone consideration of the legislation. The 
Administration expressed concern that ending the offsetting collections 
funding practice would require appropriators to fund the SEC's full 
budget out of the General Fund, subject to the discretionary spending 
caps, forcing reductions in other programs.
    The House passed H.R. 3005, the Securities Amendments of 1996, on 
June 19, 1996, but not before adding the SEC reauthorization provisions 
originally embodied in H.R. 2972. The Senate amended and passed H.R. 
3005 without the fee provisions on June 27, 1996, setting up a 
conference in which the SEC fee issue would have to be resolved. The 
fee issue was highly controversial in conference. Negotiations among 
House and Senate authorizers and appropriators, the OMB, and SEC held 
up the bill for weeks and threatened to entirely derail the 
legislation. An agreement was finally reached on the fee issue and the 
bill was passed in the closing days of the 104th Congress. H.R. 3005 
became P.L. 104-290 --the National Securities Markets Improvement Act 
when the President signed the bill on October 11, 1996.
    Under the complex deal worked out in conference, transaction fee 
rates were fixed until fiscal year 2007, and decreased thereafter. The 
NSMIA specified that a portion of the registration fee is deposited as 
General Fund revenue, and a portion is made available to the 
appropriators as offsetting collections. Transaction fees remain at 1/
300th of 1 percent until fiscal year 2007, when they are reduced to 1/
800th of 1 percent. Beginning in 1997, Nasdaq trades became subject to 
the full transaction fee rate. While the exchange transaction fees are 
collected as General Fund revenue, the Nasdaq transaction fees are 
deposited as offsetting collections. (However, this will change when 
the Nasdaq converts to an exchange later this year and those 
transaction fees will be deposited in the General Fund, and therefore 
be unavailable to the appropriators.) By pushing general revenue losses 
into the out-years, the new fee structure minimized budget-scoring 
concerns.

Current Situation and Impact
    Unfortunately, actual fee collections have significantly outpaced 
the Congressional Budget Office's (CBO) and OMB's conservative 
estimates of market growth relied on by this Committee and Congress in 
enacting NSMIA. In fiscal year 2000, actual collections from all 
sources (including Section 31, Section 6(b), and merger and tender 
fees) grew to $2.27 billion dollars-- over six times the SEC's budget 
of $377 million. The latest CBO estimates show runaway growth in the 
fees from $2.478 billion in fiscal year 2001 to $3.769 billion in 
fiscal year 2005. In other words, total SEC fees are projected to raise 
$15.2 billion over the next 5 years ostensibly to finance an agency 
that will require only a fraction of that amount over the same period. 
These excessive and growing fee collections will remain a tax on 
savings and investment unless Congress takes action.
    Thus, today's fee collection surplus was not anticipated because 
the Government's budget projections used overly conservative estimates 
of the dollar volume growth in the markets. The markets have 
experienced remarkable dollar volume growth over the last few years. 
For example, total volume on the Nasdaq increased from 272.6 billion 
shares in 1999, to 439.6 billion in 2000. This 60 percent increase in 
Nasdaq trading volume occurred even as the value of the Nasdaq index 
plummeted by 50 percent.
    With volume growth driving fee receipt growth, it is not surprising 
that budget estimates routinely fall short of the actual fee 
collections and must be continually revised upward. A set of fee 
projections for fiscal year 2001-2007 illustrates this trend, and the 
constantly expanding fee surplus:

    Looking at fiscal year 2001, the 1999 estimate for fees for that 
year were two and a half times greater than estimated in NSMIA just 3 
years earlier. Now the latest CBO estimate for the fiscal year 2001 
shows that fee receipts will be about 25 percent higher than estimated 
in 1999 and three times greater than the 1996 NSMIA estimate.
    Clearly, this is not the scenario this Committee intended when it 
fought to redesign the SEC funding structure in 1996 to reduce the 
amount of the fee surplus. I want to emphasize that the issue here is 
not SEC funding. Indeed Mr. Chairman, the legislation you have 
sponsored with Senator Schumer protects SEC funding. Section 5 of S. 
143 safeguards against overcollections or undercollections of the fees. 
This provision is one of the most important in the proposed legislation 
to avoid repeating the mistakes of prior fee restructuring efforts--it 
eliminates the need to have absolutely accurate long-term projections 
of market activities--something that simply cannot be done. Section 5 
ensures that the restructured fees will fund the SEC without turning 
the fees into a general revenue tax--regardless of the accuracy of 
budget projections.
    For the record, I will state unequivocally that the industry and 
all investors consider it their duty to pay for continued self-funding 
for the SEC. That has never been in question, the discussion focuses 
only on the level of collections.

Impact on Securities Professionals
    Section 31 transaction fees operate as a tax on the gross trading 
revenue of securities professionals. One STA member firm which makes 
markets in about 100 Nasdaq stocks estimated that its Section 31 fee 
payments amounted to 40 percent of its net OTC trading profits before 
the allocation of overhead. Another firm found that its Section 31 fee 
payments were twice the amount of its rental payments for the building 
housing its trading activities. Section 31 fees operate as a gross 
receipts tax, with traders reporting rates of 3.5 percent, and as high 
as 6 percent of gross revenues. As a gross receipts tax, the fees are 
paid before Federal and State taxes, before salary, and before 
allocations for overhead. Because of this, market makers and 
specialists face potential losses in a down market as margins get 
further squeezed even as their trading volumes and their transaction 
fees can continue to increase. This is a perverse scenario and onerous 
burden on the very traders who provide liquidity in the markets for 
hundreds of stocks.

Impact on the Markets
    Excessive fees also reduce liquidity in the market. The major 
impact falls on the thinly traded stocks of small start-up companies. 
Therefore, the fees deter capital from flowing to the entrepreneurial, 
high-technology companies that have driven the new economy and given us 
the longest expansion in U.S. history.

