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Notice

Order Making Fiscal 2002 Mid-Year Adjustment to the Fee Rates Applicable Under Sections 31(b) and (c) of the Securities Exchange Act of 1934

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I. Background

Section 31 of the Securities Exchange Act of 1934 (“Exchange Act”) requires each national securities exchange and national securities association to pay transaction fees to the Commission.[1] Specifically, Section 31(b) requires each national securities exchange to pay the Commission fees based on the aggregate dollar amount of sales of certain securities transacted on the exchange.[2] Section 31(c) requires each national securities association to pay the Commission fees based on the aggregate dollar amount of sales of certain securities transacted by or through any member of the association otherwise than on an exchange.[3]

The Investor and Capital Markets Fee Relief Act (“Fee Relief Act”) recently amended Section 31 to change the fee rates applicable under Sections 31(b) and (c).[4] The Fee Relief Act established an initial rate of $15 per $1,000,000 of the aggregate dollar amount of sales of Start Printed Page 10240securities, which rate became effective December 28, 2001.[5]

Further, the Fee Relief Act requires the Commission to make annual adjustments to the fee rates applicable under Sections 31(b) and (c) for each of the fiscal years 2003 through 2011, and one final adjustment to fix the fee rates for fiscal 2012 and beyond.[6] The Fee Relief Act also requires the Commission, in certain circumstances, to make a mid-year adjustment to the fee rates in fiscal 2002 through fiscal 2011. The annual and mid-year adjustments are designed to adjust the fee rates in a given fiscal year so that, when applied to the aggregate dollar volume of sales for the fiscal year, they are reasonably likely to produce total fee collections under Section 31 equal to the “target offsetting collection amount” specified in the Fee Relief Act for that fiscal year.[7] For fiscal 2002, the target offsetting collection amount is $732,000,000.[8]

Congress determined the Fee Relief Act's target offsetting collection amounts by applying reduced fee rates to the Congressional Budget Office's (“CBO”) January 2001 projections of dollar volume for fiscal years 2002 through 2011.[9] In any fiscal year through fiscal 2011, the annual and, in certain circumstances, mid-year adjustment mechanisms will result in additional fee rate reductions if the CBO's January 2001 projection of dollar volume for the fiscal year proves to be too low, and fee rate increases if the CBO's January 2001 projection of dollar volume for the fiscal year proves to be too high.

II. Determination of the Need for a Mid-Year Adjustment in Fiscal 2002

Under paragraph 31(j)(2) of the Exchange Act, the Commission must make a mid-year adjustment to the fee rates under Sections 31(b) and (c) in fiscal 2002 if, based on the actual aggregate dollar volume of sales during the first five months of the fiscal year, it determines that the amount $48,800,000,000,000 is reasonably likely to be 10% (or more) greater or less than the actual aggregate dollar volume of sales for fiscal 2002.[10] To make this determination, the Commission must estimate the actual aggregate dollar volume of sales for fiscal 2002.

Based on data provided by the national securities exchanges and the national securities association that are subject to Section 31,[11] the actual aggregate dollar volume of sales during the first four months of fiscal 2002 was $8,118,639,282,307.[12] Using these data and a methodology for estimating the aggregate dollar amount of sales for the remainder of fiscal 2002 (developed after consultation with the CBO and the Office of Management and Budget),[13] the Commission estimates that the aggregate dollar amount of sales for the remainder of fiscal 2002 to be $18,817,006,987,123. Thus, the Commission estimates that the actual aggregate dollar volume of sales for all of fiscal 2002 will be $26,935,646,269,430.

Because $48,800,000,000,000 is more than 10% greater than the $26,935,646,269,430 estimated actual aggregate dollar volume of sales for fiscal 2002, paragraph 31(j)(2) of the Exchange Act requires the Commission to issue an order adjusting the fee rates under Sections 31(b) and (c).

III. Calculation of the Uniform Adjusted Rate

Paragraph 31(j)(2) specifies the method for determining the mid-year adjustment for fiscal 2002. Specifically, the Commission must adjust the rates under Sections 31(b) and (c) to a “uniform adjusted rate that, when applied to the revised estimate of the aggregate dollar amount of sales for the remainder of [fiscal 2002], is reasonably likely to produce aggregate fee collections under Section 31 (including fees collected [14] during such 5-month period and assessments collected under [Section 31(d)]) that are equal to [$732,000,000].” In other words, the uniform adjusted rate is determined by subtracting fees collected prior to the effective date of the new rate and assessments collected under Section 31(d) during all of fiscal 2002 from $732,000,000, which is the target offsetting collection amount for fiscal 2002. That sum is then divided by the revised estimate of the aggregate dollar volume of sales for the remainder of the fiscal year following the effective date of the new rate.

The Commission estimates that it will collect $290,970,371 in fees for the period prior to the effective date of the mid-year adjustment [15] and $337,500 in assessments on round turn transactions in security futures products during all of fiscal 2002.[16] Using the methodology referenced in Part II above, the Commission estimates that the aggregate dollar volume of sales for the remainder of fiscal 2002 following the effective date of the new rate will be $14,626,040,810,789. Based on these estimates, the uniform adjusted rate is $30.10 per million.[17]

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The Commission recognizes that this fee rate is substantially higher than $15 per million initial fee rate set forth in the Fee Relief Act. However, this higher fee rate is a direct consequence of the dramatic decline in dollar volume in fiscal 2002 compared to the CBO's January 2001 projection of dollar volume for fiscal 2002. The recent decline in dollar volume for securities transactions subject to Section 31 fees is illustrated in Appendix A.

