A key trading cost will rise next year, but securities industry officials fear that in 2012 the business will be hit with a much bigger one.
The Section 31 securities transaction tax is now scheduled to rise next year from the current $16.90 per million dollars to $19.20 per million, according to the Securities and Exchange Commission. It relies on the fee to pay for the costs of regulating the trading industry.
The 13.6 percent increase in Section 31 fees will go into effect 30 days after the SEC’s 2011 budget is adopted. Still, there is a larger issue looming, says a trading industry official.
"In 2012, it is quite unclear how things are going to be handled," according to David Franasiak, a lobbyist for the Security Traders Association. He warns that, potentially, the Section 31 fees could "double or triple" in 2012, as the SEC takes on more duties and more staff.
"If these costs go up enough, it is inevitable that some of them will have to be passed on to the investor," said one trading executive who declined to be identified.
An SEC official declined comment.
The Section 31 rate is based on market volume under the Investor and Capital Markets Fee Relief Act of 2002. That’s legislation the trading industry lobbied for to keep these fees from becoming excessive and a profit center for the government. Before the Fee Relief Act, the Section 31 fee was as high as $33 per million dollars of trades and was generating profits for the government.
The fee rate is set twice a year. Since the Fee Relief Act became law, the rate has been dropped nine times and raised seven times, including the projected rate for early next year.
The Act, in re-directing how the transaction fee would be set, called on regulators to "consider the economic benefits flowing to investors from fee reductions to include such factors as market efficiency, expansion of investment opportunities, and enhanced liquidity and capital formation." The 2002 legislation also said the SEC would now be "self-funded."
That’s the way it has worked over the last eight years. So when trading volumes are strong, the fee could be dropped. When they decline, the fee must be raised. Market volume has been down for most of this year, noted another STA official, so a rate increase was expected in 2011.
"Many of our members had been expecting that," said John Giesea, president and CEO of the STA. However, the system of limiting fee increases could radically change after next year, according to Franasiak, the lobbyist.
Given the new SEC’s numerous new responsibilities as a result of the massive financial industry regulatory reforms brought by Dodd-Frank, Franasiak warns that Section 31 fees could rise much more in 2012.
"With all these increased costs, they’re going to go to the same pool of contributors, who are people who invest in the equity markets. I think it’s unfair," according to Franasiak. If current trends continue, he says a Section 31 rate of $33 per million is possible in the next few years.