Impact on the Investing Public
    But ultimately, the investing public shoulders this burden. Section 
31 fees are a tax on personal savings and investment in the form of 
lower returns. And as more Americans invest, more people pay this tax. 
Indeed, recent Federal Reserve data show that the percentage of 
households owning equities has increased from around 32 percent in 1989 
to 41 percent in 1995 and to over 50 percent in 2000. It is important 
to note that Americans of all income levels are increasing their 
savings through equity ownership. According to some of the most recent 
statistics, 29 percent of households with incomes between $15,000 and 
$25,000 own stock.
    What is the impact of these fees on people saving through mutual 
funds? Take for example two widely held mutual funds, the Vanguard 
Windsor II Fund and the Vanguard Growth Fund. Each pays close to one 
quarter of a million dollars annually in these fees--fees paid by 
investors through reduced earnings. And just as more Americans are 
owning equities, more people are also saving through mutual funds. 
Forty-nine percent of U.S. households, or approximately 50 million 
households own mutual funds. Seventeen percent of U.S. households with 
incomes below $25,000 owned mutual funds in 2000. This is up from 13 
percent of households in that income bracket just 2 years earlier. So 
this is not a tax on the wealthy. It is paid by the smallest, as well 
as the largest market participants in the country.
    Section 31 fees are not only a drag on savings through equities and 
mutual funds, they also hurt those who participate in pension plans, 
including public pension plans. For example, over a 5 year period the 
following States' public pension plans will pay millions of dollars of 
Section 31 fees:

     New York-- over $13 million.
     California--nearly $18 million.
     New Jersey-- over $2.5 million.
     Michigan--nearly $5 million.
     Pennsylvania--approximately $6.5 million.
     Connecticut-- over $1 million.

    Finally, SEC Chairman Arthur Levitt's testimony last year noted 
that individual investors pay 87 percent of the fees levied on NYSE 
trades. This clearly illustrates where the burden of these fees falls.
    At a time when the Government is encouraging savings and planning 
for the future, it is inconsistent for it to levy this pernicious tax 
on investment.

Conclusion
    STA strongly supports S. 143. This legislation provides meaningful 
fee relief, while ensuring that the SEC continues to have the resources 
necessary to supervise and regulate the securities markets. Indeed, the 
fee levels set in S. 143 will accommodate the recent significant 
increases in the SEC's budget and the ``pay parity'' provision that is 
also a part of this legislation. Furthermore, S. 143 addresses concerns 
raised by Members of the Appropriations Committees by ensuring that 
they will continue to receive the same level of fees designated as 
offsetting collections as included in the most recent budget baseline. 
Indeed, as mentioned earlier in my testimony, without a change in 
current law, the conversion of the Nasdaq to an exchange will 
automatically deprive the appropriators of nearly all the offsetting 
collections they now receive.
    As I also mentioned earlier, we applaud the inclusion of a fee cap 
and floor concept that insures against the unintended overcollection of 
fees while protecting the SEC from any possible shortfall. Given the 
recent track record of budget projections, this is a prudent safeguard 
to ensure that the legislation fulfills its intent. In sum, S. 143 
would move the fee collection system toward its original purpose: 
Providing a stable source of funding for the SEC, derived from a 
constituency that benefits from its oversight and regulation.
    In closing, Mr. Chairman, STA applauds you for scheduling this 
prompt hearing on an issue of great importance to our members across 
the United States. Thank you, and I will be happy to answer any 
questions.

RESPONSE TO WRITTEN QUESTION OF SENATOR SARBANES FROM LAURA S. 
                             UNGER

Q.1. Section 31 of the Securities Exchange Act of 1934, the 
statute which authorizes transaction fees, directs the 
collection of fees ``to recover the costs to the Government of 
the supervision and the regulation of securities markets and 
securities professionals, and costs related to such supervision 
and regulation, including enforcement activities, policy and 
rulemaking activities, administration, legal services, and 
international regulatory activities.'' Section 6(b) of the 
Securities Act of 1933, the statute which authorizes 
registration fees, similarly directs the collection of fees to 
recover the costs to the Government ``of the securities 
registration process, and costs related to such process, 
including enforcement activities, policy and rulemaking 
activities, administration, legal services, and international 
regulatory activities.''
    Please identify the Government agencies, in addition to the 
Securities and Exchange Commission, that have conducted 
enforcement activities, policy and rulemaking activities, 
administration, legal services or international regulatory 
activities that relate to securities markets, securities 
professionals, or securities registration.

