Reducing Securities Transaction Fees: Revenue Effects of H.R. 1088 and S. 143

Reducing Securities Transaction Fees: Revenue Effects of H.R. 1088 and S. 143

Order Code RS20953
Updated September 7, 2001
CRS Report for Congress
Received through the CRS Web
Reducing Securities Transaction Fees:
Effects on Collections of H.R. 1088 and S. 143
Mark Jickling
Specialist in Public Finance
Government and Finance Division
Summary
Both the House and the Senate have passed separate bills that would reduce fees
collected by the Securities and Exchange Commission (SEC) from sellers of corporate
stock and companies active in securities and merger markets.1 H.R. 1088 and S. 143
have the common aim of reducing the amounts collected to a sum more nearly equal to
the SEC’s budget, and would replace the current fee structure. In some cases, existing
fee rates would be lowered; in others, collections would become subject to annual caps
or targets. The proposed fee schedules in the two bills are not identical. This report sets
out the differences, and, relying upon forecasts of collections under current law prepared
by the Congressional Budget Office (CBO), presents dollar estimates of the impact on
fee collections through FY2011. Over fiscal years 2002 through 2011, H.R. 1088 would
reduce fee collections by an estimated $15.0 billion; S. 143 by about $16.7 billion. This
report will be updated if legislative developments warrant.
There are three major securities transaction fees:
! Section 31 transaction fees, payable by sellers of corporate stock;
! Section 6(b) registration fees, payable by corporations selling new issues
of stock or bonds; and
! merger and tender offer fees, paid by corporations acquiring other
businesses, pursuant to Sections 13(e)(3) and 14(g) of the Securities
Exchange Act of 1934.
The table and chart below show how total collections of these fees would be affected
by the provisions of H.R. 1088 and S. 143. The versions of the bills referred to are: S. 143
as passed by the Senate on March 22, 2001, and H.R. 1088 as passed by the House on
June 14, 2001.
1 For an overview of the issue, see CRS Report RS20204.
Congressional Research Service ˜ The Library of Congress

CRS-2
Table 1. Estimated Collections of All Securities Fees,
Under Current Law, H.R. 1088, and S. 143: Fiscal Years 2002-2011
(All figures in millions of dollars)
Current Law
H.R. 1088
S. 143
Fiscal
CBO Fee
Year
Collections
Change
Change
Estimated
Estimated
Forecast
From CBO
From CBO
Collections
Collections
Estimate
Estimate
2002
2,872
1,212
-1,660
915
-1,957
2003
3,188
1,309
-1,879
1,115
-2,073
2004
3,523
1,525
-1,998
1,340
-2,183
2005
3,958
1,827
-2,131
1,665
-2,293
2006
4,444
2,172
-2,272
2,010
-2,434
2007
2,079
1,141
-938
1,015
-1,064
2008
2,124
1,177
-947
1,035
-1,089
2009
2,373
1,368
-1,005
1,225
-1,148
2010
2,641
1,566
-1,075
1,430
-1,211
2011
2,939
1,797
-1,142
1,665
-1,274
Totals
30,141
15,094
-15,047
13,415
-16,726
Source: Calculated by CRS using April 2001 baseline forecasts by the
Congressional Budget Office (CBO).
The figures in the table above depend on CBO estimates of the future volume and
value of securities market transactions, which are extremely difficult to predict. If the
stock, bond, and merger markets underperform the CBO estimates, fee collections under
current law could be significantly lower than the CBO’s forecasts.
The estimates in Table 1 for fee collections under H.R. 1088 and S. 143 are derived
by applying the fee rates and collections targets and caps contained in the bills to the CBO
current-law estimates. For simplification, it is assumed that the collections targets and
caps in the bills will be met exactly. In practice, it is likely that actual collections – based
on rates to be adjusted annually according to forecasts of market activity – would fall short
of the target figures in some fiscal years.

CRS-3
Figure 1. Estimated Securities Fee Collections
Under Current Law, H.R. 1088, and S. 143
Source: Calculated by CRS using Congressional Budget Office forecasts.
More detailed estimates of the effects of the bills on fee collections – including the
impact on individual fees – appear in the CBO cost estimates, which are available on the
CBO web site [http://www.cbo.gov] and in the committee reports that accompanied both
bills.2
The estimates presented above suggest that enactment of either bill, or a bill
combining features of the two, would result in a substantial reduction in fee collections.
Using the April 2001 CBO forecast as a guide, CRS estimates that H.R. 1088 would
reduce fee revenue by about $1.50 billion per year (or 50%) over the period of FY2002-
2011, while S. 143 would reduce average annual revenues by about $1.67 billion (or
55%). The difference is attributable primarily to the treatment of 6(b) registration fees,
where S. 143 sets a lower rate that has a more pronounced effect on forecasted collections
than do the target figures set forth in H.R. 1088.
While current law establishes fixed fee rates (some of which are set to decline in
FY2007), both H.R. 1088 and S. 143 mandate the use of flexible rates for some fees, to
be adjusted annually in order that collections meet caps or target figures specified in the
legislation. An interesting possibility is that the fee rates could rise if market activity
and/or prices decline: that is, given falling volume, each transaction might have to be taxed
at a higher rate to obtain the specified amount of revenue. It is conceivable that a severe
market decline could result in some fee rates higher than they would be under current law.
2 U.S. Congress. House. Committee on Financial Services. Investor and Capital Markets Fee
Relief Act. H.Rept. 107-52, Part 1, to accompany H.R. 1088. p. 13-19. and: Senate. Committee
on Banking, Housing, and Urban Affairs. Competitive Market Supervision Act of 2001. S.Rept.
107-3, to accompany S. 143. p. 8-14.

CRS-4
The table below sets out the treatment of the three major securities fees under current law,
S. 143, and H.R. 1088.
Table 2. Levels of Three Major Securities Fees: Under Current Law,
H.R. 1088, and S. 143
Fee
Current Law
H.R. 1088
S. 143
Section 31
1/300th of 1% of
Base rate of $15
Rate to be set
Transaction Fees
the value of stock
per $1 million in
annually in order
(On Sale of Stock
sold. In FY 2007
stock sales, but
that total
and Stock
and later years,
SEC would adjust
collections equal a
Options)
1/800th of 1%.
the rate to meet an
cap specified in
annual collections
Section 4 of the
target level
bill.
specified in Section
3 of the bill.
Section 6(b)
$200 per $1
Base rate of $92
$67 per $1 million
Registration Fees
million of
per $1 million in
of securities sold
(On New Offerings
securities offered,
securities offered,
through FY 2006;
of Stocks and
plus a
but SEC would
$33 per $1 million
Bonds)
supplemental
adjust the fee rate
in FY 2007 and
amount ($39 per
to meet an annual
later years.
million in FY
collections target
2002, falling to
level specified in
zero in FY 2006).
Section 3 of the
In FY 2007, the
bill.
fee will drop to
$67 per $1 million.
Merger and
$200 per $1
Base rate of $92
$67 per $1 million
Tender Offer
million in reported
per $1 million
of transaction
Fees
transaction value.
transaction value,
value through FY
but SEC would
2006; $33 per $1
adjust the fee rate
million in FY 2007
annually to the
and later years.
same rate as that
set for Section 6(b)
registration fees.
Source: Securities Act of 1933, Securities Exchange Act of 1934, H.R. 1088
and S. 143 as passed by the House and Senate, respectively.