Senate panel signals `go’ on SEC fee cut

Key Senate Democrats appear ready to greenlight legislation to lower fees on transactions and new stock issues that the financial services industry pays – and ultimately passes on to investors.

The proceeds, originally intended to fund the Securities and Exchange Commission, have ballooned way beyond what it actually costs to run the agency; $2 billion is expected to be collected this fiscal year compared with the SEC’s $422 million budget.

The industry has used that fact to lobby strongly for some relief, and it appears to have finally struck a responsive chord on Capitol Hill.

Eight of the Senate Banking Committee’s 10 Democrats expressed support for the bill at a recent hearing – all but guaranteeing passage in that chamber.

Most Senate Republicans and House Financial Services Committee Chairman Michael Oxley, R-Ohio, support the measure, which would set fees based on the SEC’s budget and reduce them once the budget was met.

Programs could suffer

Only Maryland Democrat Paul Sarbanes, ranking minority member on the Senate committee, expressed reservations about the bill.

“I don’t want to rain on the parade, and I know where the parade is going – marching through here at a rapid clip,” he said at the Feb. 14 hearing on the bill, which is sponsored by the committee’s chairman, Phil Gramm of Texas, and Sen. Charles Schumer, D-N.Y.

Fee reductions, which are ex-

pected to cost the government about $1 billion a year and $14 billion over the next 10 years, would come out of general revenues, Mr. Sarbanes said.

“Any additional reductions in SEC fees will necessarily come at the expense of strengthening Social Security and Medicare, providing tax relief for middle-income families, pharmaceutical initiatives and paying off the debt,” he asserted.

Mr. Sarbanes also noted that the securities industry is doing well, reaping a record $20 billion in pretax profits in 2000. That’s a 59% increase over $12.6 billion in pretax profits in 1999.

The 1999 profit figures, Mr. Sarbanes said, were up 26% over 1998, while the cost of individual transactions for most investors is “tiny.”

But Marc Lackritz, president of the Securities Industry Association, said the excess would have been better spent by reinvesting it “to stimulate economic growth and create jobs.” Mr. Lackritz maintains dual offices in New York and Washington.

Heavy tax burden

Laura Unger, the SEC’s acting chairman, told the committee that 87% of fees on transactions on the New York Stock Exchange and 82% of transaction fees charged for Nasdaq trades were passed on to investors. The Congressional Budget Office estimates that the fees, under current law, will be $3.8 billion by fiscal 2005.

Mr. Gramm released figures showing that an average investor would pay about $1,300 in excessive fees over a 45-year work cycle.

If that amount earned a conservative annual return of 6%, it would generate about $5,800 more at retirement, or more than $11,000 for a working couple, he said.

“That shows that the fees are a very heavy tax [burden] on people who try to build up savings to send their children to college, to retire or to provide for their future,” he said.

Leopold Korins, president and chief executive officer of the Securities Traders Association in New York, told the committee that excessive fees also reduce liquidity in the market.

“The major impact falls on the thinly traded stocks of small startup companies,” he said.

“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.”

Mr. Korins also said that the fees are a drag on the earnings of mutual funds and pension plans. Public pension plans in California will pay nearly $18 million in transaction fees over five years under current law, and New York pension plans will pay more than $13 million, he said.

The legislation would ensure that enough money would be available to fund the SEC, but would also ensure “that the fees on new stock issues and transactions don’t become a general revenue source for the federal government,” said Mr. Gramm.

The legislation also would give SEC lawyers pay parity with those in other financial services regulatory agencies. Ms. Unger testified that SEC turnover was 17% for its attorneys in fiscal 2000 compared with turnover of about 7% among attorneys in other government agencies.

She attributed the high SEC turnover to lower pay scales. The agency currently has 250 vacant jobs, she said, adding that such a disparity also leads to a morale problem.