A.1. The Federal securities laws grant regulatory authority to 
several of the Federal Government agencies other than the SEC, 
most notably the Federal banking agencies (the Federal Reserve 
Board, the Office of Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, and the Office of Thrift 
Supervision), the Department of Justice, including the U.S. 
Attorneys' Offices, and the Commodity Futures Trading 
Commission.
    While not constituting the ``supervision [or] regulation of 
securities markets and securities professionals'' per se, a 
number of other Federal Government agencies, in carrying out 
their own statutory mandates, engage in enforcement or other 
regulatory activities that relate, in some way, to the 
securities markets, securities professionals, or securities 
registration. For example, the Department of Justice, through 
its Antitrust Division, has brought civil actions alleging 
violations of the Sherman Act against securities firms and 
national securities exchanges. As another example, the Equal 
Employment Opportunity Commission has brought a civil action 
against a securities firm alleging violations of the Americans 
with Disabilities Act.
    In some of these situations, these agencies may consult or 
work cooperatively with our staff in conducting these 
activities; in other situations, these agencies may conduct 
these activities without the Commission's involvement or even 
awareness. Accordingly, we cannot produce a definitive list of 
the agencies that have conducted these activities. In addition, 
other Federal Government agencies--for example, the Office of 
Management and Budget under the Paperwork Reduction Act, 44 
U.S.C. Section 3501 et seq. (1998)--have regulatory 
responsibilities in connection with Federal agency rulemakings, 
including Commission rulemakings.
    Finally, the Commission and its staff provide information 
to or obtain information from other Federal agencies in the 
course of the Commission's enforcement and other regulatory 
activities or as part of routine agency to agency cooperation 
and information sharing.\1\ Arguably, where another agency 
incurs costs to provide information to the SEC, these costs are 
``related to the [Commission's] supervision and regulation'' of 
the securities markets, securities professionals, or securities 
registration.
---------------------------------------------------------------------------
    \1\ As partially reflected in an earlier list provided to Senator 
Sarbanes's staff of Federal agencies our enforcement division has 
cooperated with on investigations, the Federal Government agencies that 
the Commission has been in contact with at least periodically over the 
last several years include: the Central Intelligence Agency, Commerce 
Department, Commodity Futures Trading Commission, Comptroller of the 
Currency, Defense Department, Energy Department, Energy Information 
Administration, Environmental Protection Agency, Federal Bureau of 
Investigation, Federal Communications Commission, Federal Criminal 
Investigative Organization, Federal Deposit Insurance Corporation, 
Federal Reserve Banks, Federal Reserve Board, Federal Trade Commission, 
Food and Drug Administration, General Accounting Office, Housing and 
Urban Development Department, Internal Revenue Service, Justice 
Department, Labor Department, National Archives and Records 
Administration, National Credit Union Administration, State Department, 
Office of Thrift Supervision, Small Business Administration, Treasury 
Department, U.S. Agency for International Development, U.S. Customs 
Service, U.S. Geological Service, U.S. Postal Inspection Service, and 
the U.S. Trade Representative.
---------------------------------------------------------------------------

          RESPONSE TO ORAL QUESTIONS OF SENATOR GRAMM

                      FROM LAURA S. UNGER

Q.1. During the Committee's February 14 hearing, Chairman Gramm 
asked the Commission to submit information on the effect of an 
existing higher pay scale for economists on our retention rate 
for economists compared to our retention rate for lawyers.

A.1. The Securities Litigation Uniform Standards Act of 1998 
(``SLUSA''), P.L. 105-353, granted the Commission the authority 
to pay its economists more than permitted under the General 
Schedule. Although SLUSA does not amount to full pay parity for 
the reason that is explained below, it does preliminarily 
appear to be having some positive effect on the Commission's 
attrition rate for economists.
    During fiscal 1999, prior to introduction of the new pay 
scale, the Commission lost three of the eight permanent 
economists in its Office of Economic Analysis (``OEA'') and 
hired an additional six, resulting in a total of 11 permanent 
economists employed in OEA at the start of fiscal year 2000.\2\ 
During fiscal 2000, the first fiscal year the new pay scale 
applied, three permanent OEA economists left the Commission and 
eight more were hired. As of the start of fiscal 2001, the 
Commission employed a total of 16 permanent economists in OEA, 
none of whom have left as of mid-March 2001.
---------------------------------------------------------------------------
    \2\ As a recruiting tool, OEA also hires a number of 
Intergovernmental Personnel Act (``IPA'') fellows, who typically are 
university faculty members in finance or economics. Because IPA fellows 
are temporary employees who work pursuant to contract for a set period 
of time, they have not been included in these figures.
---------------------------------------------------------------------------
    Given the limited time it has been in effect and the 
limited number of staff to whom it applies, it is hazardous to 
attempt to draw any conclusions from this data. Nonetheless, if 
we were to try to draw conclusions it would appear that while 
the authority granted by SLUSA has slowed attrition, it has not 
brought the Commission's economist attrition rate down to an 
acceptable level. The loss of three of the 11 economists who 
began fiscal 2000 in OEA constitutes an attrition rate of over 
21 percent.
    Even with SLUSA's pay authority, the Commission still 
cannot match the pay and benefits of economists at the Federal 
banking regulators. Economist pay at the Commission is 
currently capped at the EX-IV level for base pay, and at the 
EX-III level for total pay. For IPA fellows, pay is capped at 
the General Schedule 15/10 level. Pay at the Federal banking 
agencies is not subject to these caps. The Competitive Market 
Supervision Act would address these problems and therefore 
better enable the Commission to recruit and retain economists.

Q.2. During the Committee's February 14 hearing, Chairman Gramm 
asked the Commission to submit the amount the Commission has 
contributed to the Federal Treasury in the past 10 years 
through collection of fines imposed for violations of the 
securities laws.

A.2. The table attached as Appendix A shows, by fiscal year, 
the total fines collected and contributed to the Treasury in 
connection with Commission enforcement actions as of February 
2001. The chart includes fines collected through settlements 
and judgments after litigation, but does not include 
disgorgement.
    Appendix B is a chart that was discussed during the hearing 
and should be included in the record.

