At Issue: A matter of wealth, not stealth

Your Sept. 25 editorial asserts that the fees on securities transactions have simply become a general tax because the total amount collected last year ($1.7 billion) far exceeds the budget of the SEC ($377 million). I disagree with the premise of your argument that the regulatory bodies are profiting at the expense of investors and that there is no evidence that the securities industry in underregulated.

There are two important questions you failed to ask, much less answer, before you reached the conclusion that these user fees were unfair “stealth taxes,” however. Rather than simply stating the obvious — that more funds are collected than budgeted — these questions approach this controversy from the other side of the argument: that the Securities and Exchange Commission and self-regulatory organizations are too underfunded and understaffed to effectively regulate today’s securities markets.

The first question you should have raised is: Does the amount collected from these user fees give us an indication of how complex the markets have become? As we all know, the securities markets have undergone unprecedented growth over the last 10 years. As recently as 1965, only 10.4% of American households owned stock either directly or through mutual funds. By 1997, that share had more than quadrupled – to 43%. Increased ownership has helped the market surge from a mere 1100 in 1983 to more than 10 times that number. Money raised annually through new offerings rose to 2 trillion in 1999, from only $58 billion in 1980. To accommodate this growth, the number of those with Series 7 securities licenses has climbed to more than 650,000, from 196,000. Daily trading volume has soared to close to 2 billion shares a day, from 500 million in 1993. One can see that the markets have become more complex, if for no other reason than sheer size.

abuses have escalated

The second question, then, is: Are the regulatory bodies too underfunded and understaffed to effectively regulate this more complex market, especially under a self-regulatory model which is not only unique in American industry but which was put in place 60 years ago when the markets were far less complex? Since Mr. Levitt became chairman, the budget of the SEC has increased only 28%. A good indication that the agency lacks the resources to do the job is that the number of enforcement cases it pursues has remained somewhat flat at 450-525 per year.

Flagrant abuses in online trading have escalated. During that same period, self-regulatory organizations either turned a blind eye to abuses in the industry or applied their rules on a very subjective basis, benefiting many of the larger member firms.

In his book, “The Transformation of Wall Street,” law professor Joel Seligman writes: “The greatest weakness in SEC `self-regulation’ of the over-the-counter market was the risk that during periods when the commission was led by less-activist chairmen than [William O.] Douglas, or hamstrung by budget stringency, the SEC would cease to prod the NASD to discipline its members vigilantly.”

The jury is still out on Mr. Levitt, even though some accused him of sleeping at the wheel during the Nasdaq market makers’ collusion of the early1990s. But we can most definitely say that the SEC, along with most other federal agencies, is hamstrung by “budget stringency.”

specious argument

Rep. Vito Fossella’s argument that fees passed on to investors would dissuade them from entering the markets is specious at best. I would conjecture that, if surveyed, most of the investing public would not even be aware that the fees existed. If asked whether they would pay 1/300th of 1% per transaction to ensure that the securities markets were policed properly, how do you think most investors would reply? I would dare say that the investing public has lost more from major investment frauds (e.g., Prudential limited partnerships, Piper Jaffray’s mutual fund problems, hedge fund problems, market-maker collusion, etc.) than was ever spent on user fees.

Mr. Fossella’s recent comments give us a good idea of where he really stands on the issue. He was quoted by the Bureau of National Affairs in August of 1999 as saying: “I would err on the side of not regulating online trading and let the industry police itself.” We have already seen how disastrous that kind of thinking has been this past year — for investors and investment professionals alike — as the airwaves were inundated with deceptive advertising.

Cutting these fees would be a bad idea. Instead, the fees should be dedicated solely to operating the SEC. Excess funds should be saved for when volumes dry up. Staff levels should be increased to spread the case loads, and pay levels should be brought up to match those in the private sector so that we can have the best and brightest policing the industry and protecting our funds – especially if the politicians are successful in privatizing Social Security. Further, the entire self-regulatory system should be reviewed and updated to accommodate the complexities of today’s markets.

Thomas O’Keefe,

Founder and president,

National Association of

Investment Professionals

Minneapolis