Page 1       TOP OF DOC


U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.

    The subcommittee met, pursuant to call, at 9:30 a.m., in room 2128, Rayburn House Office Building, Hon. Richard H. Baker, [chairman of the subcommittee], presiding.

    Present: Chairman Baker; Representatives Shays, Cox, Royce, Lucas of Oklahoma, Barr, Shadegg, Weldon, Fossella, Miller, Ose, Ferguson, Hart, Rogers, Kanjorski, Bentsen, Mascara, Jones, Capuano, Sherman, Meeks, Inslee, Hinojosa, Lucas of Kentucky, Crowley and Israel.

    Also Present: Representatives Oxley and Kelly.

    Chairman BAKER. Good morning. I would like to call this hearing of the Subcommittee on Capital Markets to order and welcome each of you here this morning.

    As an advisory for Members who are present, because of our distinguished first panel of witnesses this morning, I have counseled with Mr. Kanjorski's staff and with Chairman Oxley that we would proceed to receive the testimony of the Senators. Should others wish to make opening statements, we would proceed to those after the Senators have concluded their testimony and before the second panel.
 Page 2       PREV PAGE       TOP OF DOC

    It would be my intent at that point to make brief remarks, recognize Mr. Kanjorski, Chairman Oxley, and Ranking Member LaFalce, should he participate this morning, and limit our opening statements for that purpose. As we are all aware, we have 47 Members and even with 3 minutes per Member we would use up most of the morning telling each other hello.

    So I will suggest that if that method is acceptable to all present we would proceed accordingly.

    At this time, I am particularly pleased to introduce a very good friend and the leader on financial service modernization in the Congress and welcome to our first meeting here the Chairman of our newly organized Financial Services Committee. We now have much more similar jurisdiction, and I am looking forward to a long and productive working relationship with you and Members of your committee. Welcome, Chairman Gramm.


    Senator GRAMM. Mr. Chairman, thank you very much.

    Let me first congratulate you on your chairmanship and Paul on being the Ranking Member. I want to congratulate you for consolidating financial services jurisdiction in one committee. I can assure you it will make my life much easier. And let me also say that I look forward to working with each of you as we try to make financial services cheaper and more available to a larger number of Americans.
 Page 3       PREV PAGE       TOP OF DOC

    I am happy to have the opportunity today to testify on something that seems to me not only imminently reasonable but something that every Member of Congress should be supportive of and that is our efforts to try to see that we don't take fees that were established to fund the SEC and allow those fees to become a source of general revenue in Federal Government.

    As you know, Mr. Chairman, today, even though no one intended it, we collect six times as much in fees on securities transactions, tender fees and fees on the initial offering of stocks as we need to fund the Securities and Exchange Commission.

    The level of this excessive fee is very large, $14 billion over the next 10 years, if we allow the current law to stand. People who try to save and invest, accumulate every mutual fund, every retirement program, both public and private, in America, every person saving for college or for retirement will end up paying billions of dollars of fees that no one ever intended that they pay and do not serve the purpose for which the fees were imposed.

    To give you an idea of the magnitude of these excessive fees, if you take the average worker and look at a 45-year retirement program, on average that retirement program would pay about $1,300 of fees above the level necessary to fund the regulation that is required for the markets that they use to operate efficiently.

    If that $1,300, instead of being paid in excessive fees, were invested, that would mean that the average investor in a retirement program, an IRA or 401(k) program over their working life could expect about $5,800 of additional funds on their retirement, rather than going to the Federal Government in these excessive fees. So this is a major issue. I think that you can see what a major issue it is when you look at the groups that have endorsed the bill in the Senate. Our bill in the Senate basically sets up a process to assure that we always have enough money to fund the SEC. It guarantees that when we are overperforming under our current rate structure the fees be dropped; if we are underperforming, the fees be raised. We do it in such a way as to hold the appropriators harmless. And so the net result is we guarantee a funding source for the purpose that the fee was initially adopted but for no other purpose.
 Page 4       PREV PAGE       TOP OF DOC

    This effort has been endorsed—and I think you are hearing from some of these same groups—by TIAA-CREF, which is the Nation's largest teacher retirement program. It has been endorsed by the American Shareholders Association, by the National Treasury Employees Union and by the California Public Employee Retirement System, among other groups.

    I believe that it is very important that we adopt this bill. We have included in the bill a pay parity provision for the SEC. As I am sure this committee is aware, in the recent past we have become concerned that financial regulators were losing people due to wage increases in the private sector. We raised salaries for financial regulators such as the Comptroller of the Currency and the Federal Reserve Bank, but a similar change was not made with regard to the SEC. As you can imagine, the rate of turnover is very high among professional people.

    I think it is fair to say that, whether one believes we need more regulation or less, that I think there is a very strong consensus that we need to have the most qualified people, the most able people administering those regulations.

    So that is the essence of the Senate bill. We have passed the bill on a voice vote in the Banking Committee. We are going to be on campaign finance reform for the next couple of weeks in the Senate. But it would be my goal toward the end of this month or the beginning of the next month to bring this bill to the floor of the Senate where I am hopeful that we will be successful.

    So I want to commend this subcommittee for holding this hearing. I am very happy to be here. I know you are hearing from a lot of people, but if anybody has a question I would be very happy to try to answer it.
 Page 5       PREV PAGE       TOP OF DOC

    Chairman BAKER. Thank you, Senator.

    I have been advised that Senator Schumer is on his way. He should be here in about 10 minutes. What I would suggest is the subcommittee proceed with a few questions. On the Senator's arrival, we will recognize him for his statement.

    Senator, I have certainly agreed with your view about the need to reduce unwarranted fees—or let's just call this a tax. It has no relation any longer to providing for appropriate level of operation for the SEC. We should ensure for the appropriate level of operation for the SEC, as your legislation does. But one other point in discussion of this subject with some Members, there have been those who question the timing: Why this? Why now?

    In looking back over the performance of the markets over the last year, after the decade of extraordinary growth in 401(k) net worth to most working families—and I would also quickly point out that we have investing, at least since 1995, people online engaging in $8 trades who are not institutional investors investing hundreds of thousands, but working families investing a hundred at a time, making provision for their child's education, maybe to buy their first home, looking forward to their retirement one day. So this very much is a consumer-oriented approach.

    Unfortunately, given the events in the larger economy over the last year, many of these working families have seen that portfolio value drop from 10 percent to maybe a third of value. And if we are to unleash this billion-and-a-half dollars of unnecessary fee collection, isn't that a logical thing to do to promote additional economic growth, perhaps aid in a small way in the recovery of those values of those savings of working families across the country?
 Page 6       PREV PAGE       TOP OF DOC

    Senator GRAMM. Mr. Chairman, let me say it is interesting that you mentioned about the people trading online at very low commissions, because Island Ecn, which has been a leader in that effort, which has brought down commissions dramatically, has told our committee that in analyzing their data that their average customer pays more in fees than Island makes in profit. So this has become a relevant factor to people who tried.

    I would also caution people that when we are talking about big institutional traders, they may be big and they may be institutional, but basically they are big because they have millions of people's money. And that money belongs to working men and women all over America who every day pay these transaction fees; and by paying these transaction fees their level of investment is lower, their retirement security is lower, the hurdle they face in saving enough money to send their children to college is higher. So in the end, with the biggest institutional investor, with Fidelity, every penny they are investing belongs to people in your district, in my State, who are trying to meet some of life's goals with this investment. And when you are paying six times the fee that is required to fund the regulation which you benefit from, then you are making that hurdle higher for people.

    I would also say there is one other reason for doing it now, and that is the very rapid growth of foreign exchanges. And on these foreign exchanges you don't have these transaction fees. And what is happening, just to give you an example, we invented futures. We had an absolute monopoly on the market. Yet now a larger value and volume of futures are traded in Germany than traded in the United States because they have become very competitive. They have had some regulatory advantages; and they have also had some advantages, quite frankly, in that they had not built the structure that we had built in our exchanges. And, as a result, they are becoming very fierce competitors.
 Page 7       PREV PAGE       TOP OF DOC

    I think there is a competitiveness argument to be made for lowering these fees by making American markets more attractive not only to American investors but to foreign investors as well.

    Chairman BAKER. I just wanted to make clear the point some would argue this is to benefit Wall Street types. In fact, the whole mission we are engaged in here is to help working families maintain their money for their own futures; and I think sometimes that gets lost in this debate.

    Senator GRAMM. Well, if I could say, Wall Street types, as you call them, basically are conduits. But the people who are actually paying the fees, as is obviously who has endorsed this bill, are people who are in the National Treasury Employees Union, people who are in the California Public Employee Retirement Program. That is where the fees are being paid.

    Chairman BAKER. Without doubt.

    Mr. Chairman, given our new rulings around the House, I have expired my 5 minutes, and therefore I would recognize Mr. Kanjorski.

    Mr. KANJORSKI. Thank you, Mr. Chairman.

    Senator, let me put this in perspective. We did make an adjustment in 1996, and it was a very fair adjustment that fees go to cost. No one, however, could have anticipated the explosion of the markets in the last 4 years. This is not something that has been planned or thought about as if by accident or perhaps by good fortune.
 Page 8       PREV PAGE       TOP OF DOC

    Do you feel the same support for this bill would exist if we separated the pay parity piece from the fee reduction?

    Senator GRAMM. Well, I think you would have obviously the support of the investing community. I think the two go together.

    I think what we are trying to do is to set up a reliable system to guarantee a funding source for the SEC. And I think, while we are doing that, that guaranteeing that SEC employees are competitively paid and we have got a chance to have effective regulation, I think the two go together.

    I would say that in 1996 when we passed that old law we intended through that law to eliminate excessive fees. And I think you are right. No one ever decided they wanted to have the excessive fees. It is just that we do have them. The 1996 law we wrote was a static law which made a one-time adjustment. We thought that would fix the problem. It didn't. And the approach we have taken is to try to set up a system where annually you do an evaluation and adjust the fees.

    Mr. KANJORSKI. Although we call this a fee, Chairman Baker has referred to it perhaps as a tax. I will accept either one as the description. But, if we are going to lose a billion-and-a-half dollars a year, obtained by charging 33 cents for every $10,000 in trading—which does not seem excessive, about the cost of a call in a telephone booth—how would you make up for the loss of those revenues?

 Page 9       PREV PAGE       TOP OF DOC
    I find it very difficult to ask this question, because you always have a million ways to make budget cuts. But, in all seriousness, we are going to lose a billion-and-a-half dollars, Senator. What fees are we going to increase? What taxes are we going to increase? Where do you see that billion-and-a-half dollars coming from?

    Let me suggest several areas that I look at in analyzing this issue.

    One, the Securities and Exchange Commission does not have what we call CRA. This money very easily could be a potential way of funding that type of activity.

    Two, there is a decided disadvantage in the United States varying from region to region. We all recognize that one-third of our economy falls into a classification of a distressed area. In reality, this fee overcharge, if maintained and used for other purposes, could clearly fund regional economic development in distressed economic communities, including those in Texas, Mississippi, and throughout the South.

    Or we could use it for environmental cleanup. A billion-and-a-half dollars would fund a $30 billion environmental cleanup fund for the country. That would help Pennsylvania in a very big way. We have a lot of land reclamation needs and polluted water as a result of past mining practices. And, 1/10 of that fund would be enough to clean up the land in Pennsylvania.

    So, while I agree it comes out of a particular category, it does not seem to be all that penalizing. I am wondering, rather than running on down that road, if it would not be better to hold the fee adjustment until we see what happens to the overall budget and revenue picture of the Government.
 Page 10       PREV PAGE       TOP OF DOC

    Senator GRAMM. Well, if I may, let me respond by saying that basically what you are doing is—I think there are two arguments I would like to make. One is, the fee was imposed for a specific purpose; and the fee is not now being used for that purpose; and I think there is a certain illegitimacy in taking a fee that was meant as a user fee and using it for general Government.

    The second question is, even if you had decided to do that, you would have to ask a question: Is America benefited more by expanding economic development programs or funding environmental cleanup than it would be advantaged by letting literally millions of families do a better job in building up their retirement and saving money to send their children to college?

    I think that a stronger argument can be made that the American society would be benefited—not only was a tax collected for this purpose, but that American society would be benefited more by letting millions of savers and investors keep it than any other purposes that you have mentioned, as meritorious as many of them are.

    Finally, let me say that, as we look at where we are today in the American economy, it is hard to imagine a better time to adjust fees to the funding needs of the agency they were meant to fund. In fact, if you can't do it today, when could we ever do it? What circumstance that has ever existed in history would be more advantageous to us for making the adjustment than today?

    Chairman BAKER. I am sorry, your time has expired, Paul. I will come back to you.
 Page 11       PREV PAGE       TOP OF DOC

    Mr. Chairman, Mr. Oxley.

    Mr. OXLEY. Thank you, Mr. Chairman.

    Welcome, Chairman Gramm; and we look forward to our mutual relationship in the jurisdiction of the two committees.

    I want to thank you for your leadership on this issue and your leadership in the last Congress getting finally, after all those years, financial services modernization passed which bears your name along with Chairman Leach and Chairman Bliley. It was a pleasure to work with you. Many of the folks in this room had a great deal to do with our success, and I think the fact that the committee has expanded jurisdiction goes directly to our success in passing Gramm-Leach-Bliley, and we are excited about that. Obviously, the next step is to deal with some of the issues that we have before us, including the rate cut for these fees.