                PREPARED STATEMENT OF ROBERT B. FAGENSON
          Vice Chairman, Van der Moolen Specialists USA, Inc.
               Vice Chairman of the Board of Directors of
       The Specialist Association of the New York Stock Exchange
                           February 14, 2001
    Chairman Gramm, Senator Schumer, Members of the Committee, good 
afternoon. I am Robert Fagenson, Vice Chairman of the Board of 
Directors of The Specialist Association of the New York Stock Exchange. 
I am pleased to appear before you to present the Association's views 
concerning S. 143--The Competitive Market Supervision Act of 2001. The 
Association wholeheartedly supports the legislation because it will 
provide significant relief to all American investors while preserving 
the high quality of securities regulation by ensuring that the 
Securities and Exchange Commission (``SEC'') is fully funded. I will 
limit my testimony today to transaction fees imposed by Section 31 of 
the Securities Exchange Act of 1934 (``Exchange Act'') and the 
registration fees under Section 6(b) of the Securities Act of 1933 
(``Securities Act'').
    The Specialist Association is comprised of 18 broker-dealer firms, 
which include all of the individual specialists of the New York Stock 
Exchange. Our specialists are at the heart of the auction market of the 
world's most active stock exchange. The Exchange's auction trading 
marketplace is the mechanism through which the prices of stocks listed 
on the Exchange are ``discovered'' and liquidity is provided to buyers 
and sellers. We coordinate orderly trading in our respective specialty 
stocks. We supply liquidity when necessary to the proper operation of 
the market, acting as buyer or seller in the absence of public demand 
to buy or sell in those stocks.
    Over 260 billion shares of stock were traded on the Exchange in 
2000 in more than 221 million transactions. Specialists participated as 
principal, selling for their own accounts, in 13.6 percent of those 
transactions, paying approximately $50 million in Section 31 fees last 
year (an amount we expect to significantly increase this year). A total 
of $370 million was paid in Section 31 fees in 2000 on NYSE 
transactions by all NYSE member firms and their customers.
    Beginning in the 1930's, the Federal Government, through the SEC, 
has collected fees on the registration of securities under the 
Securities Act (``Section 6(b) fees'') and on sales of securities under 
the Exchange Act (``Section 31 fees''). Although these fees were 
initially intended as user fees to defray the costs of Federal 
securities regulation, the amounts collected have exceeded the cost of 
running the SEC since 1983. As discussed below, those collected amounts 
now are more than six times the SEC's budget. In short, the Section 
6(b) and Section 31 fees have become a general tax on capital raising 
and a tax on American investors. Moreover, as I will discuss in a 
moment, Section 31 fees represent a tax imposed at a particularly 
inopportune time in the life cycle of a specialist's or market maker's 
capital.
    Please let there be no misunderstanding. We support continued full 
funding for the SEC, an agency that has overseen our constantly 
growing, remarkably fair and efficient markets that raise new capital 
and serve the public investor, contributing to our worldwide reputation 
for fairness and integrity. What we object to is misuse of the 
financing mechanism designed to offset the cost of operating the SEC 
through over-collection of the fees and application of the proceeds to 
completely unrelated purposes.
    As things stand, the Section 31 fee cannot be viewed as anything 
but a tax on the sale of securities, a purpose for which it was never 
intended. Although assessed in relatively small increments--it is 
currently set at 1/300 of 1 percent of the total dollar amount of 
securities sold, the tax is creating a drag of over $1 billion per year 
on the capital markets. This drag on our markets represents a cost paid 
by all investors, including the huge number of individual participants 
in mutual funds, pension plans, and other forms of retirement accounts.
    These fees have consistently grown over years. In fiscal 1999, the 
SEC's fee collections from Section 6(b) and Section 31 fees (and fees 
related to mergers and tender offers) mushroomed to $1.75 billion. That 
is, the SEC's fee collections amounted to more than five times its $337 
million budget. In fiscal 2000, the agency collected more than $2.27 
billion, more than six times what was needed to fund its operation.
    To bring transaction fees back into line with the cost of running 
the SEC, there have been efforts to cap or reduce Section 31 fees, 
including Chairman Gramm and Senator Schumer's proposal last year. 
These efforts are supported by, among many others, Americans for Tax 
Reform, the National Taxpayers' Union, Citizens for a Sound Economy, 
the U.S. Chamber of Commerce, the Profit Sharing/401(k) Council, the 
Security Traders Association, the Securities Industry Association, and 
all the securities and options markets, including the New York Stock 
Exchange and our Association.
    Also, we expect the trading volume on the Exchange to continue to 
increase, which in turn will have the effect of increasing the Section 
31 tax. In fiscal 1999, the average daily trading volume was 809 
million shares. In 2000, it was over one billion shares. And with 
decimalization now fully implemented, volume will surely increase again 
by a significant amount (as it did when the standard trading increment 
was reduced to 1/16 from 1/8).
    The Section 31 ``tax'' is unfair particularly to our members 
because it in effect imposes a tax on the amount of gross revenue, 
rather than on profits. Thus, our members must pay this tax regardless 
of whether their business is profitable. Moreover, the Section 31 tax 
is imposed at a particularly inopportune time in terms of its ultimate 
effect on market liquidity. Unencumbered by Section 31 fees, revenue 
generated by specialists and market makers in securities transactions 
could be used by these market professionals to make our markets more 
efficient through investment in technology, provide more liquidity to 
the market and provide additional benefits to American investors. Thus, 
investors and the market in general lose more than simply the amount of 
the Section 31 fees themselves in terms of sacrificed market liquidity 
and efficiency.
    We would also be wise to remember that we have had the benefit of a 
thriving and competitive bull market for an unprecedented number of 
years. During such times, the impact of measures placing inappropriate 
burdens on capital formation and market activity can be softened or 
blunted. As is often the case with respect to ill-advised policy, it is 
only when market conditions eventually decline and liquidity becomes 
more scarce that the full brunt of a cloaked tax such as the current 
Section 31 fees will be felt by us all. This will be particularly true 
to the extent that market prices stagnate or decline.
    In conclusion, the general tax revenue is the objective of other 
laws, but not the securities laws. Congressional action to restore the 
unintended tax now represented by the Section 31 fee to its original 
purpose--to fund the operations of the SEC, and not for any other type 
of Federal expenditure--is long overdue. While providing significant 
relief to investors by reducing the excess fees collected by the SEC, 
at the same time S. 143 guarantees full funding of the agency by 
providing it with the authority to adjust fee rates in the event fee 
revenues are projected to fall below the appropriated amounts. All 
American investors will benefit from this bill. We applaud your efforts 
regarding this important matter and we are committed to working with 
you and this Committee toward the passage of this legislation.
    The Association is thankful for this opportunity to express its 
views on the Competitive Market Supervision Act of 2001. Thank you, Mr. 
Chairman.
    I would be pleased to respond to any questions you, Senator 
Schumer, or other Committee Members may have.
                               ----------