IV. Effective Date of the Uniform Adjusted Rate

Subparagraph 31(j)(4)(B) of the Exchange Act provides that a mid-year adjustment shall take effect on April 1 of the fiscal year to which such rate applies. Therefore, the exchanges and the national securities association that are subject to Section 31 fees must pay fees under Sections 31(b) and (c) at the uniform adjusted rate of $30.10 per million for sales of securities transacted on April 1, 2002, and thereafter until the annual adjustment for fiscal 2003 is effective.[18]

V. Conclusion

Accordingly, pursuant to Section 31 of the Exchange Act,[19]

It is hereby ordered that the fee rates under Sections 31(b) and (c) of the Exchange Act shall be $30.10 per $1,000,000 of the aggregate dollar amount of sales of securities subject to these sections effective April 1, 2002, and thereafter until the annual adjustment for fiscal 2003 is effective.

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By the Commission.

Margaret H. McFarland,

Deputy Secretary.

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Footnotes

4.  Pub. L. 107-123, 115 Stat. 2390 (2002).

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5.  15 U.S.C. 78ee; Fee Relief Act, Pub. L. 107-123, section 11, 115 Stat. 2390 (2002).

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6.  15 U.S.C. 78ee(j)(1) and (j)(3).

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7.  See 15 U.S.C. 78ee(l)(1).

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9.  The target offsetting collection amounts for fiscal 2002 through 2006 were determined by applying a rate of $15 per million to the CBO's projections of dollar volume for those fiscal years. The target offsetting collection amounts for fiscal 2007 through 2011 were determined by applying a rate of $7 per million to the CBO's projections of dollar volume for those fiscal years. For example, CBO's projection of dollar volume for fiscal 2002 was $48,800,000,000,000. See infra, note 10. Applying the initial rate under the Fee Relief Act of $15 per million to that projection produces the target offsetting collection amount under the Fee Relief Act for fiscal 2002 of $732,000,000.

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10.  The amount $48,800,000,000,000 is CBO's January 2001 projection of dollar volume for fiscal 2002.

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11.  Each exchange is required to file a monthly report on Form R-31 containing dollar volume data on sales of securities subject to Section 31 on the exchange. The report is due by the end of the month following the month for which the exchange provides dollar volume data. The National Association of Securities Dealers, Inc. (“NASD”) provides data separately.

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12.  Although paragraph 31(j)(2) indicates that the Commission should determine the actual aggregate dollar volume of sales for fiscal 2002 “based on the actual aggregate dollar volume of sales during the first 5 months of such fiscal year,” data are only available for the first four months of the fiscal year as of the date the Commission is required to issue this order, i.e., March 1, 2002. Dollar volume data on sales of securities subject to Section 31 for February 2002 will not be available from the exchanges and the NASD for several weeks.

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13.  The methodology for forecasting dollar volume is as follows. First, the Commission constructs a ten-year monthly time series of average daily dollar volume (“ADDV”) for all securities transactions subject to Section 31 fees. The Commission then calculates the average monthly rate of change in ADDV. To obtain ADDV forecasts, the Commission assumes that this rate of change will hold through the end of fiscal 2002. Finally, the Commission multiplies each month's ADDV forecast by the number of trading days in that month to obtain a forecast of total monthly dollar volume. Future forecasts will be based on rolling ten-year periods of data.

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14.  The term “fees collected” is not defined in Section 31. Because national securities exchanges and national securities associations are not required to pay the first installment of Section 31 fees for fiscal 2002 until March 15, the Commission will not “collect” any fees in the first five months of fiscal 2002. See 15 U.S.C. 78ee(e). However, the Commission believes that, for purposes of calculating the mid-year adjustment, Congress, by stating in paragraph 31(j)(2) that the “uniform adjusted rate . . . is reasonably likely to produce aggregate fee collections under Section 31 * * * that are equal to [$732,000,000],” intended the Commission to include the fees that the Commission will collect based on transactions in the six months before the effective date of the mid-year adjustment.

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15.  This calculation is based on applying a fee rate of $33.33 per million to the actual aggregate dollar volume of sales of securities subject to Section 31 prior to December 28, 2001, and a fee rate of $15 per million to the projected aggregate dollar volume of sales of securities subject to Section 31 from December 28, 2001 through March 31, 2002.

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16.  The estimate of $337,500 in assessments on round turn transactions in security futures products is based on CBO's August 2001 estimate for fiscal 2002, revised to reflect the reduced assessment amount on round turn transactions under the Fee Relief Act, 15 U.S.C. 78ee(d), and the delayed start date for trading in security futures products.

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17.  ($732,000,000−$290,970,371−$337,500)/$14,626,040,810,789 = $0.00003013. Consistent with the system requirements of the exchanges and the NASD, the Commission rounds this result to the seventh decimal point, yielding a rate of $30.10 per million.

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18.  Paragraph 31(j)(1) and Section 31(g) of the Exchange Act require the Commission to issue an order no later than April 30, 2002, adjusting the fee rates applicable under Sections 31(b) and (c) for fiscal 2003. These fee rates for fiscal 2003 will be effective on the later of October 1, 2002 or thirty days after the enactment of the Commission's regular appropriation for fiscal 2003.

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19.  15 U.S.C. § 78ee.

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BILLING CODE 8010-01-P

[FR Doc. 02-5324 Filed 3-5-02; 8:45 am]

BILLING CODE 8010-01-C