    Let me ask you this: You had indicated that you had hoped to get the bill to the floor late this month or early April. We obviously would like to keep abreast of that progress from the Senate and also from our perspective as well. I had some discussions with the gentleman from New York beside me here, Mr. Fossella, who will be lead sponsor on the legislation; and we hope to introduce that bill perhaps as early as next week but certainly the week after. But I want you to know that we are not slacking off, but we are going to try to keep pace. We think that the arguments you made make a great deal of sense and that this is a perfect opportunity to pass this needed legislation.

 Page 12       PREV PAGE       TOP OF DOC
    I have no particular question but simply wanted to commend you and also your cosponsor, Chuck Schumer—he is, as you are, a former Member of this body—for, both of you, for your leadership and bipartisanship on this very important issue. I yield back.

    Senator GRAMM. Thank you, Mr. Chairman. I look forward to working with you.

    I think this is something that, obviously, there is a lot of work to be done. But I think we can do it.

    I would like to say this is a fee and not a tax. This is a user fee which has been not through any effort by Congress to do it, but simply because the power of the American economy is now used for a purpose that it was never collected. It is important that we keep it a fee and not a tax, because by fee it is within your jurisdiction. If this were a tax, it would be under the jurisdiction of the Ways and Means Committee.

    Chairman BAKER. Thank you, Mr. Chairman.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    Mr. Chairman, always good to see you. I have to say as a fellow Texan I am proud to see that Wall Street is coming to a Texan to get help on this matter.

 Page 13       PREV PAGE       TOP OF DOC
    Senator GRAMM. Well, actually, I went to Wall Street to get help on this matter.

    Mr. BENTSEN. Senator, I think you are on the right track on this bill. But I do have a couple of questions. One is—and also I want to say I think, if I understand your testimony, the sort of anti-deficiency language, though, in your bill protects the functions of the Securities and Exchange Commission, which I think we would all agree for investors' sake, we would want to make sure that the SEC is not shortchanged in the process.

    You in your bill, as I understand it, you reduce all fees, not just the Section 31 transactional fees.

    Senator GRAMM. That is right.

    Mr. BENTSEN. Can you tell us why you chose to not just focus on the base of consumer side but instead on the registration fees and merger and acquisition fees?

    Second of all, if you could tell us, you mentioned that this the excess fee collection is about $14 billion, I think, over 10 years—or projected to be that amount as we are looking at—out 10 years on a lot of issues today. I don't know and I didn't look for this, but I don't think this is in the President's budget blueprint. You may have noticed it. And, if not, have you talked with the Office of Management and Budget and do you have a read from the Administration of how they feel about your legislation?

    Senator GRAMM. Well, let me deal with these two points.
 Page 14       PREV PAGE       TOP OF DOC

    First of all, as I looked at the fees, all three fees are ultimately paid for by the saving and investment community. Probably the most inefficient fee from an economic point of view is an excessive fee that is imposed on the issue of a new stock. I mean, that is like taxing seed corn. That really is a tax that makes it harder for every small business in America to grow and create jobs and become a bigger business, and I felt there was a very strong argument for that.

    In mergers, ultimately, the owner, the seller of the one stock, the buyer of the other stock is the American public. So while we sort of think of those things as being big business, from the point of view of the Treasury Employees Labor Union and their thrift savings plan, which many of us participate in as Federal employees, we are substantial investors in every one of those transactions as savers and investors. So we decided in the Banking Committee that the way to do it was to do all three fees equally.

    Could you do it any other way? You could probably make an argument either way. My basic belief was that all of these fees ultimately were paid by savers and investors; and, second, that they were all excessive if—that we were collecting 6 times as much as we needed.

    The second question, I believe the Administration will endorse this. I am very reluctant to speak for the new Administration, but I believe in the end that they will be supportive of reducing these fees.

    Mr. BENTSEN. But, at this time, do you know offhand if it is assumed in their budget?
 Page 15       PREV PAGE       TOP OF DOC

    Senator GRAMM. I don't know whether it is or not.

    Mr. BENTSEN. Thank you.

    Senator GRAMM. At some point obviously they will be called upon to say whether they support the repeal of the fees. I believe they will.

    Mr. BENTSEN. Knowing how bashful you are, I am sure you will find a way to ask them about it.

    Senator GRAMM. Well, I have talked to them about it.

    Mr. BENTSEN. I am sure you have.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Bentsen.

    By time of arrival, the next to be recognized is Mr. Fossella.

    Mr. FOSSELLA. Thank you, Mr. Chairman; and thank you for your leadership and, in particular, Mr. Oxley as well. And I welcome you, Chairman Gramm.

    Other than to add very briefly that I think you hit the nail on the head, Chairman Gramm. That is that the moral argument of this is often ignored and lost, and that is this fee was intended to fund the SEC. The promise and the commitment through Congress to the American people and investors was for that very purpose.
 Page 16       PREV PAGE       TOP OF DOC

    And I think trying to work with you and others in the Senate and people like Mr. Oxley here is all we are trying to do is give a refund to the American people and the investors that actually have to pay this fee. We are not saying that we want to underfund the SEC. To the contrary, the SEC is going to be fully protected and, thus, investors are going to be protected.

    In addition, we ask ourselves a very simple question. Do we believe that this overpayment to the Federal Treasury is better left in the hands of investors, families across America? I think Mr. Baker highlighted that. Or do we believe it is better spent here in Washington?

    As I see it, the answer is crystal clear, that if we really want to keep our economy growing, if we want to make more Americans investors, if we want to remove this unnecessary or excessive fee, we reduce it in a reasonable way. So I merely take this time to thank you, as Mr. Oxley does, for your leadership in the Senate. I believe at the end of the day we will do this and do what is best in the interest of Americans and the investors that have to pay this fee. And I thank you for your time.

    Senator GRAMM. Thank you.

    Chairman BAKER. Mr. Mascara.

    I am sorry. Mr. Crowley is next.

 Page 17       PREV PAGE       TOP OF DOC
    Mr. CROWLEY. Thank you, Mr. Chairman. Senator, welcome; and thank you for your testimony today.

    Let me applaud you on your bill and Senator Schumer's bill. I support your measure.

    My office has been working with Congressman Towns and with Congressman Fossella in their markup of their bill. The concern that I have, the thing that really separates your bill from what I believe is Mr. Fossella's bill, is the issue of pay parity for the SEC workers; and I was wondering if you could enlighten us as to why you think that is important. I think it is important. But why you think it is important, why you think it should be included in the House version of the bill.

    Senator GRAMM. Well, first of all, the SEC is losing its most capable people because the differential between their pay at the SEC and the private sector has gotten so large.

    Let me make it clear that the SEC will never be able to compete on a monetary basis with the private sector, so we don't have anyone working at the SEC or the Fed that doesn't want to do that job. Most people could get more in the private sector. Some are doing that job to learn skills and become credentialized to ultimately go into the private sector, which I think is a good thing for both the Government and the private sector.

    But we decided in our financial regulators that we wanted to increase pay for highly skilled people to try to make it possible for the people who wanted to stay at the Fed and the Comptroller through supervision to have ability to do that. Because the jurisdiction of the committees were different. The Banking Committee provided this pay parity for financial regulators, but a similar bill was not provided by the Commerce Committee. So, as a result, we have got employees, financial regulators at the Fed that are making one salary; and then we have got people who are doing jobs at the SEC that are at least as challenging, but they are making a lower pay grade.
 Page 18       PREV PAGE       TOP OF DOC

    So this is, in part, simply good Government policy. It is partly a matter of equity. Again, nobody intended to give the pay parity to people at the Fed and these other financial regulators and not to the SEC. It was one of the by-products of our old jurisdiction where you had people doing similar type work but under jurisdiction of two different committees.

    If you look at the rates at which highly skilled people have left the SEC, I don't quite remember that number, but I think that the turnover rate was something like 9 percent—13 percent last year. That was much larger than in the financial regulatory agencies, and I believe pay parity is a reason.

    Again, whether you want more regulation or less, we want good regulation; and you can't have good regulation without having good people.

    Mr. CROWLEY. Is it your understanding that the industry itself supports that measure?

    Senator GRAMM. I do understand that.

    Mr. CROWLEY. Do you have any knowledge as to whether or not the industry itself overall would support including pay parity in this legislation?

    Senator GRAMM. Well, in our bill in the Senate, we had both pay parity and the fee reduction; and we had broad support for that. I can't speak for industry anymore than I can speak for the Administration, but I think at least most people that I know in the securities business they would rather have more competent people regulating them than less competent people.
 Page 19       PREV PAGE       TOP OF DOC

    Mr. CROWLEY. So for the record, Senator, would you like to see included in the bill pay parity?

    Senator GRAMM. I have it in my bill because I thought it fit, and for the record I would prefer it in the final bill.

    Mr. CROWLEY. Thank you. I yield back the balance.

    Chairman BAKER. Thank you, Mr. Crowley.

    Mr. Ose.

    Mr. OSE. Thank you, Mr. Chairman.

    Senator, I appreciate you coming to visit with us today. I followed you over here.

    Senator GRAMM. Oh, this committee is so big it is hard for an old person to figure out where people are. OK.

    Mr. OSE. It is equally difficult for a young person, I must tell you.

    Senator GRAMM. I had to look four rows up. I tell you it also is disconcerting to see people sitting on the top row that I hardly know. I once was over here, but it has been a while, obviously a while.
 Page 20       PREV PAGE       TOP OF DOC

    Mr. OSE. The only reason I know it is tough for young people is Vito told me.

    On the pay parity question, do you have any numbers to quantify how much additional funding SEC might need to achieve pay parity?

    Senator GRAMM. I don't have those numbers with me, but I think the SEC is going to—are you going to testify? Since we have a perfectly capable person who is being paid to do that, I am going to let her tell you, but they do have the numbers and will provide them.

    Mr. OSE. In terms of the industry itself, many of the intermediaries like Fidelity and others at the end of the day they will go into the market and sell their excess or buy the short having reconfigured their interior portfolios. Are fees collected on the interior transactions?

    Senator GRAMM. Yes.

    Mr. OSE. They are.

    The question I have is that if we are collecting one-and-a-quarter or one-and-a-half billion versus an SEC cost requirement of about $380 million a year, your proposal, if I read it right, would take the fee or tax charge, however you want to assess it, from 1/300th of 1 percent to 1/500th of 1 percent. But it seems to me, if you do the math, you ought to go from 1/300th to 1/900th of 1 percent; and I am curious why we only go a little bit of the way.
 Page 21       PREV PAGE       TOP OF DOC

    Senator GRAMM. I think part of it was in our 1996 law in these outyears we are already reducing the rate somewhat. Believe me, we have spent a lot of time trying to figure out how to do this right since we don't want it to come back 4 years from now and do it again.

    Second, we have tried to do it so that we don't disadvantage our appropriators so that we ended up getting opposition that we don't need. I will get somebody to put down on one sheet of paper exactly how all the numbers work and give them to you.

    Mr. OSE. I would appreciate that.

    My final question is, if I understand the 1996 legislation, it was very specific that this fee was designed to cover SEC's costs. It was not to cover SEC's costs and CRA or environmental remediation and X, Y and Z. Am I correct?

    Senator GRAMM. There was no doubt about the fact, A, when the fee was first imposed and, B, every time we have changed, and including 1996, it has been the clear intent of Congress that the fee pay for the SEC's operation under the basic argument that the investing public benefits from the regulatory process and, therefore, they should pay for it. But no one has ever made an argument that I am aware of, that the Congress has adopted anyway, that the fee should become a general revenue source.

    I would argue—and I don't want to drift off into my old days as an economics professor—but if you were going to define efficiency of a tax as the most efficient tax is where I take a dollar out of your pocket, but I don't change your behavior, so you are a dollar poorer and the Government is a dollar richer, that would be the most efficient tax. The most inefficient tax is a tax where I take a dollar out of your pocket, but in doing so, I change your behavior, say the death tax, so that you sell your business sooner, you do all kinds of other non-productive things so that the cost might be $5 or $6 for every dollar we collect.
 Page 22       PREV PAGE       TOP OF DOC

    I would argue that these fees, while they are justified to pay for the SEC, they are a very inefficient way to raise money. The cost they impose on society is much higher than the money we get. The idea of imposing fees on the issue of new stock, a direct tax on sort of the seed corn of the economy, as a way of funding the Government, it would be almost the worst imaginable tax you could come up with. Yet, through no intent by anybody, we have come up with exactly that system; and that is what we are trying to fix.

    Chairman BAKER. Your time has expired.

    Mr. Israel.

    Mr. ISRAEL. No questions.

    Chairman BAKER. Mr. Lucas.

    Mr. LUCAS OF KENTUCKY. No questions.

    Chairman BAKER. Mr. Hinojosa.

    Mr. HINOJOSA. Thank you.

    Senator GRAMM. We know that name well where I am from.

    Mr. HINOJOSA. Thank you, Senator Gramm. It is a pleasure to see you.
 Page 23       PREV PAGE       TOP OF DOC

    For me, it is a new experience to serve on this Financial Services Committee. I am going to pass up this opportunity to ask questions. Instead, I think I am going to listen and better understand your legislation; and from everything I have heard, it seems like a very prudent thing to do. So, up to this point, I have no objections.

    Senator GRAMM. Thank you, dear friend.

    Chairman BAKER. Thank you very much, sir.

    Mr. Ferguson.

    Ms. Hart.

    Mr. Weldon.

    Mr. WELDON. Thank you, Mr. Chairman.

    I just want to go on record as being in support of the fee reduction as well as the pay parity. I can readily see how that is important.

    Chairman Gramm, I appreciate you coming here and testifying.