                    PREPARED STATEMENT OF LON GORMAN

                   President, Schwab Capital Markets
             Vice Chairman, The Charles Schwab Corporation
                   Vice Chairman of the Board of the
                    Securities Industry Association
                           February 14, 2001

    Chairman Gramm, Senator Sarbanes, and Members of the Committee, I 
am Lon Gorman, President of Schwab Capital Markets and Vice Chairman of 
The Charles Schwab Corporation, a national and global leader in 
corporate and municipal finance, and in securities sales, trading, and 
research. I also serve as the Vice Chairman of the Board of the 
Securities Industry Association (``SIA'').\1\ I am testifying on behalf 
of SIA and we appreciate this opportunity to present our views 
concerning securities transaction fees and the legislation introduced 
by Chairman Gramm and Senator Schumer.
---------------------------------------------------------------------------
    \1\ The Securities Industry Association brings together the shared 
interests of more than 740 securities firms to accomplish common goals. 
SIA member-firms (including investment banks, broker-dealers, and 
mutual fund companies) are active in all United States and foreign 
markets and in all phases of corporate and public finance. The U.S. 
securities industry manages the accounts of approximately 50-million 
investors directly and tens of millions of investors indirectly through 
corporate, thrift, and pension plans. The industry generates in excess 
of $300 billion of revenues yearly in the U.S. economy and employs 
approximately 700,000 individuals.
---------------------------------------------------------------------------
    We believe it is critical that the Congress examine the issue of 
Securities and Exchange Commission (SEC) fees because the facts and 
assumptions on which enactment of the current statutory fee structure 
was based have changed. Fees that were developed several years ago to 
fund the cost of regulating the securities markets now seriously exceed 
the Government's cost of regulation to such a degree that they 
constitute a drag on capital formation, and a special burden on every 
American investor.
    The ``Competitive Market Supervision Act'' (S. 143), introduced by 
Chairman Gramm and Senator Charles Schumer, has earned the strong 
support of the securities industry because of its dual approach that 
combines a fee-rate cut and a cap on revenue generated by the 
transaction fees. S. 143 represents the best approach for full funding 
of the SEC and reducing the burden on capital caused by this excessive 
fee. If enacted, the Gramm/Schumer proposal would save investors $8 
billion over 5 years--funds that would have otherwise been collected as 
excess fees and remitted to the Treasury General Fund.
Relief for Investors
    The U.S. securities markets serve as a strong engine for economic 
growth and job creation. The securities industry furnishes the seed 
capital for start-up companies, provides the liquidity that is 
essential to bringing investors into the market, harnesses investment 
for growth and expansion for the economy, and creates savings and 
investment vehicles for millions of Americans. Today, almost 50 percent 
of U.S. households own stock, directly or indirectly. By the end of 
this year, the number of individuals who own stock is likely to exceed 
80 million.
    In fiscal year 2000 SEC fee collections exceeded $2.2 billion, 
$1.89 billion more than the $377 million SEC appropriation for fiscal 
year 2000. That is more than six times the Commission's funding level. 
Fee collections are projected to exceed SEC appropriations by more than 
$2 billion in fiscal year 2001. In fact, fee collections are projected 
to exceed the cost to run the Commission by more than $2 billion for 
each year through fiscal year 2005. If the current statutory fee 
collection continues American investors will shoulder the burden of 
more than $15 billion in these fees over the next 5 years. We do not 
believe it is in the interest of investors--or, of the Nation's capital 
markets--for these fees to so grossly surpass the regulatory costs 
incurred. These transaction fees drain capital from the private markets 
removing it at the very start of the capital-raising process--and 
divert it into the U.S. Treasury.
    Why should the general public care? Aren't these fees being paid by 
Wall Street? Generally they are not. When brokerages charge an investor 
for selling shares, they generally pass on the SEC fees to the 
customers in transaction costs. In fact, most securities confirmations 
include a separate line item for the SEC transaction fee. Once this fee 
is reduced, investors will be able to see the savings immediately. The 
individual investor, not the broker, is paying the vast bulk of the 
transaction fees. This is money that could help fund retirement 
savings, fuel economic growth, and create jobs.
    We know that our markets have been made better, and fairer, by the 
presence of a strong and effective Securities and Exchange Commission. 
And, because it is in our interest--and, more importantly, in the 
public interest--to have an effective SEC, SIA has always strongly 
supported full funding for the agency so that it can carry out its 
important investor protection mission. In the past, SIA has supported 
full funding for the SEC even at times when budget freezes and budget 
cuts were being pressed on all Federal agencies. If S. 143 is enacted, 
the excess fees charged to investors, the industry, and issuers will be 
reduced; yet will still generate substantially more in revenues than 
the cost of running the SEC.
Background
    Five years ago, the industry was asked to ``step up to the plate'' 
and pay additional fees in order to help Congress move to a more 
reliable funding mechanism for the SEC. We agreed to do so because we 
believed it was in the long-term interests of the securities markets. 
The fee structure adopted as part of the National Securities Markets 
Improvement Act of 1996 (``NSMIA'') for the first time assessed 
transaction fees on the Nasdaq markets. This provision was intended to 
establish parity between the fees assessed on exchange and Nasdaq 
markets. While it was expected that, as a result of these changes, the 
fees paid by investors and the industry would increase in the near 
term, the ultimate goal of NSMIA's fee provisions was to bring fees 
collected by the SEC more in line with the actual cost of running the 
agency.
    At the time these provisions were enacted, no one anticipated the 
explosion of market activity that has taken place over the past several 
years and continues today. In particular, no one could have predicted 
the phenomenal influence that online investors would have on the equity 
markets. In 1996, the transaction fee, already levied on NYSE stocks, 
was first imposed on transactions of securities traded on the Nasdaq 
Stock Market.
    Since the enactment of the NSMIA in 1996, SEC appropriations have 
risen in an effort to give the SEC sufficient resources to oversee the 
markets and enforce the Federal securities laws. However, the increase 
in transaction and other fees paid by investors, issuers, and the 
industry has far exceeded the increase in the cost of running the SEC. 
The following chart sets forth the fees collected by the SEC during 
fiscal years 1996 -2000 and estimated fees to be collected during 
fiscal years 2001-2005 (including Section 6(b) fees, Section 31 fees, 
and other fees), compared with the amounts appropriated or requested to 
be appropriated to the SEC during these years (dollar amounts in 
millions):

