For other versions of this document, see http://wikileaks.org/wiki/CRS-RS20953 ------------------------------------------------------------------------------ Order Code RS20953 Updated September 7, 2001 CRS Report for Congress Received through the CRS Web Reducing Securities Transaction Fees: Effects on Collections of H.R. 1088 and S. 143 Mark Jickling Specialist in Public Finance Government and Finance Division Summary Both the House and the Senate have passed separate bills that would reduce fees collected by the Securities and Exchange Commission (SEC) from sellers of corporate stock and companies active in securities and merger markets.1 H.R. 1088 and S. 143 have the common aim of reducing the amounts collected to a sum more nearly equal to the SEC's budget, and would replace the current fee structure. In some cases, existing fee rates would be lowered; in others, collections would become subject to annual caps or targets. The proposed fee schedules in the two bills are not identical. This report sets out the differences, and, relying upon forecasts of collections under current law prepared by the Congressional Budget Office (CBO), presents dollar estimates of the impact on fee collections through FY2011. Over fiscal years 2002 through 2011, H.R. 1088 would reduce fee collections by an estimated $15.0 billion; S. 143 by about $16.7 billion. This report will be updated if legislative developments warrant. There are three major securities transaction fees: ! Section 31 transaction fees, payable by sellers of corporate stock; ! Section 6(b) registration fees, payable by corporations selling new issues of stock or bonds; and ! merger and tender offer fees, paid by corporations acquiring other businesses, pursuant to Sections 13(e)(3) and 14(g) of the Securities Exchange Act of 1934. The table and chart below show how total collections of these fees would be affected by the provisions of H.R. 1088 and S. 143. The versions of the bills referred to are: S. 143 as passed by the Senate on March 22, 2001, and H.R. 1088 as passed by the House on June 14, 2001. 1 For an overview of the issue, see CRS Report RS20204. Congressional Research Service ~ The Library of Congress CRS-2 Table 1. Estimated Collections of All Securities Fees, Under Current Law, H.R. 1088, and S. 143: Fiscal Years 2002-2011 (All figures in millions of dollars) Current Law H.R. 1088 S. 143 Fiscal CBO Fee Year Collections Change Change Estimated Estimated Forecast From CBO From CBO Collections Collections Estimate Estimate 2002 2,872 1,212 -1,660 915 -1,957 2003 3,188 1,309 -1,879 1,115 -2,073 2004 3,523 1,525 -1,998 1,340 -2,183 2005 3,958 1,827 -2,131 1,665 -2,293 2006 4,444 2,172 -2,272 2,010 -2,434 2007 2,079 1,141 -938 1,015 -1,064 2008 2,124 1,177 -947 1,035 -1,089 2009 2,373 1,368 -1,005 1,225 -1,148 2010 2,641 1,566 -1,075 1,430 -1,211 2011 2,939 1,797 -1,142 1,665 -1,274 Totals 30,141 15,094 -15,047 13,415 -16,726 Source: Calculated by CRS using April 2001 baseline forecasts by the Congressional Budget Office (CBO). The figures in the table above depend on CBO estimates of the future volume and value of securities market transactions, which are extremely difficult to predict. If the stock, bond, and merger markets underperform the CBO estimates, fee collections under current law could be significantly lower than the CBO's forecasts. The estimates in Table 1 for fee collections under H.R. 1088 and S. 143 are derived by applying the fee rates and collections targets and caps contained in the bills to the CBO current-law estimates. For simplification, it is assumed that the collections targets and caps in the bills will be met exactly. In practice, it is likely that actual collections ­ based on rates to be adjusted annually according to forecasts of market activity ­ would fall short of the target figures in some fiscal years. CRS-3 Figure 1. Estimated Securities Fee Collections Under Current Law, H.R. 1088, and S. 143 Source: Calculated by CRS using Congressional Budget Office forecasts. More detailed estimates of the effects of the bills on fee collections ­ including the impact on individual fees ­ appear in the CBO cost estimates, which are available on the CBO web site [http://www.cbo.gov] and in the committee reports that accompanied both bills.2 The estimates presented above suggest that enactment of either bill, or a bill combining features of the two, would result in a substantial reduction in fee collections. Using the April 2001 CBO forecast as a guide, CRS estimates that H.R. 1088 would reduce fee revenue by about $1.50 billion per year (or 50%) over the period of FY2002- 2011, while S. 143 would reduce average annual revenues by about $1.67 billion (or 55%). The difference is attributable primarily to the treatment of 6(b) registration fees, where S. 143 sets a lower rate that has a more pronounced effect on forecasted collections than do the target figures set forth in H.R. 1088. While current law establishes fixed fee rates (some of which are set to decline in FY2007), both H.R. 1088 and S. 143 mandate the use of flexible rates for some fees, to be adjusted annually in order that collections meet caps or target figures specified in the legislation. An interesting possibility is that the fee rates could rise if market activity and/or prices decline: that is, given falling volume, each transaction might have to be taxed at a higher rate to obtain the specified amount of revenue. It is conceivable that a severe market decline could result in some fee rates higher than they would be under current law. 2 U.S. Congress. House. Committee on Financial Services. Investor and Capital Markets Fee Relief Act. H.Rept. 107-52, Part 1, to accompany H.R. 1088. p. 13-19. and: Senate. Committee on Banking, Housing, and Urban Affairs. Competitive Market Supervision Act of 2001. S.Rept. 107-3, to accompany S. 143. p. 8-14. CRS-4 The table below sets out the treatment of the three major securities fees under current law, S. 143, and H.R. 1088. Table 2. Levels of Three Major Securities Fees: Under Current Law, H.R. 1088, and S. 143 Fee Current Law H.R. 1088 S. 143 Section 31 1/300th of 1% of Base rate of $15 Rate to be set Transaction Fees the value of stock per $1 million in annually in order (On Sale of Stock sold. In FY 2007 stock sales, but that total and Stock and later years, SEC would adjust collections equal a Options) 1/800th of 1%. the rate to meet an cap specified in annual collections Section 4 of the target level bill. specified in Section 3 of the bill. Section 6(b) $200 per $1 Base rate of $92 $67 per $1 million Registration Fees million of per $1 million in of securities sold (On New Offerings securities offered, securities offered, through FY 2006; of Stocks and plus a but SEC would $33 per $1 million Bonds) supplemental adjust the fee rate in FY 2007 and amount ($39 per to meet an annual later years. million in FY collections target 2002, falling to level specified in zero in FY 2006). Section 3 of the In FY 2007, the bill. fee will drop to $67 per $1 million. Merger and $200 per $1 Base rate of $92 $67 per $1 million Tender Offer million in reported per $1 million of transaction Fees transaction value. transaction value, value through FY but SEC would 2006; $33 per $1 adjust the fee rate million in FY 2007 annually to the and later years. same rate as that set for Section 6(b) registration fees. Source: Securities Act of 1933, Securities Exchange Act of 1934, H.R. 1088 and S. 143 as passed by the House and Senate, respectively. ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RS20953