    There will be arguments made, I think we have had heard some this morning, about the revenues and what they could be used for, quote, unquote, and that, of course, all those arguments always assume sort of a zero sum game, that if the Government doesn't get the money then the money is essentially lost. I wonder if you could elaborate on that. As I understand it, economic theory, that if we don't take that money in, then that money is going to be out there in the economy, essentially doing good things, creating jobs and in the end producing wealth and sending more money back to the Government.
 Page 24       PREV PAGE       TOP OF DOC

    Senator GRAMM. Well, let me say this, that I think the debate about Government spending versus taxes is a totally legitimate debate when you are debating the tax bill.

    I think on a user fee that the idea that we made a mistake when we set the fee in not taking into account the kind of economic growth we have experienced and therefore we have had this windfall at the expense of schoolteachers in California, retired couples in Florida, struggling parents in New York City, and therefore, since we have had the windfall that nobody ever intended, that now it is our money and therefore we are giving up something in having a fee that fits the purpose that the fee was adopted, I think that is a debate we ought to be having on the tax cut and not on this fee issue.

    The point is, the fee was put in place to fund the SEC and not to be a general revenue source. We are collecting six times as much as we need by the most conservative estimate; and, in doing so, you basically are affecting every saver and every investor in America.

    When you bring together the diverse groups that support this bill, it is pretty clear that this is basically a grass-roots effort. And I just—today, with tens of millions of Americans increasingly investing their money in mutual funds and retirement programs, with—the average American family 3 years ago had more wealth in its financial assets than it did the equity of its home, it seems to me that there is hardly anything that is more people oriented than not penalizing people that are trying to get ahead and save and invest and become owners of wealth.

 Page 25       PREV PAGE       TOP OF DOC
    In the America of 50 or 100 years ago, only a very small number of people could ever benefit from the power of compound interest, and they were so greatly disadvantaged—I mean advantaged as a result of it. Now ordinary people are getting the opportunity, really for the first time, to benefit from it; and I don't think that we should be continuing excessive fees on them. That is really the argument, I think.

    Mr. WELDON. Thank you, Mr. Chairman. I yield back.

    Senator GRAMM. If it is OK, why don't I stop and let Senator Schumer testify?

    Chairman BAKER. Mr. Chairman, what I suggest—I understand Senator Schumer also has some time constraints—that perhaps we would recognize the Senator for his remarks; and for the Members we will pick up in the order we left with questions at that point. So that whoever has been patient and waiting to ask their questions, you'll ask either Senator at your choice.

    Chairman BAKER. It is a pleasure to welcome you back, Senator. As a former colleague on this committee, we look forward to working with you in our expanded jurisdiction capacity and thank you for coming.


    Senator SCHUMER. Thank you, Mr. Chairman; and I would like to thank you and Ranking Member Kanjorski for holding this hearing today.
 Page 26       PREV PAGE       TOP OF DOC

    I would like you to know when you come down from New York to Washington you know that New York is at many disadvantages here in the Capitol. But this is one place where it is not. I count five New Yorkers here. And since this bill not only benefits America and New York, the financial capital of the world, we couldn't have a better forum to start out.

    I would also like to just thank you for getting going early. This is another one of—you would be surprised, Mr. Chairman. Over in the Senate there are many—or several ongoing Gramm-Schumer collaborations, and this is but another.

    Chairman BAKER. It is a source of continuing amazement over here, I would add.

    Senator SCHUMER. The Senate changes you in remarkable ways.

    But, actually, Phil said this is really a grass-roots bill; and to prove it he brought me along here. Just kidding.

    Anyway, I want to thank you and I want to thank Chairman Gramm for his leadership on this issue. It is of great importance to investors across the country, big ones and little ones and every one in between.

    I am pleased to be working with the Senator to be lead Democrat in the effort to reduce the Section 31 and 6(b) fees in the Senate. Frankly, Mr. Chairman, I have never been more sanguine about our prospects, and starting this bi-cameral process early in the legislative cycle optimizes our chances for getting this done in Congress.
 Page 27       PREV PAGE       TOP OF DOC

    As everyone here knows, these fees were enacted to fund the SEC as sort of a user fee. No one had any objection to that and—like the surcharge on airline tickets. Unfortunately, the fees have been—basically fallen out of line with the SEC's budget. Because of the democratization of the securities market in the 1990's, the volume of trading exploded and so has the volume of fees.

    I am sure Phil mentioned the numbers. Based on trading volume 40 years ago, Section 31 fees would have been about $3 million. If fees had only grown with inflation, today they would be $17.7 million. But today they are not $17.7 million, they are $2.3 billion. That is an annual growth rate of 19 percent, and it is 600 percent of the SEC's budget.

    Now, Congressman Kanjorski and I would probably like to see the SEC's budget go up that much, but I know Mr. Chairman and Chairman Gramm would not like to do that. So we think we ought to return it to the taxpayers.

    The way the law is currently written, the fee collections are used to fund the SEC; the rest becomes part of the overall Federal budget. Which means inadvertently this body and our body on the other side have passed a tax on investors that goes to funding all sorts of other projects and programs. We never intended that, and it is about time we undid it, and that is why we are here.

    S. 143 will rationalize the process by reducing the fee rate, capping the total fees collected; and, at the same time, it guarantees the funding that the SEC needs to grow in this expanding securities world. Over 10 years it is going to save investors $14 billion. And since, according to the SEC, investors pay 87 percent of Section 31 fees, all types of investors, from the retiree who owns 50 shares of Cisco to the mutual fund representing all of us with billions in the market, everyone will benefit.
 Page 28       PREV PAGE       TOP OF DOC

    I don't have to remind this subcommittee nearly 50 percent of Americans have direct investment in the stock market. The Gramm-Schumer bill provides relief to every single one of them. So I would—I think theses issue have been talked about freely. I know Senator Gramm has given a great opening statement. So I am—instead of taking the committee's time, I am going to ask that the rest of my statement be read into the record.

    Chairman BAKER. Without objection.

    Senator SCHUMER. And I am here available for your questions until I get a buzz from the Commerce Committee where I have to go back to.

    Chairman BAKER. Understanding that, we would quickly recognize Mrs. Jones, who is next in line.

    Mrs. JONES. Thank you, Mr. Chairman; and, Senator Gramm, Senator Schumer, thank you for coming.

    I have to add a little humor to this. You see, all these guys just came on this subcommittee when they don't have a chance to sit at the top row. When I started, I was first at the bottom corner over there. We used to call it the kids table. So they are enjoying sitting at the top of the row.

    I am going to make my question kind of short. I would ask both of you to address it.
 Page 29       PREV PAGE       TOP OF DOC

    The Section 31 fees are apparently the area in which there has been the most growth. I think, Senator Schumer, you just said that 87 percent of the Section 31 fees are paid by consumers. Your bill actually addresses more than Section 31 fees. If in the other areas the fees have not grown at that magnitude, why is it that you propose that those fees be cut as well?

    Senator GRAMM. Well, let me respond by saying that the figure that Chuck used is the figure where people pay the fee directly. The fees are paid indirectly by the other 13 percent. We just decided to do them across the board because it was the simplest way to do it. There is nothing magic about it. We have an excess of fees. We could have rearranged the distribution of it. But we just thought it was simpler to reduce all the fees across the board and keep the same relationship among the three fees.

    Senator SCHUMER. That is—basically, Phil has summed up the answer. I mean, our job here is to take this extra several $1.8 billion or whatever it ends up being and bring it back to where it should be to the investor. And if we rearranged all the different fee amounts based on income—it is a great question, but we thought it would create more complications and get in the way of our overall goal. But it is not an irrational thing to do. What you suggest is not an irrational thing to do.

    Mrs. JONES. Just as a follow-up, and this is a new area to me since this is a new responsibility to me, too, the Banking Committee, I am assuming—or I would ask that perhaps whatever you have been doing on this issue to assess whether or not in the other areas there has been the significant growth and maybe we might need some of those dollars for the administration, I have no idea, but I would appreciate any information, if you don't do it toward some, subsequently it would be——
 Page 30       PREV PAGE       TOP OF DOC

    Senator SCHUMER. Congresswoman, my staff informs me—I don't know if it is the same exact percentage, but because of IPOs and everything else there has been the same dramatic growth.

    Mrs. JONES. They are trying to tell you something.

    Senator SCHUMER. But those may be reduced under the 1996 act, she reminds me.

    Mrs. JONES. Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mrs. Jones.

    Next would be Mr. Barr.

    Mr. BARR. Thank you, Mr. Chairman. It is a pleasure to have our two colleagues from the Senate here today.

    With regard to the issue of pay parity, I have some real concerns about sort of getting into that whole issue. Where we would draw the line with any number of Government agencies and indeed our military that have a serious problem with pilots leaving, attorneys leaving and going into private practice, at least in part because of disparities in pay and it being more lucrative in the private sector, I don't know that we could ever or would ever want to try and reach pay parity, get into a bidding war with private industry. There is something very special about public service, and certainly we all understand and the vast majority of Federal employees that I know and work with are men and women of tremendous honor and they make very serious sacrifices to serve the public, as all of us do.
 Page 31       PREV PAGE       TOP OF DOC

    Is an issue of the fee reductions, the fee ratio reductions important enough that we should move forward with it even if we don't have the pay parity provision in the legislation?

    Senator GRAMM. Let me respond by saying that by pay parity we mean parity among financial regulators. We have already done it for the other financial regulators, and so we were simply taking this opportunity where we were adjusting the fees to bring all salaries of all financial regulators in the system into parity.

    I am for it. I am also for fee reduction. So I learned long ago in our business if somebody is voting with you on one thing, don't insist that as a condition to do that they vote with you on everything, or else Chuck and I wouldn't be sitting here together.

    But I would ask you to look at this issue. The concern you raise is clearly a valid concern. We are not talking about parity with the private sector. Most people who are working for the SEC probably could make more money in the private sector, but there is no logic to people at the Federal Reserve Bank doing a similar kind of job being paid on a different scale, and we find ourselves in that unusual circumstance today.

    Senator SCHUMER. The only thing I would say to the Congressman is the parity is aimed at banking regulators who are under different types of rulings. The job of being an SEC employee is just as difficult, if not—Chairman Levitt—former Chairman Levitt and I think Acting Chairperson Unger will be here later to talk about the difficulty of finding good people in these. And we need them. The SEC regulation system, where there has been a broad consensus based on disclosure rather than detailed regulation, needs good people there; and we are really suffering. So this isn't going to cost that much. It is not private versus public, which is opening a whole can of worms but, rather, simply equaling our parity to those of the banking regulators who run different rules, because there is different types of agencies.
 Page 32       PREV PAGE       TOP OF DOC

    Mr. BARR. OK. Thank you for the clarification. Thank you, Senators.

    Chairman BAKER. Thank you, Mr. Barr.

    Mr. Meeks.

    Mr. MEEKS. Thank you, Mr. Chairman.

    Senator Schumer, let me just ask this very briefly. You know, because of the Gramm-Leach-Bliley law, we have separated the barriers from banking, insurance and securities. My question is this: Banks still operate on the CRA rules and regulations, and some have suggested why not take some of the excess fees and apply them to funds for economic development and environmental restoration, leveling the playing fields with the banks as far as the CRA requirements. What do you think about that?

    Senator SCHUMER. I think it is an interesting idea, though it is one I would oppose for this reason. The original sort of tradeoff with the banks, why they are under more severe forms of regulation than say the securities industry, is because they got Federal insurance; and still, to this day, people go to banks because they know Uncle Sam is there. Recent history has proven most people believe it is there, not just for the $100,000, but for the whole ball of wax, and history has borne that out. Phil and I would probably disagree whether that was good or bad, but that has never happened.

 Page 33       PREV PAGE       TOP OF DOC
    The whole framework of the securities industry, which is more entrepreneurial, which is more ''win a lot of money and lose a lot of money,'' has never had that Federal insurance. I think it would be a terrible idea for both the industry and for the country to give them that Federal insurance. They would certainly demand it if we extended CRA and other types of things which I have been fully supportive of.

    As you know, in Gramm-Leach-Bliley that was our major sticking point until we came to an agreement on that. And I think it would be a bad idea, because I think it would change the whole entrepreneurial nature of the securities industry.

    I support putting in more dollars. I know how good CRA has been for the community you represent and for hundreds of communities across America and scores across New York, but I don't think this would be the right way to do it.

    Mr. OSE. Will the gentleman yield for a follow-up?

    Mr. MEEKS. I yield.

    Mr. OSE. I want to go back. I asked earlier about the pay period qualification. I scanned Ms. Unger's testimony. It is about $70 million to achieve pay parity.

    If I understand correctly, if we opted to do that, that would take us from about $380 million in SEC costs annually to $450 million, which would still be roughly 1/5th of what the fees are, according to Senator Schumer's testimony.
 Page 34       PREV PAGE       TOP OF DOC

    I come back to my point that the underlying legislation authorizing the fee collection only allowed collection for the costs of SEC. Is that correct?

    Senator GRAMM. The way it works is that we look at the adopted budget of the SEC and we adapt the fee to that. So whatever Congress decides in terms of funding for the SEC, that will—with a delayed process will determine what the fee will be.

    Now, as you know, when we grant pay increases in the Federal Government, sometimes we absorb the pay increase and sometimes we fully fund it without absorption, and sometimes we have a degree of absorption and a degree of funding.

    The decision about funding the SEC will be made by the Appropriations Committee, and they will make a decision—assuming that we grant pay parity, they will make a decision as to whether any of it should be absorbed, all of it should be absorbed, part of it should be absorbed. But there will be no problem in terms of the fee, because the fee will be adjusted; and we maintain a cushion in the way we have set it, in any case, for a fairly short period of time. So we try to come up with a dynamic way of doing it so we are sure, no matter what happens to volumes, that we do not end up with this excessive collection of fees.