    In addition to our concerns about these fees as a drag on 
investment, we are concerned about the potential for these fees to 
jeopardize market liquidity.
    Although transaction volume and market valuations have increased, 
market maker and specialist revenue on these transactions has declined 
as a result of lower margins and technology investment to handle the 
ever-increasing volumes. Section 31 fees thus comprise an increasing 
share of gross trading revenues, even though the rate of the fee has 
remained constant. If left uncorrected, these fees will have a 
significant effect on the ability of market makers and specialists to 
commit capital to the market. We believe that our equity markets--much 
admired and envied throughout the world--would operate much less 
efficiently in the absence of market maker and specialist liquidity.
Unintended Results
    This result certainly was not intended by Congress. When Congress 
adopted NSMIA's fee provisions, its intent was clear. The language of 
Section 6(b) states that the registration fees to be collected by the 
SEC under that section ``are designed to recover the costs to the 
Government of the securities registration process, and costs related to 
such process. . . .'' \2\ Similarly, the language of Section 31 states 
that the transaction fees to be collected by the SEC ``are designed to 
recover the costs to the Government of the supervision and regulation 
of securities markets and securities professionals and costs related to 
such supervision and regulation. . . .'' \3\ Unfortunately, the fees 
have far exceeded the cost of regulation. They divert resources which 
could be used more productively elsewhere in our economy; and they 
discourage capital investments in technology that could be used to make 
our equity markets more efficient and attractive to investors. This is 
real capital that could be used to fund new businesses, to build 
plants, to create jobs, and to add to the national wealth.
---------------------------------------------------------------------------
    \2\ Securities Act of 1933, Section 6(b)(1).
    \3\ Securities Exchange Act of 1934, Section 31(a).
---------------------------------------------------------------------------
    Furthermore, the transaction fee structure creates an uneven 
playing field. Congress expressly stated that extending the transaction 
fees to Nasdaq securities was intended to ``provide more equal 
treatment of these organized markets, which are overseen by the 
Commission.'' However, when Congress extended the SEC transaction fees 
to Nasdaq trades, it failed to take into account the structure of the 
Nasdaq market. In the Nasdaq market, dealers frequently must trade as 
principals to maintain orderly markets and to provide liquidity to 
customers on demand. Although many of these dealer-to-dealer trades are 
being effectuated ultimately to fill a customer order, they are 
nevertheless subject to multiple fee assessments.
Conclusion
    There may be some who believe that since the U.S. stock market has 
recently had a number of record years, investors, market makers, 
specialists, and other market participants somehow can, or should, pay 
these fees. We have demonstrated that we are more than willing to pay 
the fair cost associated with regulation. But, it simply is not right 
to charge investors, issuers, and other market participants six times 
the cost of regulation. At a minimum, a burden of this size, with its 
potential to adversely affect the structure of the capital markets, 
should not be imposed inadvertently because of changed circumstances.
    The securities industry is faced with a number of challenges 
currently and in the near future: Converting and expanding quote 
capacity to accommodate decimalization; further reducing settlement 
time to T+1; ensuring that investors and issuers benefit from the 
explosion in technology and electronic commerce; and, meeting the 
competitive challenges of globalization. All of these challenges have 
required, and will continue to require, significant financial 
investment on our part, as well as the time and efforts of our most 
talented industry professionals. We intend to meet these challenges to 
maintain and enhance the international preeminence of our capital 
markets, to help fund the continued growth of the U.S. economy, and to 
ensure that investors and issuers have even more opportunities in the 
new century.
    We appreciate Chairman Gramm and Senator Schumer's recognition of 
the disparity between the fair cost of regulation and the costly burden 
of the transaction fee. This legislation will better align the amount 
of fees collected with the cost of regulation. We have confidence that 
Congress, once it reviews the facts, will make a decision that is in 
the interest of millions of investors. We are committed to working with 
you and this Committee to find such a solution.
    Thank you.
                               ----------

                 PREPARED STATEMENT OF ROBERT H. FORNEY

                  President & Chief Executive Officer
                         Chicago Stock Exchange
                           February 14, 2001

    Chairman Gramm, and other distinguished Members of the Committee, I 
appreciate your interest in the Section 31(a) fee issue and welcome the 
opportunity to offer my views on behalf of the Chicago Stock Exchange. 
The excessive Section 31(a) fees, monies that end up in the general 
revenues rather than the intended purpose of funding the SEC, are 
simply a hidden tax on the American people who are working hard to 
build a secure financial future for themselves and their families. You 
are to be commended for your efforts on this very important issue.
    The Chicago Stock Exchange (``CHX'') opened for trading in 1882 and 
today has become the second-largest stock exchange in the United 
States. In 2000, over 26 billion shares traded and approximately 65 
million trades executed--transactions representing a total value of 
over $1.2 trillion. We are known as an innovative, low-cost, and high-
quality equity marketplace that is a leader in technology. Our 
automated trading systems provide a significant boost in productivity, 
capacity, and reliability while reducing our operating costs. Our 
investment in technology has served us well, resulting in an average 
annual growth rate of more than 70 percent over the past 5 years. 
Today, we are able to process over 10,000 trades per minute. The CHX 
also uniquely benefits the investor by providing the largest auction 
market for Nasdaq stocks. These and other aspects of our exchange, such 
as extended trading hours, automated price improvement, and the ability 
to trade more than 4,400 issues--more than any other U.S. exchange-- 
distinguishes the CHX.
    While we are justifiably proud of our growth, we continue to be an 
organization mostly comprised of small businesses that fiercely compete 
with much larger rivals. Excessive Section 31(a) fees are not just an 
unfair burden on investors, they are also an impediment to small 
trading firms growing their businesses, providing quality jobs to 
people in our community, and providing serious competition that 
benefits all investors.

