It's now or never for the trading industry in the 107th Congress. Never have the
Security Traders Association's chances seemed so bright to obtain favored tax-reduction legislation of Section 31(a) fees. Still, if the industry isn't able to take advantage of this unique opportunity over the next two years, it will be a long time before it has another one, STA officials concede.
"This [Bush] administration is much more sympathetic than the previous one. This is the year to get things done," said Lee Korins, president of the STA. That's what STA officials and securities industry lobbyists tell Traders Magazine in a series of interviews about the new Congressional session and about their attempts to reduce the unpopular Section 31(a) tax, which is the STA's top priority in the current two-year session of Congress.
The STA, which has failed numerous times over the past four years in its attempts to pass legislation to reduce Section 31(a) fees, now has a new chief lobbyist and believes it will be more successful this time than in the last two Congresses. That's because more lawmakers now understand the issue, they say. STA officials note that this new Congress is under Republican control, even though they concede the control is tenuous. Congress will negotiate with the first Republican administration in eight years, an administration that has indicated it is interested in Section 31(a) reductions.
These circumstances will give the STA and the rest of the securities industry a unique opportunity to make a successful case for tax reduction, industry officials contend. Legislation with significant bi-partisan sponsorship is pending. It would provide the tax reduction that the trading industry wants.
"I believe we have a very good chance. I would say our chances are about 70 percent this time," according to Arthur Pacheco, a senior managing director with Bear Stearns and the new chairman of the STA's Political Action Committee (STAPAC). The STA has said the same thing several times over the previous two sessions of Congress. In the last session, it was only able to move Section 31(a) tax reductions through two Congressional committees, although neither measure ever made it to the floor of the Senate or the House of Representatives.
Pacheco implicitly acknowledges STA's previous failures. "It's been difficult to do this in the past, but I think we can do it this time," he added. Others in the securities industry agree.
Favored Legislation
The STA's favored legislation is Senate Bill 143. It is "a bill to amend the Securities Act of 1933 and the Securities Exchange Act of 1934, to reduce securities fees in excess of those required to fund operations of the Securities and Exchange Commission," according to the legislation.
"I don't want to make odds on this," added another securities official. "After all, look at how many people were wrong about the Super Bowl, but I do think we have the best chance ever to do it this time," said Dan Michaelis, a spokes-
man for the Securities Industry Association, which is another securities group lobbying for the tax cut.
"The chances are good," agreed Christi Harlan, a spokeswoman for the Senate Banking Committee, which began hearings on the bill last month. The STA enters this session with much optimism.
"I am confident that this will be the year that both the full House and Senate do what's right for consumers and pass the bill without delay," Korins said. However, he concedes that there will be critics who will charge that the legislation amounts to a tax cut for the rich. He says members of Congress such as Chris Dodd (D-Conn.) and Representative Ed Markey (D-Mass.) have been opponents of Section 31 relief in the past.
Neither Markey nor Dodd returned telephone calls as Traders Magazine went to press. A spokesman for the Senate Minority Leader made no public comment on the bill. Several Congressional sources told us that, because the SB 143 is relatively new, many lawmakers have yet to take a position on it.
"The senator is still looking at this," said a spokesman for Senator Jon Corzine (D-N.J.), a freshman senator who is a former Goldman Sachs executive.
Section 31(a) is a transaction tax that goes back to the 1930s and was part of the New Deal reforms to ensure fair markets. It was intended to fund regulatory costs of the securities industry. The act authorizes assessing for the "costs related to such supervision and regulation, including enforcement activities, policy and rulemaking activities, administration legal services and international regulatory services."
When the act became effective, it was only designed to apply to an exchange market. For many years, taxes generated tended to be almost the same as the SEC budget. But in 1996, with the passage of the National Securities Markets Improvement Act (NSMIA), the fast growing Nasdaq market, which was not a traditional auction market as envisioned in the original legislation, was included in the taxable base of Section 31(a).
Tax receipts explo-
ded. It has been a windfall for the federal government. Yet NSMIA had only been designed as a fee-not a general tax-to recoup the costs of regulation. With Nasdaq volumes rising at a dramatic pace each year in the late 1990s, the funds flowing into government coffers to fund the SEC far exceeded anything the government had ever received.
De Facto Tax
The Section 31(a) is a fee whose detractors charge has become a de facto tax. Last year, Section 31 receipts, along with other fees paid to the SEC to pay for the costs of regulation, came to about $2.27 billion, according to the SIA. The SEC budget last year was some $377 million, which gave the government a bonus of $1.8 billion more than was needed to fund the regulatory operations of the securities industry.