    Mr. OSE. If I understand the math of the proposed flexibility, instead of being four or five times what is necessary, we get down to one-and-a-half to two times what SEC costs are on an annual basis.

    Is that about right?
 Page 35       PREV PAGE       TOP OF DOC

    Senator GRAMM. We have a cushion in the bill of some 40 percent or something like that.

    Mr. OSE. I thank the gentleman.

    Chairman BAKER. Our next Member would be Mr. Fossella.

    Mr. Cox.

    Mr. COX. Yes, thank you. I want to thank my Senate colleagues and betters for attending today and providing your testimony.

    Even though, Senator Gramm, I missed your testimony, I——

    Senator GRAMM. I could give it again.

    Mr. COX. You will be providing it.

    Obviously, the central question for us is whether or not to conform our House legislation to what you have provided. I know we will hear from Chairman Unger that she supports our doing that, and I wonder if you can think of any good reason that we should not.

    This is not a trick question.

 Page 36       PREV PAGE       TOP OF DOC
    Senator GRAMM. Again, I stated earlier in responding to Congressman Barr that we decided to do it this way because it made sense to us.

    Mr. COX. I ask you this question not so much because the answer appears obvious, but because if we were to move to conference, presumably the whole thing would be conferencible and we could do it there.

    Is there any reason to think that moving a bill quickly through the committee, as it has been presented to us, might get this enacted into law faster?

    Senator GRAMM. That is a decision you've got to make. We made the decision to do it together because we thought it made sense, obviously, because it is in our bill, if we get to conference, and I believe we will, it will be conferencible.

    But however you want to do it, again, if somebody is for part of something, I am not going to say, don't be with me on part of it because you are not with me on the rest of it.

    Mr. COX. Did you——

    Senator SCHUMER. Which he doesn't always say on everything.

    Mr. COX. Did you address in your earlier presentation—I apologize if you did—what you expect the Senate timing to be?

 Page 37       PREV PAGE       TOP OF DOC
    Senator GRAMM. I said we passed it out of committee on a voice vote. We have legislation pretty well stacked up until the last week of this month. My objective is going to be to try to get this bill on the floor of the Senate either the last week of this month or the first week or two of next month.

    So we are going to try to move forward, and we are working hard on it. There is a strong grass-roots base of support.

    The number of beneficiaries of this bill is very, very large. My guess is with direct investors, with IRAs and 401(k)s, we probably have, counting family members, some 200 million beneficiaries. So it is hard to imagine a bill that will touch more lives.

    Granted, it is just a little bit here, a little bit there. But as I said, on a retirement program, we are talking about $1,300 of excessive fees. If you could invest those fees instead of having them taken away and be $5,800, there are not many retirees that could not find a use for $5,800.

    Mr. COX. This has been essentially a love fest today, with minor exceptions at the margin. We are obviously all in agreement here on the merits of fee reduction and rationalization. The only question, it seems to me, that is before us is to what extent we try and conform ourselves to your overall approach with respect to the pay structure at the Securities and Exchange Commission.

    I would certainly urge our subcommittee to do whatever we can to do this as quickly as possible so we can have legislation before the President as soon as possible.
 Page 38       PREV PAGE       TOP OF DOC

    I yield to my colleague.

    Mr. KANJORSKI. Thank you, Mr. Chairman.


    Mr. COX. In fact, even though I was not here for your earlier comments, I understand it is not entirely a love fest.

    Mr. KANJORSKI. May I make a point? First of all, Senator Schumer, you indicated that we have no insurance policy for investors. In fact, we have the Securities Investor Protection Corporation.

    I would like to offer for the record an article in the New York Times Business Section of September 25, 2000. It is a rather detailed article and one story involves a case in Pennsylvania. Someone invested $100,000 in bonds, and the bonds were fraudulently purchased and absconded by the investor and it took them 4 years to get their money back. It shows the inadequacy of the fund as to how it is operating.

    We need to address this issue. These funds could go to correct these sorts of excesses and failures that are out there. They could protect the American investors we all talk about protecting—not the Wall Street brokers, but ordinary investors in our districts. This is the fund that should do it.

 Page 39       PREV PAGE       TOP OF DOC
    Mr. Chairman, I ask to submit that article for the record.

    Chairman BAKER. Without objection, we will put this in the record.

    Senator SCHUMER. Congressman.

    Mr. KANJORSKI. Yes.

    Senator SCHUMER. I think the best way to protect investors is to give the SEC the funds it needs. They will admit to you that they don't have those now, and our bill helps do that. Of course, SIPC is not a grand scheme of Federal insurance the way we have it for——

    Mr. KANJORSKI. You mean on the SEC pay scale, bringing it up to parity with other financial regulators.

    Senator SCHUMER. And let them hire the people we need.

    Chairman BAKER. We have a couple more Members.

    Let me announce this: We have a vote on the floor. I would intend to stay another 10 minutes, with your cooperation. I have two Members who have been here most of the morning. I know they would like to ask of the Senators before they leave.

 Page 40       PREV PAGE       TOP OF DOC
    Mr. COX. In the interest of moving along, Mr. Chairman, I yield back the balance of my time.

    Chairman BAKER. It has been expired a little while back.

    We have two Members—excuse me, three. We have Mr. Shadegg; Mr. Rogers; Mr. Sherman, who just stepped out; and Mrs. Kelly, who is not a Member but has been patiently participating this morning. If we can, I would like to get those three Members in before the clock runs, starting first with Mr. Shadegg.

    Mr. SHADEGG. Thank you, Mr. Chairman. I will be brief.

    I simply—I guess to join the love fest want to say that on behalf of the interests in my district who have looked at this legislation and have let me know their sentiments, including, at least the figure I have is some 80 million families that invest, I think this is legislation that is well overdue. I commend you on your efforts and I appreciate you for taking your time to come here this morning.

    I yield back the balance of my time.

    Chairman BAKER. Thank you, Mr. Shadegg.

    Our next Member is Mr. Rogers.

    Mr. ROGERS. Mr. Chairman, I will yield my time.
 Page 41       PREV PAGE       TOP OF DOC

    Chairman BAKER. Mrs. Kelly.

    Mrs. KELLY. Thank you, Mr. Chairman.

    I thank both of you Senators for coming over this morning. I appreciate your letting me speak here at the committee today.

    I simply want to ask, you have something in your bill that I don't think I have heard discussed. What is the advantage of reducing the other fees that are in the bill, the mergers and tenders fee and the registration fees? I wonder if you could just speak quickly to that.

    Senator GRAMM. We made a decision that all three fees have grown exponentially and that we wanted to keep them at their same relative rate; so reducing one, we would reduce the other.

    I would say the same argument applies; to the degree that we incur costs at the SEC in overseeing the issuing of new stock, we should collect the amount of fees we need to oversee the issuing of new stock and not more. The same is true with mergers and tender offers. The fee should reflect the cost of overseeing, supervising, and making decisions in those areas.

    I would say also that every one of these fees is ultimately paid for by investors, and so I think all the same arguments apply. I don't think there is one fee that is more consumer-oriented than the other.
 Page 42       PREV PAGE       TOP OF DOC

    I would have to say, from a philosophical point of view, which has nothing to do with the fee and its use, I find the fee on the issue of new stocks probably the most inefficient economically, because it imposes a fee on a transaction that is so critical to the American economy, and that is the issue of new stock and really the birth of new public companies.

    But we decided not to get into all of that. I think Chuck said it well: We were not trying to create problems, we were trying to solve problems, and keeping all three of them proportional was a way of doing that.

    Mrs. KELLY. I thank you.

    My office just did a little quick calculation. We found that if you had a long-term investor that went into the market with $1,000 in a mutual fund with the returns matching the Standard & Poors 500 in 1950, it would be now worth about half-a-million dollars; but if you figure in a compounded 2 percent, which is conservative, fee, it is only worth $230,000. That is a big cut.

    I think that these fees really—I agree with you, I think we should maybe take a look at the whole gamut of them.

    Thank you very much. I yield back.

    Chairman BAKER. Thank you, Mrs. Kelly.

 Page 43       PREV PAGE       TOP OF DOC
    Mr. Kanjorski wants one more round before we recess.

    Mr. KANJORSKI. It is tough to get into a discussion when Senator Gramm and Senator Schumer are on the same side. I do not know where we go. We have the whole gamut covered.

    Senator GRAMM. When you are outside our spectrum, you are pretty far out there on the wings.

    Mr. KANJORSKI. You have made a very strong argument here for equity and fairness, and that appeals to me. Certainly these fees were intended to cover the costs of regulatory transactions, but it remains a question as to whether or not we can get these fees into balance.

    But if you are going to carry that principle over, Senator Gramm, I am still worried about losing $1.5 billion to the Treasury. How are we going to make it up? If you are going to say that we do not have to make it up, then we have a problem.

    Mr. Schumer, you should take up on this issue. We have a lot of trust funds in the United States Government that we have been robbing and not using because we need those trust funds to cover the budget. When is their day of fairness?

    Let me give you one example, and I ask your assistance on it. We have almost $2 billion in the Abandoned Mine Land Fund. It has been used to run every other agency of the Government of the United States for the last 6 years without any major portion of the fund going back to reclaim land. That is what the fees paid by the coal operators were to be used for—to make up for past bad practices that affect human life and put it at risk.
 Page 44       PREV PAGE       TOP OF DOC

    Do you not think before we give the money back or reduce this fund that we should make whole these other funds, and make sure that the funds that they are no longer being used for general Treasury purposes—which it not what they were created for? Where is the equity here?

    Senator GRAMM. Let me respond by saying that we really have already started doing that. I worked with Senator Byrd on trying to fix the problem we had with the Highway Trust Fund, where 26 cents out of every dollar of gasoline taxes was not going to road construction, was not going to mass transit. We fixed that. As a result, every penny of it goes for those purposes.

    I believe that we should—with user fees and trust funds, that we need to basically have them go for the purposes they are created for. This is the one that is under our jurisdiction. It is not a trust fund; it is simply a funding source.

    We have already done it for the biggest trust fund, which was the Highway Trust Fund. I think this is a major step toward doing what you are talking about.

    Mr. KANJORSKI. So I could anticipate the support of Senator Gramm and Senator Schumer in the Senate when we try and make whole the Abandoned Mine Land Fund? That it is the right thing to do. These $1.2 billion should be paid out to fix this land trust fund.

    Senator SCHUMER. Let me say it is a little bit of a different argument in this sense: This is not a trust fund. In other words, there is not a whole lot of money sitting here. You can argue—if you have a trust fund, where it sits there, you can argue it either way—either spend the money on the intended purpose or return the money to the taxpayers.
 Page 45       PREV PAGE       TOP OF DOC

    Mr. KANJORSKI. But the reason we have not been able to fix this is that if you spend the money on its intended purpose, there is a shortfall of revenue in the overall Federal budget. This legislation is going to exacerbate that problem. We are going to lose $1.5 billion a year of revenue that is now going to the United States, so that is less of an opportunity to pledge our money to these funds.

    But you are certainly right. I agree with you completely.

    Senator GRAMM. These fellows don't own this.

    Senator SCHUMER. Right. But it is fundamentally not an honest way, and I don't mean dishonest in terms of crooked, but in terms of telling people what they are paying; when you pass a law to do one thing, like the nickel gasoline tax, and then it does another, and you at least have to pay, you know—and that is not fair, which—the fund you are mentioning, it is the same thing.

    Mr. KANJORSKI. But we do not have the revenues to pay out that fund money. The fact is, I am perfectly agreeable to go along with you and be fair on this type of fee arrangement. What I am asking for is an equitable commitment from two extremely effective Senators to help us be true to the purposes of these other funds and to make sure the revenues are there, from whatever fair source they come from, to pay out as intended by the Congress for the last 20 or 25 years.

    Senator SCHUMER. I would be very sympathetic to that argument.
 Page 46       PREV PAGE       TOP OF DOC

    Senator GRAMM. I would have to say that I think trust funds should be used for the purposes they have been collected. Trust funds are a little bit different. But within that caveat, I think either you ought to lower the fee and collect less, or you ought to use the money for the purpose that it was collected.

    What we are trying to do here is lower the fee.

    Chairman BAKER. If I may interrupt, we are down to about 3 minutes on the floor.

    I especially want to extend my appreciation to both the Senators for being here on our first full hearing of this new subcommittee. I think you set a high standard of bipartisan cooperation for us to emulate. I appreciate your bold leadership.

    And, Senator Gramm, for the record, some may have indicated you didn't go far enough in cutting taxes. I want to clear the record. This subcommittee will never accuse Senator Gramm of not being aggressive enough. Thank you.

    We will stand in recess pending the second panel. We are going to go right over and vote and come right back. We will have limited opening statements, as promised to Members.

    I would expect to reconvene in about 15 minutes.

 Page 47       PREV PAGE       TOP OF DOC

    Chairman BAKER. I would like to reconvene our hearing of the Capital Markets Subcommittee.

    Upon consultation with Mr. Kanjorski, we determined that we would both submit statements for the record, as well as make it permissible for all Members who choose to submit an opening statement to do so at any time.

    I am pleased to welcome our next witness, our entire second panel, and welcome you here. I know certainly of your experience on Capitol Hill and your longstanding service within the SEC, and in your capacity as acting director, we look forward to your insightful knowledge on this subject, as well as others, over the coming months and years, I'm sure.

    So we extend our welcome to you, Ms. Unger.


    Ms. UNGER. Thank you very much, Chairman Baker, and thank you, Ranking Member Kanjorski, and—is there any other Member up there—other Members as they come in.

    Chairman BAKER. They are on their way. They weren't as committed to getting here as Mr. Kanjorski and I, but they are on their way.
 Page 48       PREV PAGE       TOP OF DOC

    Ms. UNGER. Thank you for the opportunity to testify here on behalf of the SEC regarding fee collections required by the Federal securities laws.