The Case For Reducing Section 31(a) Fees

    Before I lay out the arguments for reducing fees, let me reassure 
you that the Chicago Stock Exchange supports a fully funded SEC. 
Investor protection is of the utmost importance --investors have to 
have confidence in the integrity of our markets. At the same time, 
these excessive collections must be brought into line with the true 
budget needs of the SEC.

Section 31(a) Fee Collections Far Exceed Expectations and
SEC Budget Needs

    When the NSMIA fee structure was established in 1996, no one could 
have anticipated the explosion in transaction volume that has occurred 
and the huge increase in fees that are being collected as a result. As 
SEC Chairman Arthur Levitt noted in 1998:

          [t]he projections made in 1996 when NSMIA was enacted did not 
        anticipate the strength of the bull market we are enjoying 
        today. Collections are currently up across the board--not only 
        for Nasdaq trades. Collections will continue to increase if 
        market activity continues to grow.

    They did. The fiscal year 2000 revenue generated by Section 31(a) 
transaction fees alone (not including other fees, such as registration 
fees) was $1.1 billion, which far exceeded the SEC's appropriated 
budget of $377 million. In fiscal year 2001, Section 31(a) fees are 
again expected to exceed $1 billion because the sharply increasing 
volume of transactions is expected to continue. For many reasons that 
include growing investor activity in the United States and around the 
world, we believe that even if market values decline, transaction 
volume is likely to continue to grow.
    This unexpected growth in securities market transaction since 1996, 
which at our exchange has averaged more than 70 percent growth per 
year, provides sufficient reason for Congress to revisit the fee 
structure established in NSMIA to bring it more in line with the 
purposes Congress articulated. If left unchecked, the Section 31(a) fee 
is expected to continue to swell, imposing a back-door tax on capital 
and limiting the U.S. securities industry's ability to create better 
products for investors at lower costs and aggressively compete in the 
global market.

The Section 31(a) Fee Structure Harms Competition in the Industry

    Excessive Section 31(a) fees also reduce competition within the 
industry. The CHX is a regional exchange that trades securities that 
are listed and also traded on the primary markets (the New York Stock 
Exchange, the American Stock Exchange, and the Nasdaq). CHX competes 
for these trades almost entirely based upon speed, quality, and cost of 
execution. To be successful, it must better the primary markets in 
these areas.
    The CHX strategy is to gain a cost advantage over its competitors 
through greater reliance on technology and enhance productivity. The 
CHX has invested heavily in creating systems and processes that can 
efficiently execute large numbers of transactions. Our productivity has 
increased more than 50 percent in each of the past 5 years. These 
investments are fixed costs. As volume increases, these fixed costs are 
being spread over a greater number of trades, which, in turn, allows 
the CHX to reduce transaction fees for all users of its markets. The 
strategy has proven to be successful to the point where there are now 
many products that have no associated exchange fee.
    While the CHX has been able to reduce its transaction fees as the 
volume has increased, Section 31(a) fees have remained constant. The 
result has been that an increasingly larger percentage of our 
customer's cost of doing business at the CHX is beyond our ability to 
control. Cost is, in large part, what gives the CHX a competitive 
advantage and that advantage grows as our volume grows. A Federal 
Government tax rate that remains fixed regardless of volume or SEC 
needs limits our ability to compete and provides a disincentive to 
pursuing further volume-related efficiencies.
    Mr. Chairman, let me cite a specific example of just how these 
excessive fees can impact a small business trading on our Exchange. 
Rock Island Specialists, a specialist firm on our floor, has 70 
employees. It competes successfully with firms many times its size 
because of the quality of its service and importantly, its ability to 
control its costs. Like all successful small businesses, Rock Island 
Specialists would like to grow its business and create new employment 
opportunities, but growth requires capital.
    This year Rock Island will pay the U.S. Government approximately $4 
million in Federal income taxes. It will pay the U.S. Government an 
additional $1.75 million in Section 31(a) fees; a 44 percent Federal 
surtax on its business. I believe that we are all better served by 
allowing small businesses to use the excess fees to build their 
businesses and create greater competition in the marketplace. Investors 
will benefit from the competition and new jobs will be created.
Section 31(a) Fees Harm Our Ability to Compete Internationally
    European exchanges are consolidating their operations. It is our 
view that, in the near future, only a few large exchanges are likely to 
dominate the European market. These exchanges will pose a competitive 
threat to U.S. exchanges should they add U.S. securities to the multi-
national mix of securities traded in their markets. The ability to 
route orders over vast distances to foreign markets and to receive 
prompt reports of executions is becoming less difficult with each 
advancement in communications technology. National boundaries are 
losing their relevance in the securities markets.
    Foreign exchanges will be in direct competition with U.S. regional 
exchanges for trades in securities listed on the U.S. primary 
securities markets. The foreign exchanges are likely to find, as U.S. 
regional exchanges have found, that to be successful they will have to 
compete on quality and cost executions. But these foreign competitors 
will not be subject to Section 31(a) fees and therefore have a cost 
advantage over U.S. regional exchanges. This advantage could prove 
critical to the CHX and other U.S. regional exchanges that compete with 
the primary markets, and with each other, based largely on their 
ability to provide lower cost transactions.
    This potential competitive threat can be seen in the financial 
futures markets which, since their inception in the 1970's, have been 
international markets. Traders from around the world direct orders to 
U.S. futures exchanges to trade foreign currency; Eurodollars, U.S. 
Treasury Bonds, and other financial futures contracts. Similarly, 
traders from around the world direct their orders for German Bund 
financial futures to a German futures exchange. As recently as 2 years 
ago, those traders directed their orders for Bund futures contracts to 
a futures exchange in England. In this example, the business left 
England and went to Germany because the futures exchange in Germany 
could provided the same product in a more cost efficient means.
    The lessons learned from events in the international derivatives 
markets also can apply to securities markets. We can expect that 
investors will shift from a market in one country to a market in 
another to trade the same product at a lower cost, just as has happened 
in the derivatives markets. Anything that imposes a higher costs on 
U.S. exchanges, such as excessive Section 31(a) fees, risks harming our 
international competitiveness.
The Current Section 31(a) Fees Structure Deserves Congressional 
        Attention
    As noted above, the current Section 31(a) fee structure was 
carefully crafted by Congress in 1996 to meet important public policy 
goals. Again, the CHX supports a fee structure that provides stable, 
long-term funding mechanism for the SEC to ensure that its essential 
regulatory and oversight functions are continued. Today, the 
Commission's funding is no longer in question. Given the explosive 
growth in securities transactions and the likelihood of continued 
expansion, the issue has become whether the current Section 31(a) fee 
formula is appropriate in 2001 and beyond. From the perspective of the 
CHX, excessive fees harm our ability to compete at home and abroad to 
provide the highest quality service at the lowest industry costs for 
our members and all investors.
    The Competitive Market Supervision Act of 2001 will restore the 
Section 31(a) fee structure to its intended purpose: Fully funding the 
SEC. We support this effort to eliminate what has become an unfair tax 
on investors and an unfair burden on participants in the U.S. equity 
markets.
    We appreciate the Committee's interest in this issue and we 
appreciate the opportunity to present the views of the CHX. We remain 
committed to focusing our efforts on lowering trading costs while 
enhancing U.S. leadership in this most critical of industries.