Harlan, the Senate Banking Committee staffer and a former Wall Street Journal reporter, says the overtaxing problem actually began in 1993 and 1994, but didn't become pronounced until 1996.
This over funding, Pacheco complains, ends up in the general treasury, where it can "pay for pork barrel stuff." Senator James Bunning, a Republican from Kentucky, calls the Section 31(a) fees a "backdoor tax on capital formation [which] is an unfair burden to investors and brokers." Adds Senator Charles Schumer (D-N.Y.), a co-sponsor of SB 143, "Today, the fee collections are used to fund the SEC and the excess amount becomes part of the overall federal budget. That means that investors are helping to pay for activities ranging from tanks to highways to cancer research. These are all worthy expenditures, but it's not why Congress created Section 31(a) fees and it's simply unfair to investors." STA's Korins contends that the securities industry and its customers will pay billions of dollars in additional taxes over the next five years if the rates are not reduced.
Section 31(a) fees come in two varieties. Offsetting fee collections are made immediately available for Congress to appropriate. This money can be used for any purpose that Congress wants. On the other hand, exchange-traded stock fees-from the Big Board and other officially registered exchanges-are put aside for the annual budget appropriation process.
SIA's Michaelis, citing a study that shows that 48 percent of American households now directly or indirectly own equities, says the debate will be made into a broad based one in which most Americans have a stake. "This is not a partisan issue. And it is in the best interests of all Americans to have this issue addressed," he said.
Susan Woodward, an economist who was retained by the STA to study the issue, concluded that "the fee is not shared by producers and consumers, but borne entirely by consumers." She estimates the fee costs the average investor about $1,000 a year.
Adjusting Fees
Senate Bill 143 would give members of Congress the power to adjust the fees each time they're setting the SEC budget. The fee is now assessed at 1/300 of one percent of the sale price of a security.
"The first thing we want to do," according to Senator Phil Gramm (R-Texas), a sponsor of SB 143 and the chairman of the Senate Banking Committee, "is to roll these fees back to the amount needed by the SEC and then set up a structure to guarantee that whenever they're excessive, we lower them, and whenever they're inadequate, we raise them, and we always have enough money to fund the Securities and Exchange Commission."
The bill would also increase salaries for the SEC professional staff so their pay would be equivalent with the Federal Reserve Board staff, a move that sponsors say will encourage lower staff turnover rates at the SEC.
SEC officials didn't return telephone calls. However, last year, at a subcommittee hearing, then SEC Chairman Arthur Levitt said that the commission, "shares the subcommittee's concern that fee collections are currently well in excess of initial projections."
"This is not a partisan issue. And it is in the best interests of all Americans to have this issue addressed," he said.
Why is the STA's Pacheco optimistic this time? Pacheco notes that the legislation, which is entitled The Competitive Market Supervision Act of 2001, is sponsored by a conservative Republican from Texas, and co-sponsored by a liberal New York Democrat. This time Pacheco believes the case for this tax reduction legislation can be made without the securities industry becoming caught up in a political battle between Republicans and Democrats and without the debate deteriorating into a class war of rich stockholders versus those who don't hold any equities.
But the other side of the STA's hopeful agenda for this Congress is the possibility that, if history repeats and Section 31(a) tax relief doesn't happen in this session, it is likely the tax cutting possibilities will dim if the Democrats take back control of Congress in two years (possibly even sooner if a Republican senator dies or suddenly resigns) or if the economy goes into a recession and the government's huge surpluses suddenly turn into deficits again. Also, Pacheco notes that Congress' attention span is short; that most legislation will be passed in the first year of the session. By next year, many lawmakers will be focusing more on the Congressional elections in 2002 and less on passing bills, he adds.
Now or Never
Korins, the STA president, recently issued this warning to his membership: "If we don't win it this year, then very frankly, ladies and gentlemen, we are never going [anywhere]." Pacheco says Korins was not overdramatic. "We certainly have the risk that, if Bush is not very successful in his first year or two, it becomes more difficult to pass these types of free market agendas."
Pacheco also says the STA's PAC needs greater funding to pass its legislative agenda. He says the PAC now has some $20,000, but to wage an effective campaign for Section 31(a) relief and other issues he wants STA members to contribute another $100,000 so there is about $120,000 in the treasury. Besides tax relief, Pacheco says another key issue for the STA will be market structure. He contends that the SEC led by Arthur Levitt took many steps to restructure the market, a policy that was unwelcome and was often carried out by regulators who didn't understand the unique structural problems of the market. "This was probably the first time in the history of the capital markets that our senior regulator has been seen to get involved in market structure issues as opposed to just regulation." Pacheco said it is important for the STA to make an effective case on Capitol Hill because government "is not particularly good at structuring markets."