    I am also honored to be the first SEC Chairman to appear before the Capital Markets Subcommittee of the newly created House Financial Services Committee.

    Today the subcommittee examines an issue of considerable importance, as you have heard, to our capital markets, the current fees the SEC is required to collect. Registration fees, transaction fees, and merger and tender offer fees impose excessive costs on investors, public companies, and securities firms. Although Congress first imposed those fees as a means of recovering the cost of securities regulation, the Congressional Budget Office today estimates that fee collections this fiscal year will total almost $2.5 billion, which is an amount more than five times the SEC's current budget.

    The Commission shares the committee's concerns regarding these excess collections and believes that there is an opportunity for Congress to significantly reduce these fees.

    Crafting a successful fee reduction is technically complex and it affects a number of interested parties. Because these fees are the source of the SEC's funding, it is also critically important to the Commission that the fees be reduced in a way that is consistent with full and stable long-term funding for the agency. A stable source of long-term funding will ensure that the SEC continues to effectively perform its statutory mission of protecting investors and maintaining market integrity.
 Page 49       PREV PAGE       TOP OF DOC

    I want to briefly mention four elements that the Commission believes are essential to any successful fee reduction, all of which is explained in greater detail in the written testimony.

    First, any bill should take into account the difficulty of predicting future market conditions. The NSMIA example that you talked about a little bit today, or that the Senators talked about a little bit today, shows that simply reducing the fees and the fee rates will reduce collections only if our markets do not exceed current projections. Fees should be reduced in a way that leads to more stable and predictable fee collections in the future.

    Second, any bill should reduce fees in a manner that spreads the cost of regulation among those who benefit from the activities of the Commission. By targeting all three types of fees the Commission collects, Congress can reduce costs not only to investors and other market participants, but also on the capital-raising process.

    Third, any bill must be administratively workable for both the industry and Government. The current fee collection system involves a large number of parties, all of whom will have to be able to work with any fee rate reduction mechanism in the future.

    Fourth, and above all to the agency, we believe that any fee reduction bill must be consistent with full and stable long-term funding for the agency.

    This involves two prongs. The first is preserving the ability of our appropriators to fund SEC operations out of offsetting collections, and the second is ensuring that the agency continues to be able to attract and retain qualified staff.
 Page 50       PREV PAGE       TOP OF DOC

    The Senate fee reduction bill that Senators Gramm and Schumer described to you ensures that the currently projected offsetting collections will be available to our appropriators to fund the agency in future years. The Senate bill also addresses the SEC's current staffing crisis by giving the Commission the much-needed ability to match the pay and benefits of our sister regulators at the banking agencies.

    For fiscal year 2000, the attorneys, accountants, and examiners at the banking agencies made 24 to 39 percent more than their counterparts at the SEC. You can imagine the effect that this has had on our staff's morale, not to mention their pocketbooks.

    The pay discrepancy between us and the banking regulators is particularly illogical in the wake of the historic Gramm-Leach-Bliley Act. Gramm-Leach-Bliley requires increased coordination among financial regulators as they undertake examinations of increasingly complex financial services firms.

    More than ever before, Commission staff members are working side by side with their banking counterparts and performing similar regulatory functions while making substantially less. The Commission must be able to attract and retain a high caliber of staff to tackle some of the most complex and difficult issues it has ever considered.

    No segment of American business has been more transformed by the rapid pace of technological change in recent years than the securities industry. No less important, our markets today are increasingly global, a trend that most expect to accelerate in the coming years.

 Page 51       PREV PAGE       TOP OF DOC
    The demographics of our markets have radically changed as we have become a Nation of investors. Twenty years ago, only 5.6 percent of Americans owned mutual funds. Today some 88 million shareholders representing 51 percent of U.S. households hold $7.4 trillion of mutual funds. This exceeds by about $4 trillion the amount on deposit at commercial banks. All of these developments raise complex and critically important challenges that the SEC must be prepared to meet.

    At such a critical time in our market's development, the Commission simply cannot afford to suffer a prolonged staffing crisis. Alarmingly, our attrition rate is nearly double the Government average. Over the last 2 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 to take better-paying jobs. If this trend continues, the Commission's mission of protecting investors and maintaining the integrity of the market will be seriously threatened.

    We would prefer to lift Title V restrictions before a crisis arises, as it did for the banking agencies in 1989.

    In conclusion, I want to commend the subcommittee for conducting this hearing. We look forward to working with you and other interested parties on this issue.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Ms. Unger. We certainly appreciate your appearance here this morning.

 Page 52       PREV PAGE       TOP OF DOC
    My first question goes to the methodology preferred by the Commission with regard to fee reduction itself. I understand there are at least a couple of different approaches. One is perhaps a little more difficult for the Commission to calculate in a timely manner, meaning less than 6 months, when a certain trigger might be initiated for fee reductions; the other of which may set sort of a cap approach, where it is a fixed amount.

    Do you have a recommendation to the subcommittee as to which or what manner of adjustment to the fee reduction in order to ensure funding of the SEC operations would be preferable?

    Ms. UNGER. I think that Congress attempted in NSMIA to fix the fee schedule and bring it closer in line with the cost of regulation.

    The lesson I learned was that the fee schedule needs more flexibility. The Senate bills' floor and ceiling provision takes into account market growth and the impact that it would have on the amount of fees the Commission receives that eventually go into the appropriations pot of money.

    The floor and ceiling approach is a difficult but possibly workable solution. Right now, the staff is in the process of meeting with the industry to find out from the people who would actually have to implement this system. First, how workable it would be, since they would be the ones collecting the fees. If that is going to be problematic for them, and if there is some type of recommendation they can make what has been introduced in the Senate, we would be happy to work with the Senate staff on making those recommended changes.

 Page 53       PREV PAGE       TOP OF DOC
    Chairman BAKER. Well, just my initial observation without getting into the detail, it appears on the face of it that the Chairman Oxley approach offers some benefits that Senator Gramm's approach does not with regard to complexity of calculations and certainty of funding. But perhaps I will follow that up with a more detailed written analysis and get your opinion on that.

    Ms. UNGER. We would like simple and certain.

    Chairman BAKER. And I am sure, the funding.

    I noted with some interest the fact that now 51 percent of U.S. households now engage in some mutual fund investment activity.

    Do you have any indication—I notice when the New York and American Exchanges close, the number of shares traded during a particular day, that does not really represent the number of transactions. On a daily basis, what would be the scope of responsibility for the SEC's supervision related to the number of transactions today, say, versus a decade ago?

    Ms. UNGER. I have those numbers; not quite a decade ago, but I will give you what I have.

    For 2001, the combined NYSE and NASDAQ average daily share volume is 3.5 billion shares a day. In 1996, that same calculation was 955 million shares a day. The average daily dollar volume for that same period for 2001 is $123 billion per day. For 1996 it was only $29 billion per day.
 Page 54       PREV PAGE       TOP OF DOC

    Chairman BAKER. What is of obvious concern to me is the individual who trades directly. It is difficult enough in understanding broker language and reading the disclosures they are required by law to provide the investor, but where the investor is acting directly online, the ability to have the transparency to understand the risk one is assuming—and I think perhaps in the last few years investors almost felt guilty in admitting they were not in the market, and a lot of people chased the opportunity without truly understanding the risk they were encountering.

    To that end, I think having adequate staffing within your agency is extremely important, not only on the enforcement side, but even on the education side; and providing additional transparency of the market to the investors so they understand the true risk they face.

    But I don't want to go over my time, because I know there are other Members who do have significant interest.

    At this time I recognize Mr. Kanjorski.

    Mr. KANJORSKI. Thank you very much, Mr. Chairman.

    Ms. Unger, I called the attention of Mr. Gramm and Mr. Schumer to the article that appeared in the New York Times Business Section on September 25, 2000, talking about the inadequacies of the Securities Investor Protection Corporation and the act establishing that entity by Congress.
 Page 55       PREV PAGE       TOP OF DOC

    Have you had a chance to look into that problem, and if you have not, will you take the opportunity to do so? Because there are funds here that could flow to the benefit of investors that seem to be delayed in their recoveries or contested on their recoveries, to their great loss.

    It seems to me that the very limited coverage given by that act could be expanded to more closely parallel, as appropriate, the positions of the FDIC.

    Ms. UNGER. Actually, our Office of Compliance Inspections and Examinations, which we call OCIE, is looking into a couple of claims that have been made, I would say, in the last year or so, and some of the experiences we have had with those claims in connection with SIPC.

    So my understanding is that they will be bringing to the Commission soon their findings and perhaps some recommendations in connection with that whole process.

    Mr. KANJORSKI. The article seems to point out that the legal fees and the trustees' fees exceed the payments made to the investors, and inordinate defenses are put up to inhibit the investors from receiving compensation back, as was originally intended by Congress.

    If you could you go over the article and do a study, I would appreciate it. It seems to me that before we correct this fee schedule, we should see if we are adequately protecting investors from any fraud and abuse occurring in the securities industry, and we should first try and utilize these funds to make that whole.
 Page 56       PREV PAGE       TOP OF DOC

    Ms. UNGER. I will take a look at the article and talk with the staff people who are working on that.

    Mr. KANJORSKI. One other thing. As I understand it, the SEC handles the civilian side of enforcement, but if there is fraud or abuse or some other activity in the securities industry that causes referral to the Justice Department, that expense is not borne by this fee effort.

    It would seem to me that we should not only look at civil costs involved in the administration of the Securities and Exchange Commission, but also the costs incurred by the United States Government when referrals are made to the Justice Department.

    If these funds only pay for the salary and operational costs of the SEC, it means that general taxpayers are paying for the administration of the criminal justice system in the securities industry. That would not seem to represent a fairness to me.

    Ms. UNGER. Actually, the fees that were discussed, the Section 31 fees and Section 6(b) fees, are statutorily set fees that the appropriators changed and continue to change every year. The articulated rationale for the fees is to recover the cost to the Government of securities regulation.

    We have civil authority, and we have administrative authority. We do bring actions involving fraud and violations of the Federal securities laws.

 Page 57       PREV PAGE       TOP OF DOC
    It just so happens that in New York, the Southern District and the U.S. attorneys have taken an active interest in white collar crime. We often coordinate with those agencies. We give them documents; we lend them personnel. So, in fact, we are sort of subsidizing that actively; and there is or has been some actual funneling of our money to those to combat criminal violations.

    Mr. KANJORSKI. But would it not be wise for us to do an analysis or study of just what the costs are to the Justice Department of administering the criminal administration of justice in securities fraud?

    I do not think in the Boesky case the SEC paid all the costs of that case. Obviously, the Justice Department out of their budget paid some of that cost, and their budget comes from the general tax revenues of the United States, not from these fees.

    It would seem to me if we want to really get accurate here and do what Senator Gramm talked about, that is, use the fee to really pay for the regulation and enforcement—and when I say ''enforcement,'' it is both civil and criminal in the securities industry—we should allocate a portion of these fees to be returned to the Treasury to help offset the general tax revenues costs that are going to the Justice Department to administer the criminal laws in the securities industry.

    Ms. UNGER. I will just make one final point on your issue. That is, what we are only talking about is fees right now on the capital-raising and transaction costs. We also get a large sum of money in terms of disgorgement in our enforcement actions. Last year that number was $19 million. That does go into the General Treasury Fund.
 Page 58       PREV PAGE       TOP OF DOC

    Mr. KANJORSKI. $19 million?

    Ms. UNGER. $19 million.

    Mr. KANJORSKI. That is hardly enough to pay for some of these extremely expensive cases.

    Ms. UNGER. In the case of Boesky, the number we collected against him in the most recent action was $30 million. Then prior to that I think it was in the area of $100 million. That all does go into the General Treasury Fund.

    Mr. KANJORSKI. Has anybody made a study, however, of what the costs are on criminal enforcement of securities laws or other criminal activities that emanate from the securities industry?

    Ms. UNGER. I am not aware of that.

    Mr. KANJORSKI. Would it not be wise to analyze whether a portion of these funds should be directed that way, or at least not cut? While the benefit here goes to the investor, there is a cost to the average American taxpayer who is not a securities investor for carrying out the criminal justice system through the Department of Justice, as opposed to the SEC.

    Chairman BAKER. Let me jump in here. We will be able to come back to you, Mr. Kanjorski, but we have a couple of Members that I need to get in. Then we will come back.
 Page 59       PREV PAGE       TOP OF DOC

    Mr. Fossella.

    Mr. FOSSELLA. No, sir.

    Chairman BAKER. Mr. Royce.

    Mr. ROYCE. Thank you, Mr. Chairman.

    I wanted to ask the Chair, if I could, if Ms. Unger could explain—we heard the Chairman of the Fed explain that the economy was flat, that arguably we are maybe growing at 1 percent.

    Could you describe how cutting excess SEC user fees might help stimulate capital formation and how it might encourage a more perfect market, perhaps, by reducing transaction costs to come in and out of the market?

    We were talking about the negative savings rates in the country. Could you tell us a little bit about how this might have a positive impact?

    Ms. UNGER. As was noted earlier, the proposal does, or the legislation does cut three different kinds of fees: the registration fees, merger and tender offer fees, and the transaction fees.

    I can talk about each one of those, and Senator Gramm so eloquently said how important it was not to have a tax on capital formation and not to have unnecessary fees associated with that, which has been the case.
 Page 60       PREV PAGE       TOP OF DOC

    I can tell you the amount of fees we have collected over the years for each of those fee categories, depending on the marketplace, of course, and it does fluctuate; and the reason I think that they want the bill to include all three kinds of fees is to have some diversification and stability in the fee collections, depending on the marketplace.