             STATEMENT OF THE INVESTMENT COMPANY INSTITUTE
                           February 14, 2001

    The Investment Company Institute* appreciates the opportunity to 
submit our testimony to the Committee in strong support of S. 143, the 
Competitive Market Supervision Act of 2001. The Institute would like to 
commend Chairman Gramm, Senator Schumer, and the other Members of the 
Committee for their continuing efforts to facilitate staff retention by 
the SEC and better align the fees imposed under the Federal securities 
laws with the costs incurred by the Securities and Exchange Commission 
(SEC) in implementing and enforcing such laws.
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    *The Investment Company Institute is the national association of 
the American investment company industry. Its membership includes 8,414 
open-end investment companies (``mutual funds''), 489 closed-end 
investment companies and 8 sponsors of unit investment trusts. Its 
mutual fund members have assets of about $6.937 trillion, accounting 
for approximately 95 percent of total industry assets, and over 83.5 
million individual shareholders. The Institute also represents the 
interests of investment advisers.
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    Mutual funds are an integral part of the U.S. economy and have 
become one of America's primary savings and investment vehicles. More 
than 88 million investors in over 50.6 million U.S. households own 
mutual fund shares today. Since 1990, the percentage of U.S. retirement 
assets held in mutual funds has more than tripled to $2.4 trillion. 
Moreover, most mutual fund investors are ordinary Americans; the median 
household income of fund shareholders is $55,000.
    The Institute has always supported, and will continue to support, 
providing the Federal Government with adequate financial resources to 
ensure effective regulatory oversight of mutual funds. We believe, 
however, that fees charged under the Federal securities laws should be 
reflective of their intended purpose to offset the costs associated 
with activities of the SEC. The Institute remains concerned that, in 
the absence of legislation such as S. 143, SEC fees will generate 
revenues significantly in excess of those required to fund SEC 
operations. Indeed, we note that while the SEC's budget for the current 
fiscal year is $422 million, it will collect more than $2 billion in 
fees. In essence this excess revenue amounts to a needless tax on 
investors who are saving for retirement, sending their children to 
college, or otherwise providing for their future. According to 
information provided by this Committee, the amount of this needless tax 
is expected to be about $8 billion over 5 years and $14 billion over 10 
years. S. 143 will eliminate this needless tax on investors by reducing 
fees collected by the SEC to an amount commensurate with the SEC's 
appropriated budget.
    Importantly, S. 143 is drafted to guarantee that the SEC receives 
100 percent of the funds it needs to operate. Indeed, if fee 
collections fall below 100 percent of the SEC's appropriated budget, 
the legislation will permit temporary fee increases as necessary to 
ensure that the agency has adequate financial resources to continue 
effective regulatory oversight and to continue important investor 
protection initiatives. The Institute supports this important 
provision.
    In addition to ensuring that the SEC is provided adequate financial 
resources to fulfill its regulatory responsibilities, S. 143 will 
better enable the SEC to maintain adequate staffing resources. The SEC 
has experienced a staff attrition rate nearly twice that of the overall 
Federal Government. S. 143 would enable the SEC to combat this high 
attrition rate of its professional staff by permitting the SEC to set 
employee pay levels at levels comparable to those paid by other 
financial regulatory agencies. This provision will enable the SEC to 
attract and retain qualified staff, and thus ensure its continued 
excellence in its regulatory oversight role.
    The Investment Company Institute believes S. 143 will benefit the 
millions of Americans invested in mutual funds and especially applauds 
provisions that: (1) reduce the heavy tax paid by consumers through 
excessive fees charged to mutual funds under the Federal securities 
laws; and (2) reform the SEC's pay structure to enable it to attract 
and retain qualified staff. As such, S. 143 will better enable the SEC 
to fulfill its mission of protecting investors and maintaining the 
integrity and the efficiency of the Nation's securities markets. The 
Institute endorses and urges the passage of S. 143 for these reasons. 
We appreciate your consideration of our views and look forward to 
working together to ensure that S. 143 becomes law during the 107th 
Congress.

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