    As to the transaction fees, one thing that had not really been discussed is that of the full amount of the fee collected, about 85 percent of it is paid by the investor. If the securities industry reduces the fees accordingly, that amount is money that will be going back to investors.

    It is interesting that you should raise the question of what stimulates the economy, because in the context of all these tax cuts, I have been asking people, what would you do if you had a $1,000 tax cut? Would you spend it, save it, or invest it? And everybody says, spend it or invest it.

    So I think that is what we are hoping for, when people have a little extra money, that they spend it or they invest it. That is where the money will probably go. If you look at the fees in and of themselves, they are not huge, but when we look at the aggregate amount of the fees, it is huge.

    Mr. ROYCE. Given the aggregate amount of the fees, is it more likely people would look differently at how quickly they enter or exit the market if they perceived that the cost of doing so, the transaction cost, was reduced?

 Page 61       PREV PAGE       TOP OF DOC
    Ms. UNGER. I am not sure I understand the question.

    Mr. ROYCE. I am just looking at it from the standpoint of reducing the cost to the potential investor.

    Ms. UNGER. For people who move quickly, maybe intraday or short-term investors, you might say, I think those are maybe a different category of investors.

    I think when we talk about the number of Americans or the American households that own mutual funds, we are talking about a longer-term investor. It is probably difficult to predict exactly what the impact will be of the fee reduction in terms of people's behavior in the marketplace, but I feel pretty confident that it will have some type of impact on their behavior.

    Mr. ROYCE. Thank you, Chairwoman Unger.

    Chairman BAKER. Thank you, Mr. Royce.

    Mr. Kanjorski, want to take another swing?

    Mr. KANJORSKI. On that issue, it is not quite fair to talk about the investors, particularly these mutual find investors, receiving all this money back, is it? What portion of the investors are actually mutual funds?

    Ms. UNGER. What portion?
 Page 62       PREV PAGE       TOP OF DOC

    Mr. KANJORSKI. When you talk about 50 percent of the American households now having stock holdings, what portion of that 50 percent are with mutual funds?

    Ms. UNGER. Fifty percent of households own mutual funds. I think it is 88 million Americans.

    Mr. KANJORSKI. Eighty-eight million?

    Ms. UNGER. Right.

    Mr. KANJORSKI. What would be the average per year contribution to the mutual fund? I do not think it would exceed $10,000, would it?

    Ms. UNGER. How much does each family invest per year?

    Mr. KANJORSKI. It does not exceed $10,000. That would be a pretty big investment for the average family.

    Ms. UNGER. I think there is probably a broad range in that number.

    Mr. KANJORSKI. What I am getting at is that we are talking here about how much money we are going to save for these investors and how we are going to stimulate the market. If there are 83 million participants, and the large percentage of them invest under $10,000 in a mutual fund, they are going to save all of 33 cents a year. As someone said the other day, it is not quite the cost of a Coca-Cola.
 Page 63       PREV PAGE       TOP OF DOC

    This is not a fee reduction that is going to stimulate this economy, or have a major effect on returning money to average investors or average people. The largest portion of these funds will come from the high-investment community in a much disproportionate rate to the general population, would you not agree?

    Ms. UNGER. I think the best argument for this legislation is that the statute that provides for recovery of the cost of regulation is bringing in far in excess of the cost of regulation.

    You heard the numbers today.

    Mr. KANJORSKI. No, I agree.

    Ms. UNGER. We are talking about five times the amount of the budget.

    Mr. KANJORSKI. Ms. Unger, I agree. But in reality, if we reduce funds coming to the Treasury of $1.5 billion a year, that shortfall is going to have to be made up by other means, and potentially from the general revenues, paid for by the general taxes of the 50 percent of the people who are not invested in the securities industry. It is just a matter of proportion, you know, who best can afford to pay at this point, and what are the benefits that flow.

    If we had to make up the $1.5 billion from all people in the United States across the board, would that be quite fair?
 Page 64       PREV PAGE       TOP OF DOC

    Ms. UNGER. I don't see why any investor should have to pay beyond the cost of regulation. If you are going to say the money is not paying for the cost of regulation——

    Mr. KANJORSKI. We are going to lose $1.5 billion. If we reduce the fee to actual costs, we are going to lose $1.5 billion in actual revenue, are we not?

    Ms. UNGER. Money that never belonged in the general revenue.

    Mr. KANJORSKI. Yes, but we are spending that money. It is allocated in the President's budget.

    Ms. UNGER. I would love to have somebody else give me money that I could spend freely, but that is not what the statute was intended to provide. The statute was intended to provide an offsetting collection for the cost of the SEC's budget for regulation.

    Mr. KANJORSKI. Of course you are aware that last year we attempted to repeal the Spanish-American War luxury tax on telephones in this country. Many people have been paying that tax for 100 years. It is not quite allocated proportionately across the system. First of all, the tax does not go to telephone regulation, and it does not go to the Spanish-American War. It goes to general revenues. We have a lot of fees and taxes that do not have attribution in this country.

    Ms. UNGER. I should also clarify that the legislation doesn't provide for the precise amount of fees to cover the exact amount of the budget. There is still some excess that will go into the general revenue.
 Page 65       PREV PAGE       TOP OF DOC

    Mr. KANJORSKI. I understand that. But all morning Senator Gramm, in particular, was talking about how this is really important to the small investors of America. I think in response to the last question, you indicated this is going to be a stimulus because people are either going to invest this 33 cents a year, or go out and have a binge spending it and bring back our economy.

    In reality, it is almost a nuisance fee or insignificant matter to the people that are investors, because they generally come from the upper 50th percentile of the American population, not the lower 50 percent?

    Ms. UNGER. This sounds like a discussion that I probably don't want to get too much deeper into because it involves ideological differences.

    Mr. KANJORSKI. Should we not be looking at some of the allocations across the country of who pays for what in the system and where we derive funds from?

    What you are doing here is getting very close to the concept that everything should pay its own costs. That is almost a flat tax concept, in a way, in that you only want to take enough money out of the system to pay for the individual fees or operations of Government.

    But there are some of us who are wealthier, who get greater benefits from Government, and these are just merely ways we keep it up.

 Page 66       PREV PAGE       TOP OF DOC
    Obviously, if I am a billionaire in this country, the Defense Department protects my $1 billion of wealth, as opposed to my neighbor who has nothing. The Defense Department protects much less of his wealth; it protects his person, but not his wealth.

    These are just ways of getting revenue, albeit not anticipated, because we thought in 1996 we had corrected it. But I am not going into that issue, I am going to the issue of making up the lost revenues.

    Chairman BAKER. If I could, I will get you to give a brief response, Ms. Unger, because we have exhausted our time again.

    Mr. KANJORSKI. I want a philosophical response.

    Ms. UNGER. I think what you are saying is, if you invest in the securities markets, you are going to have to pay for some other programs because they need money, and if you can afford to invest in the securities markets, you can afford to pay for part of these programs.

    Mr. KANJORSKI. And you say, no, that is not true?

    Ms. UNGER. I think there is a serious equity argument.

    Chairman BAKER. A subject for this panel to consider over lengthy discussions.

 Page 67       PREV PAGE       TOP OF DOC
    Ms. UNGER. I think so.

    Chairman BAKER. Mr. Fossella.

    Mr. FOSSELLA. Just for the record, I would get back to what I see is the core issue here, and this is the moral argument.

    Let us suppose that Congress in its infinite wisdom established by statute a fee of $1 for everybody who wanted to use a pencil, and there was an agency that regulated the use of pencils to make sure everybody was using them adequately and appropriately, and at some point in the future we stopped making pencils and producing pencils, but there was still money coming into this newly created entity to the tune of, let's say, $1 trillion.

    Do we at that point in time say, you know what, we don't need this agency anymore, and we don't need this funding anymore, because nobody is using pencils anymore? And I think if we approach it from that point of view, as opposed to, well, we had all this money coming in that we can use for other purposes, so let's continue using it for these other purposes, I think that would be a silly way of looking at it.

    So if we can just apply a little focus and what are perhaps the benefits of sending that money back to the investors who ultimately absorb the fee, and what they will do with the money, I think that is a positive thing. It depends on your view of how that money is actually allocated and the formation of capital and how it flows and how liquid the market is.

    But the true focus and purpose of this bill is merely to say, do you know what, these things are getting a little out of control, we are getting a little bit too much money. We have the acting Chair of the SEC before us saying, Congress should do something about it. I think if anything—if there is a signal that is clearer than that, I don't know if there is one, but I think it is refreshing that we have somebody from a Federal agency before Congress saying, stop this flow of funding to our agency and give it back to the folks who would otherwise pay this fee.
 Page 68       PREV PAGE       TOP OF DOC

    With that, I yield back.

    Chairman BAKER. Thank you, Mr. Fossella.

    Mr. Bentsen, did you have a question?

    Mr. BENTSEN. Yes. Thank you, Mr. Chairman.

    I apologize for being late, and having to leave the HHS Secretary over in another committee.

    The question I had, I had asked Senator Gramm about the Senate bill in two areas, one that I have very much of a concern about, but I think is OK, but I would like to get your comment. That is sort of the anti-deficiency provision that is in there with respect to the Commission's functions.

    He seems to feel that his bill is structured in such a way that the Commission would not—would hopefully not ever be underfunded to meet its needs if there was a fluctuation in the collection of fees, probably due to market functions. I think that is something that our committee should take into consideration as we prepare a House bill.

    The second thing is, his bill, as I mentioned, would reduce not just Section 31 fees, but fees on registration, as well as mergers and acquisitions. He makes the point that all these fees flow through to the consumer one way or the other.
 Page 69       PREV PAGE       TOP OF DOC

    Does the Commission feel there is that equitable dispersion of fees—or do you have a position on that, or do you believe that it is really Section 31 fees that affect the investor and the investor class, if you will, more so than others?

    You could make an argument—I have no axe to grind here, I am trying to get a feel for it. You could, though, make an argument that the registration fees are part of the soft costs of a transaction, and thus not necessarily passed on to the investor as much as the underwriter or the issuer itself, or the borrower.

    Of course, Senator Gramm being the classical economist that he is, would argue that all those fees get washed out at the bottom anyway. But I would like to hear your comments on both those items.

    Ms. UNGER. For the second part of what you asked, that is, reducing all three types of fees that we collect, as I mentioned to the Ranking Member, the fees were set by statute, and the appropriators have changed that statutory level over time in order to make up for these excess funds that have been going to fund other programs.

    The Section 6(b) fees were really the fees that were hit first in terms of changing the statutory amount. That was the initial area where the appropriators made the adjustment.

    The Section 31 fees initially only applied to New York Stock Exchange transactions for listed securities. Congress in 1996 applied those Section 31 fees to include over-the-counter transactions, or the NASDAQ securities market.
 Page 70       PREV PAGE       TOP OF DOC

    So you have an evolving source of these funds over the years. Depending on the vigorousness of the IPO market, we bring in a lot of Section 6(b) fees in one year. Depending on the vigorousness of the trading market, we perhaps bring in a lot of Section 31 fees in a particular year. I actually have a chart here, with numbers going back to 1980, describing how much the fees generated and the fees level for each year.

    Back in 1980, when the registration fees were then set at 1/50th of 1 percent, we received $33 million in fees. For 1998, which must have been a particularly good year for IPOs, we received $1.34 billion. So there is a huge difference depending on where the strengths of the economy are.

    So I think it does make sense that we support changing or adjusting all of the fees commensurately so that we can have an across-the-board cut in the fees.

    The Section 6(b) fees impact the cost of raising capital. It is just another line item for what it costs to go into the market and raise capital.

    Mr. BENTSEN. Should we be concerned at all that there sometimes is greater fluctuation in the issuance market than there is in the public markets? For instance, steel flow is down now, or has been for the last 6 months, and presumed to be down for the next 6 months or whatever?

    Ms. UNGER. Yes.

 Page 71       PREV PAGE       TOP OF DOC
    Mr. BENTSEN. Is there enough disparity there that you would be concerned about the deficiency offsets that any fee reduction formula should take that into consideration, or is it such a minor deviation that it really would be more trouble than it is worth?

    Ms. UNGER. Well, CBO makes the projections of what our fee revenue will be, for, I think, 3 fiscal years going forward. Those fees then become the basis for determining what the appropriate level of fees for each of those categories should be; and then there are a floor and ceiling built in in case those numbers are not met in terms of the amount of offsetting collections that will be available for our budget.

    Mr. BENTSEN. Thank you.

    Chairman BAKER. Your time has expired, Mr. Bentsen.

    Mr. Ose.

    Mr. OSE. Thank you, Mr. Chairman.

    I am a little bit curious about something, Ms. Unger. That is, typically the fee schedules are implemented by regulation and rule for such things. In other words, we give an agency direction, and then they come out with rules in the Federal Register, what have you.

    Yet, I am told that this underlying legislation in 1996 specifies 1/300ths of 1 percent in the fee area. Is that correct?
 Page 72       PREV PAGE       TOP OF DOC

    Ms. UNGER. Yes. It does set a specific amount, but going back again to the statute, in Section 6(b) and Section 31 is where you will find a specific fractional amount to arrive at what the fees should be.

    Mr. OSE. So you have no latitude at SEC as to what the fee—at this point should——

    Ms. UNGER. No, but you do.

    Mr. OSE. We do, but you don't?

    Ms. UNGER. Congress does.

    Mr. OSE. Now, the reason I ask that is that it would seem to me that in that same area, the very same underlying legislation, either the 1996 or the previous, there is a very specific connection between the very specific fee and what it is to be used for—that is, SEC costs. It is not—it doesn't say SEC costs and X, Y, and Z; it says, SEC costs.

    Is that correct?

    Ms. UNGER. You will find those fees—the statutes that I refer to are part of the Federal securities laws and specifically designed to recover the cost to the Government of securities regulation.
 Page 73       PREV PAGE       TOP OF DOC

    Mr. OSE. I am kind of curious how it is we got ourselves in a position where, in effect, we have passed a tax law here, and we are collecting taxes and using it for some purpose that is not authorized under the—are we violating the law here?

    Mr. BAKER. Oh, certainly not.

    Ms. UNGER. Can you say not? Going back to 1983, people here have noticed that we have been bringing in excess fee collections and have been looking at that as a way to fund other programs.

    We are a part of the Commerce-State-Justice budget because we are a law enforcement agency, and so our allocation comes out of that pot of money. So it is sometimes difficult for the appropriators to not take some of the money, but it has gotten so disproportionate.

    Mr. OSE. All right. Let me go on to my next question. To the extent that we have imposed fees or taxes in excess of what is authorized in the underlying legislation, that is on the order of 3 or 4, 5 times, as I understand it, what the underlying legislation says we need to cover. In other words, we are collecting $2-, $2 1/4 billion. The underlying costs is $370-$380 million. Have I got the basic magnitudes correct?

    Ms. UNGER. Well the statutory level for Section 6(b) fees was 1/50th of 1 percent, and it has been raised as high as 1/29th of 1 percent in certain years. Right now it is about at 1/40th of 1 percent.
 Page 74       PREV PAGE       TOP OF DOC

    Mr. OSE. I am talking about the aggregate number of dollars being collected, though.

    Ms. UNGER. Right. Actually I do—the numbers as to what we collected last year from each of those fees. Is that what you are talking about?

    Mr. OSE. In total?

    Ms. UNGER. We got $2.27 billion in fees; $78 million came from the merger tender offer fees. $1 billion, $103 million came from Section 6(b) fees, and $1 billion, $90 million came from Section 31 transactions.

    Mr. OSE. And this compares with a projected SEC cost of $377——

    Ms. UNGER. About $378 million.

    Mr. OSE. $378 million. I just can't——

    Ms. UNGER. Well, for this fiscal year it is $423-$422 and change.

    Mr. OSE. It is $377-$423.

 Page 75       PREV PAGE       TOP OF DOC
    Ms. UNGER. Still a small number when you compare it to $2.27 billion.

    Mr. OSE. I just keep coming back to this question. We have very specific authorization for a fee schedule tied to a very specific purpose, and yet we are collecting far in excess of that and using it for who knows what, and I don't quite understand why that is occurring.

    Thank you, Mr. Chairman.

    Chairman BAKER. You have a difficult life ahead of you looking for logic in Congress, Mr. Ose. I would want to extend my appreciation to you for your courtesies and your patience in answering our questions today. We look forward to working with you in the coming years ahead. Your testimony, as all other witnesses', will be made part of the official record and I would like to advise all witnesses that we will keep the subcommittee record open for approximately 30 days for Members who may wish to have some follow-up questions in writing and to include your responses into that record.

    I would suggest to our third panel that we will have another vote somewhere around the noon hour. If you gentlemen would like to come forward and try to get your statements in within a roughly 5-minute period each, we could hear all of your testimony before we go into that vote, perhaps ask questions and try not to detain you further.

    So, with your cooperation, we will initiate this last panel. While you are getting situated, I will proceed with the appropriate introductions. We have three gentlemen who will be heard in this panel. The first is Mr. Scott Evans who is the Executive Vice President of the Teachers Insurance and Annuities Association, which should not be lost on Members; this is an extremely important organization, but in size has about $165 billion in equity assets for retirement purposes.
 Page 76       PREV PAGE       TOP OF DOC

    Our second to be heard from today is Mr. Christopher Quick who is the CEO of Fleet Meehan Specialist, who—I have a piece of paper on right here—is the Nation's largest financial services firm, specialist firm with assets in excess of $181 billion.

    And our third witness is Mr. James Toes who has been involved in the NASDAQ market activities for some 15 years and currently is a trading manager at Merrill Lynch, which needs no further explanation.

    With that I would like to call on Mr. Evans to start us off.


    Mr. EVANS. Thank you, Chairman Baker, Ranking Member Kanjorski and Members of the subcommittee. My name is Scott Evans, and I am the Executive Vice President of Equity Investments at TIAA-CREF. I appreciate the opportunity to appear before you today to express our support for the proposed improvements to the current system of SEC fee collections. We would also like to express our support for an improvement in compensation levels for the SEC staff.

    TIAA-CREF, along with other financial organizations and associations, has written to Members of the Senate to urge their support of Senate bill S. 143 that would remedy the current fee inequity. I want to commend the full committee for making the reduction of fees charged to securities market participants a priority for the 107th Congress, and the subcommittee for acting on that priority by holding this hearing. In addition, we encourage the House to introduce a companion bill as soon as possible.
 Page 77       PREV PAGE       TOP OF DOC

    With $285 billion in assets under management, TIAA-CREF is a leading financial services organization, a major institutional investor and one of the world's largest retirement systems, with 2.3 million participants at more than 11,000 educational institutions. We offer our participants a broad array of retirement investment options through the college retirement equities fund, or CREF, which is regulated by the SEC as a 40 Act company, and also the TIAA Real Estate, Account, an SEC registrant. The TIAA-CREF group of companies also offers mutual funds and non-qualified personal annuities to the general public. In addition, we manage tuition saving programs in 12 States, and in total we hold equity shares of more than 3,000 U.S. companies on behalf of our clients.

    Last year, TIAA-CREF paid over $1.1 million in SEC fees assessed on securities transactions. In addition, we have paid more than $3.6 million to register securities issued by the TIAA-CREF group of companies over the past 5 years. These fees represent a tax to our clients, reducing the funds available to them to meet their savings and investment goals. Moreover, the amount assessed is disproportionate to the SEC's spending needs. In fiscal 2001 the SEC is expected to collect $2.47 billion in fees from participants in the securities markets, more than 5 times the $423 million that is appropriated for the SEC's operating needs.

    While we support the notion that market participants should fund SEC operations through user fees, the current fee levels are no longer appropriate. Congress enacted the existing structure several years ago when market activity was at much lower levels. The situation is very different today, with Americans participating much more actively in the securities markets. Given this greater level of activity, it is time to modify the SEC's fee structure in order to collect revenues that are more appropriate to the Agency's operating costs. We therefore endorse the effort underway in Congress to reduce the various user fees, including registration, transaction and merger and tender fees, to a level that is more in line with the SEC's funding needs.
 Page 78       PREV PAGE       TOP OF DOC

    Additionally, we support acting Chair of the Securities and Exchange Commission Unger's continued commitment to correcting the existing staffing crisis at the SEC. The legislation before Congress would help achieve this goal by improving the SEC's ability to match the pay and benefits offered by the Federal banking agencies. It is important that the SEC be able to attract and retain qualified individuals in order to carry out the SEC's important oversight responsibility for the securities markets and to provide for investor protection and education. We know from our experience working with the SEC staff that the continuity of personnel is critically important to the efficient functioning of this Agency. The legislation pending before Congress would help accomplish those goals.

    In closing, I would like to thank the subcommittee again for its commitment to reducing excessive fees at the SEC and to providing the funding necessary to enable the SEC to compete for qualified staff. It has been a privilege to speak with you today and I would be happy later to take questions.

    Chairman BAKER. An excellent free market example of being on schedule. Thank you.

    Mr. Quick.


 Page 79       PREV PAGE       TOP OF DOC
    Mr. QUICK. Thank you Chairman Baker, Ranking Member Kanjorski. I am Christopher Quick, CEO of Fleet Meehan Specialist, and a member 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 on reducing excessive fees collected by the Securities and Exchange Commission. My testimony will focus on transaction fees commonly known as Section 31 fees imposed by Section 31 of the Securities Act of 1934.

    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 exchange. The Exchange's auction trading marketplace is the mechanism through which 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 proper operation of the market, acting as a 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 see significantly increase this year. A total of $370 million was paid for Section 31 fees in 2000 on NYSE transactions by all New York Stock Exchange member firms and their customers. Over 86 percent of the transaction fees paid on the New York Stock Exchange floor are passed directly on to investors.

    Please let there be no misunderstanding. We support continued full funding of 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 a worldwide reputation for fairness and integrity. What we object to is the misuse of the financing mechanism designed to offset the cost of operating the SEC through the overcollection of fees and application of the proceeds to completely unrelated purposes.
 Page 80       PREV PAGE       TOP OF DOC

    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 1/300th of 1 percent of the total dollar amount of securities sold, the tax is creating a drag of over $1 billion per year on 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 constantly grown over the years. In fiscal 1999, the SEC's fee collections from Section 6(b) and Section 31 fees mushroomed to $1.75 billion. That is, the SEC's collections amounted to more than 5 times its $337 million budget in 1999. In fiscal 2000, the Agency collected more than $2.27 billion, more than 6 times what the Agency needed to fund its operation. Also, we expect the Exchange—expect trading volume on the Exchange to continue to increase, which in turn will have the effect of increasing the Section 31 tax.

    In 1999, average daily trading volume on the Exchange was 809 million. In 2000 it was over 1 billion, and with decimalization now fully implemented, volumes surely will increase by a significant amount as it did when the standard trading increment was reduced to 1/16th from 1/8th.

    We would also be wise to remember that we 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 the 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 the market prices stagnate or decline as they have in the last 12 months.
 Page 81       PREV PAGE       TOP OF DOC

    In conclusion, general tax revenue is the objective of other laws but not the securities laws. Congressional action to restore the unintended tax represented by the Section 31 fees to its original purpose, to fund the operations of the SEC and not for any other type of Federal expenditure, is long overdue. Reducing excessive SEC fees would save millions of individuals money as they try to invest their hard-earned money for the future. We urge the subcommittee to move forward with legislation to reduce excessive SEC fees. We are committed to working with you and the subcommittee regarding this important matter.

    The Association is thankful for the opportunity to express its views on these fees. Thank you, Mr. Chairman, Ranking Member Kanjorski. I would be pleased to respond to any other questions.

    Chairman BAKER. Thank you Mr. Quick.

    Mr. Toes, welcome.


    Mr. TOES. Thank you very much. Mr. Chairman, Members of the subcommittee. I am pleased today to be testifying before you on the issue of securities fees. I am James Toes. I am a Director at Merrill Lynch Equity Trading, and I am also President of the Security Traders Association of New York, which is an affiliate of the Securities Traders Association, on whose behalf I am testifying today.
 Page 82       PREV PAGE       TOP OF DOC

    In 1996 Congress enacted the National Securities Market Improvement Act, reforming regulation of the securities and mutual funds market. NSMIA also restructured fees imposed by the various securities laws, including extension to NASDAQ trades of the transaction fees imposed by Section 31 of the Securities Exchange Act of 1934. In restructuring the fees, Congress intended to ensure a stable source of funding for the SEC while also ensuring that the fees did not grow so large that they became a de facto tax on savings and investment rather than a user fee, which is the very situation we find ourselves in today.

    The new structure established by NSMIA was the result of a complex compromise worked out between the House and Senate authorizers and appropriators, the House Ways and Means committee, the Office of Management and Budget, and the SEC following years of congressional debate over the new SEC funding mechanism. Unfortunately, however, NSMIA has not controlled the growth of fees as originally intended. Actual fee collections significantly outpaced NSMIA's projections. We believe that the reason for this is that the Congressional Budget Office and the OMB used conservative estimates of the stock market growth which were relied on by Congress in drafting 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, over 6 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 $3.7 billion in fiscal year 2005. In other words, total SEC fees are projected to raise $15.2 billion over the next 5 years, while the SEC budget will require only a fraction of that amount over the same period. Without a change in law, these fees will generate $16 billion in excess of what Congress intended in NSMIA, over just a 7-year period from fiscal year 2001 to fiscal year 2007.
 Page 83       PREV PAGE       TOP OF DOC

    Another defect in the NSMIA fee structure is that it fails to accommodate for changes in the securities market. For example, if and when the NASDAQ's conversion to an exchange is completed, the current fee structure will result in a redirection to the general fund of a significant portion of the fees that are currently made available to fund the SEC. Thus we face the possibility of a fee structure generating billions of dollars in unanticipated fees while at the same time creating a funding crisis at the SEC.

    Clearly, this is not the scenario Congress intended when it redesigned the SEC funding structure in 1996 to reduce the amount of fee surplus.

    Ultimately, the investing public shoulders the burden of these fees. 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 has increased from around 32 percent in 1989 to over 50 percent in 2000. It is important to note that Americans of all incomes are increasing their savings through equity ownership. According to the most recent statistics, 29 percent of households with incomes between $15,000 and $25,000 own stock. Therefore, this tax is paid by the smallest as well as the largest market participants.

    Section 31 fees also burden those who participate in pension plans, including public pension plans. For example, over a 5-year period, many States' public pension plans will pay millions of dollars in Section 31 fees. Some examples include California, nearly, $18 million; New York, $13 million; Ohio, approximately $4.6 million; Pennsylvania, $6.5 million; and Texas, over $7 million. At a time when the Government is encouraging savings, it is inconsistent for it to levy this tax on investment.
 Page 84       PREV PAGE       TOP OF DOC

    To address the growing burden of the fees, the STA supports legislation that reduces fee rates so that they fulfill their intended purpose of funding the SEC and are not acting as a tax on investment; puts in place an automatic mechanism that will limit collections if the original fee rate cut does not reduce the actual collections as intended; and creates a safeguard that fully protects the amount of collections currently projected to be made available to the appropriators including the funding necessary for the SEC.

    STA has testified in the Senate in support of Section 143 which includes the provisions outlined above. We urge the House to develop legislation with these characteristics. The Senate bill also allows for growth in the SEC budget, including pay parity for SEC employees which, by the way, we also support.

    Including the safeguards to prevent overcollections and undercollections will ensure that no matter how high or how low today's fee projections are, the fees will still collect the actual amounts intended by Congress. We should not enact legislation only to find ourselves back here in 5 years because projections missed their mark or that the market structure changes created unintended shortfalls or windfalls in fee collections.

    In closing, Mr. Chairman, the STA applauds you for scheduling this prompt hearing on an issue of great importance to our members across the United States, and I also will be happy to answer any questions.

    Chairman BAKER. Thank you, Mr. Toes.

 Page 85       PREV PAGE       TOP OF DOC
    Gentlemen, to facilitate the Members who are here, I am going to suspend my questions, and I will follow up in writing for you at a later time but would recognize Mr. Kanjorski. I fully expect we will have a vote here in the next few minutes and I would like to get Members' participation before that vote.

    Mr. Kanjorski.

    Mr. KANJORSKI. Yes. Can any of you gentlemen tell me whether or not there is a fee schedule or a tax on security transactions in Germany or Great Britain?

    Mr. QUICK. I don't have the answer for that.

    Mr. KANJORSKI. You are making a compelling argument. None of us are unsympathetic to fee schedules that are set for special purposes, and of course your fee schedule, unbeknownst to the Congress' wisdom in 1996, now has far exceeded its anticipated needs. In effect, it serves as a source of revenue for the Government to be used for other purposes. Meaning that if we reduce the fee schedule we will get a shortfall of somewhere between $1 billion and $1 1/2 billion a year.

    Assuming that the budget of the United States is absolutely balanced, revenues to expenditures, and we are taking into consideration the additional income from the overpayment of fees that you are making, where would you suggest that we get the additional $1 billion or $1 1/2 billion revenue shortfall that would be in existence in a balanced budget situation?

 Page 86       PREV PAGE       TOP OF DOC
    Mr. TOES. I would suggest just cutting spending.

    Mr. KANJORSKI. Well, we are making the assumption this is a balanced budget in this new Administration that we are having. We are cutting programs to the bone. When the President sends up a budget, are we to presume in other words, your answer is if we cut revenues then we should just cut expenditures, regardless of where that would be? If we had to cut Social Security, if we had to cut Medicare, if we had to cut the environment expenses, you would just do that?

    Mr. TOES. It is my understanding that we are not asking for our money back. We are just asking that, going forward, that we just pay a different rate.

    Mr. KANJORSKI. Not the money back. Next year, if we grant what you are requesting—and I am not suggesting we should not do it—we are going to have a shortfall of $1 billion or $1 1/2 billion in revenues. My question to you is where should we make that up? Should the Congress consider a tax on security transactions instead of the fee schedule in order to make up the $1 1/2 billion? This solution would be honest. We would be saying we are going to get that revenue out of securities transactions instead of out of fee-generated costs.

    Mr. TOES. You are going to have to excuse my naiveness with how Congress and Government works, but if you did give us what we needed, and therefore you would know that the money would not be there, then you wouldn't spend it.

    Mr. KANJORSKI. Even if we had the need for it?

 Page 87       PREV PAGE       TOP OF DOC
    Mr. TOES. Well, you have got me in a corner now.

    Mr. KANJORSKI. That is always our problem here. Yes.

    Mr. EVANS. Congressman, to me they are two separate questions. The first question is we have a user fee that is being levied toward securities markets participants to fund the SEC so that they can regulate us. That user fee ought to be in close proximity to the costs of running the SEC. The second is a funding question that refers to general revenue creation, and there are many checks and balances to it. I believe it is outside of the scope of my testimony here today, but ultimately the revenue would have to be made up with increased tax revenue or decreased spending. That is the appropriate place for it to be considered.

    Mr. KANJORSKI. And that is the correct answer. Either increase taxes on other people, other than these transactions, or decrease the expenditures perhaps on necessity.

    But let me ask you a question. Are you aware of parking meters? Do you ever use parking meters?

    Mr. EVANS. Yes, sir, we have those in New York.

    Mr. KANJORSKI. Well, a parking fee is justified under municipal law for traffic control. If you have recently used a parking meter, you realize that whether you put in a quarter an hour or a dollar an hour, the rental fee for that space far exceeds the costs to the Government of that regulation of parking. In most municipalities in the country it becomes a huge income revenue source. Would it not be proper for every American to make the argument that the parking fee per hour should be reduced commensurate with the money necessary to fund that proportion of the governmental function, and any additional funds should not be allowed to be used for any other purposes of Government? Is that a logical argument?
 Page 88       PREV PAGE       TOP OF DOC

    Mr. EVANS. If the legislation that enacted the ability to charge that parking fee were directly related to the costs, then I think you could make a similar argument.

    Mr. KANJORSKI. You do not have the right to raise revenues in the parking fees. It is only for purposes of police powers, for regulation of traffic control.

    Mr. QUICK. It sounds like we could privatize parking and do an IPO or something. It sounds like a good proposition to me.

    Mr. KANJORSKI. You experts have an answer in the private market for everything. I appreciate it. I did have a hard question here. I do not want to appear that I am unsympathetic to using fees as a portion to cover up what is actually a tax, and I recognize by collecting this fee in effect we are taxing the securities industry, and subsequently their investors, but I am pressed with the problem of how we make up for the shortfall in revenue.

    Mr. QUICK. Well, I would like to go back to 1996 when the fees were changed and go back to what we did before then when we appropriated the money for the sole purpose of funding the Securities and Exchange Commission by the Congressional Budget Office. Now, all of a sudden, we find ourselves in a position, because of conditions not responsible to anybody in this room, that the market and transactions and the dollar volume have exploded, that we have created these excess fees, but what we have done is we have turned it into a tax which goes into the general revenue of the budget, for which it was never intended.

 Page 89       PREV PAGE       TOP OF DOC
    Mr. KANJORSKI. I agree. But let us play a worst case scenario game. Rather than go into a soft landing, we in fact go into a depression, and the acceleration of the market from 1996 to 2000 reverses itself but does not reverse itself to 1995, it goes back to 1950 in sales. So that the fee, even under present schedule, is out there, would not be enough to generate the revenue needed.

    Mr. QUICK. I think the bill itself, as Senator Gramm testified earlier, has a 40 percent cushion in it. So I do think we are not in danger of violating that 40 percent cushion.

    Mr. KANJORSKI. So, we can be assured that the market will not fall 40 percent?

    Chairman BAKER. Mr. Kanjorski, what we do is raise those parking fees and have an offset.

    Mr. Ose.

    Mr. OSE. Thank you, Mr. Chairman. I want to follow up with Mr. Evans on one particular issue that I am a little bit confused on. Within the portfolios that TIAA-CREF has, you have a zillion different individual people for whom you act as a fiduciary on their investment programs. Let's say I am one of those, and in the course of a day I want to say all right, I am going to call Scott Evans and I am going to change the mix. And over the course of that day, of your 373,000—whatever it is—individual investors, you have 50,000 of them do a similar activity.
 Page 90       PREV PAGE       TOP OF DOC

    At the end of the day, as I understand current industry practices, you guys reconfigure your portfolios within the overall portfolio itself, shifting stock back and forth to balance buys and sells, and to the extent you are short or long, you will go into the market and either buy or sell to make up the accurate end-of-the-day reconfiguration; is that correct?

    Mr. EVANS. Roughly, Congressman.

    Mr. OSE. Roughly is about as good as it gets.

    Mr. EVANS. We have 2.3 million participants in our pension accounts and they can on any given day change the allocation of their pension savings that they have invested with us. They would put those orders in. We would then take those orders, and when the net sales—that is when the sales exceeded the purchases—we would sell securities. Then and only then would we be assessed the Section 31 tax—I am sorry, Section 31 user fee of approximately $33 per million on that transaction. When there is a purchase there is no user fee, as I understand it.

    Mr. OSE. The only fees you pay are on the long or short portion at the end of the day? You don't pay for the intraportfolio movement?

    Mr. EVANS. That is not a transaction in the securities markets. When a transaction occurs and it is a sale transaction, we are assessed a fee under Section 31.

 Page 91       PREV PAGE       TOP OF DOC
    Mr. OSE. Mr. Chairman, I think we need to clarify this, because my understanding of the earlier testimony was that the intraportfolio transactions were subjected to the assessment, the fee, the tax, whatever you want to call it. So I appreciate, I appreciate you clarifying that. I mean, you are the practitioner. You ought to know.

    Mr. EVANS. We may be referring to different types of transactions, but as I understand it, Congressman, when TIAA-CREF goes to the securities markets and transacts with a third party, that is when the user fee is assessed.

    Mr. OSE. Inside the portfolio itself, separate from the market, when you balance everything out prior to going into the market, those movements are not subject to the tax or the assessment. In effect, that is almost a trusteeship, if you will?

    Mr. EVANS. I don't believe so, Congressman, but the question is on a level of detail that I may be mistaken. In looking at how the $1.1 million of fees is structured, I believe my answer is correct.

    Mr. OSE. All right. Moving on to my second question. I have actually taken the time to go back to the 1934 legislation and the 1996 legislation, and the reason I did was I wanted to find out if embedded in the legislation itself, pursuant to my earlier questions, there was an actual description of what the purpose of these transaction fees or these registration fees is. And I just want to read for the record, if I may, that as regards registration fees—this is actual legislation, statutory authority: ''A commission shall in accordance with this subsection collect registration fees that are designed to recover the costs to the Government of the registration process.''
 Page 92       PREV PAGE       TOP OF DOC

    And then in the transaction fees it says virtually the same thing, substituting transaction for registration. It does not say collect fees for ad infinitum programs outside of the jurisdiction of the SEC.

    So we really do have a true problem here in that we are assessing America's investing public, the people who provide our industry and businesses with capital, a tax that is clearly not authorized.

    And with that, Mr. Chairman, I yield back.

    Chairman BAKER. Thank you, Mr. Ose.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman. I have one question and one comment. I am in support of this, but I also sit on the Budget Committee, and even though we now have all the money we are ever going to need and surpluses as far as the eye can see, even though I think it was just 6 short years ago it was deficits as far as the eye can see, and even though we know these projections will never be wrong and there is no need to discount future revenue streams, at least I know you all do, but we don't need to do that—that, you know, there shouldn't be a problem, but we do kind of have to think where we might come up with $14 billion, because this isn't in the President's budget, and you start adding $14 billion here and $12 billion there and $10 billion there, and pretty soon you get right through the contingency. So it is a little bit more difficult than you might think, and it is doesn't matter which party you are in either.
 Page 93       PREV PAGE       TOP OF DOC

    But the question is this: The proposal put forth in the Senate would—and this is something we are trying to put together, a proposal here would, if I understand it, allow sort of a 6-month look back or look forward, with the ability to make adjustments in the fee structure to ensure that there were sufficient funds for the operation of the Commission.

    From your standpoint, does that give you some concerns that as market makers or as dealers or as investors that you would have to make adjustments, or is it easy enough, particularly under the Section 31 fees, that you either have one fee or another fee and you just make an adjustment, but is it something that the back office can handle or is it an administrative nightmare?

    Mr. EVANS. From our perspective, the variability of the Section 31 fees, in order to continually reassess their capability of covering SEC costs, is a practical solution, and whether it is $33 per million or $14 per million or whatever the fee, it is not a large issue for us administratively. Our principal interest is that that fee level is closely aligned with the SEC's ability to fully fund themselves, including their ability to adequately compensate staff relative to other Federal banking agencies.

    Mr. BENTSEN. I guess my question is just specifically if we tell you it is one thing on January 1 and we come back on June 1 and tell you it is something else, is that problematic or not—or July 1—is that problematic or not?

    Mr. EVANS. It could present problems if there are retroactive adjustments. If the fee going forward were adjusted to compensate, I think that might be a more practical——
 Page 94       PREV PAGE       TOP OF DOC

    Mr. BENTSEN. So would it be better to have just a set amount per year and if you are off a little bit you just make it up? Would that be your preference as opposed to having——

    Mr. EVANS. The more simple the fee, Congressman, the easier it is to administrate.

    Mr. BENTSEN. Do any of the others have comments on that?

    Mr. QUICK. It is a 30-day adjustment in the Senate bill. It wouldn't present a problem from a specialist standpoint at all.

    Mr. BENTSEN. It would not?

    Mr. QUICK. It would not.

    Mr. BENTSEN. And what about for Merrill or a dealer?

    Mr. TOES. On Merrill Lynch it wouldn't be a problem. It is hard for me to speak for the other broker-dealers, Smith Barney, and—but our understanding is that a 30-day would be adequate time.

    Mr. BENTSEN. So that the back office would be able to work it out and adjust it accordingly?
 Page 95       PREV PAGE       TOP OF DOC

    Mr. TOES. Yes.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Bentsen.

    Gentlemen, the record will remain open for 30 days for Members to submit additional questions to you in writing and to include your responses as part of our official record. I want to thank you for your participation and make it clear that there is general agreement among many Members that this action is indeed appropriate. There is continuing discussion about the appropriateness of how the formula is to be implemented, the pay parity issue raised by the SEC. There may well be other issues that will circle this, but just the assurance from the committee to you and other market participants that we believe that the assessment is inappropriate and that action should be taken by this section of Congress sooner rather than later, and your appearance here today has helped us toward that final goal.

    Thank you very much. Our hearing is adjourned.

    [Whereupon, at 12:17 p.m., the hearing was adjourned.]