“(5) $184,000,000 for fiscal year 1998; and

"(6) zero each succeeding fiscal year.

"(e) DEPOSIT AND CREDIT OF OFFSETTING COLLECTIONS.—

"(1) OFFSETTING COLLECTIONS CONTINGENT ON APPROPRIATIONS.—The authority of the Commission to collect and deposit fees as offsetting collections pursuant to paragraph (2) is available only to the extent provided in advance in appropriations Acts.

(2) OFFSETTING COLLECTIONS. Of the moneys received during any fiscal year from fees described in subsection (c), there shall (subject to paragraph (1)) be deposited as an offsetting collection in, and credited to, the account providing appropriations to carry out the functions described in the sections referred to in such subsection, an amount equal to the amount appropriated to the Commission for such fiscal year (determined without regard to any reduction attributable to such offsetting collections and excluding any amounts that are permitted to remain available after the close of the succeeding fiscal year).

“(3) GENERAL REVENUES.-The remainder of any moneys received during any fiscal year (after complying with paragraph (2)) shall be deposited in the Treasury of the United States as miscellaneous receipts.

“(f) JUDICIAL REVIEW; REPORTS TO CONGRESS.-The determinations and adjustments made by the Commission under this section shall not be subject to judicial review. The Commission shall, not less than 30 days before the effective date of any adjustments required by this section, submit such adjustments to the Congress together with a report explaining the estimates and calculations on which such adjustments are based.

"(g) RECLASSIFICATION FOR BUDGET PURPOSES.

"(1) EFFECT ON DISCRETIONARY SPENDING LIMITS.-For purposes of complying with section 251 of the Balanced Budget and Emergency Deficit Control Act of 1985, the change mandated by subsection (e) of this section in the budgetary treatment of certain moneys received from fees shall be treated as a change in concepts and definitions within the meaning of section 251(b)(1)(A) of that Act. Accordingly

"(A) at the earliest time allowed by section 251(b)(1) of that Act, the Director of the Office of Management and Budget shall adjust the discretionary spending limits in accordance with section 251(b)(1) to reflect this change in concepts and definitions; and

"(B) if a final sequestration report under section 254(g) of that Act is issued before the adjustment under subparagraph (A) occurs, the change in budgetary treatment mandated by subsection (e) of this section shall be disregarded for all purposes of that report.

“(2) EFFECT ON PAY-AS-YOU-GO LIMITS.-The changes mandated by this section shall be treated as affecting receipts for purposes of section 252 of that Act only to the extent that the applicable surplus amount differs from the surplus amount in the baseline. For this purpose, the surplus amount in the baseline shall be determined by subtracting the baseline estimate of outlays of the Commission from the baseline estimate of receipts generated by the fees described in subsection (c).".

(b) ADJUSTMENT OF FEES TO RECOVER COSTS.—

(1) CHANGES IN APPLICATION AND COLLECTION OF TRANSACTION FEES UNDER SECTION 31 OF THE SECURITIES EXCHANGE ACT OF 1934.-Section 31 of the Securities Exchange Act of 1934 (15 U.S.C. 78ee) is amended to read as follows:

"TRANSACTION FEES

"SEC. 31. (a) COST RECOVERY.-The Commission shall, in accordance with this section and subject to section 31A(e), collect transaction fees to recover the costs of supervision and regulation of, and enforcement with respect to, securities markets and securities professionals. Such costs shall include a proportional share of related Commission expenses in the following areas: enforcement activities, policy and rulemaking activities, administration, legal services, investor information services, and international regulatory activities.

“(b) EXCHANGE-TRADED SECURITIES.-Every national securities exchange shall pay to the Commission a fee in an amount equal to 1/300th of 1 percent of the aggregate dollar amount of sales of securities (other than bonds, debentures, and other evidences of indebtedness) transacted on such national securities exchange.

"(c) OFF-EXCHANGE-TRADED SECURITIES.-For transactions occurring on or after January 1, 1994, every national securities association shall pay to the Commission a fee in an amount equal to 1/300th of 1 percent of the aggregate dollar amount

of sales transacted by or through any member of such association otherwise than on a national securities exchange of—

"(1) securities registered on such an exchange (other than bonds, debentures, and other evidences of indebtedness); and

“(2) securities (other than bonds, debentures, and other evidences of indebtedness) subject to prompt last sale reporting pursuant to the rules of a registered national securities association.

"(d) DATES FOR Payment of FEES.-For transactions occurring on or after January 1, 1994, the fees required by subsections (b) and (c) shall be paid semiannually. Fees shall be paid on September 15 for transactions occurring during the period from the preceding January 1 through June 30, and shall be paid on March 15 for transactions occurring during the period from the preceding July 1 through December 31.

"(e) EXEMPTIONS.-The Commission, by rule, may exempt any sale of securities or any class of sales of securities from any fee imposed by this section, if the Commission finds that such exemption is consistent with the public interest, the equal regulation of markets and brokers and dealers, and the development of a national market system.

"(f) RATES SUBJECT TO ADJUSTMENT AND CONTINGENT ON APPROPRIATIONS.—The fees required by this section are subject to adjustment by the Commission pursuant to section 31A of this title. The authority to collect such fees and the total amount of such fees are subject to subsection (e) of such section.".

(2) REGISTRATION FEES.-Section 6(b) of the Securities Act of 1933 (15 U.S.C. 77f(b)) is amended to read as follows:

"(b)(1) The Commission shall, in accordance with this subsection and subject to section 31A(e) of the Securities Exchange Act of 1934, collect registration fees to recover the costs of services of the securities registration process. Such costs shall include a proportional share of related Commission expenses in the following areas: enforcement activities, policy and rulemaking activities, administration, legal services, investor information services, and international regulatory activities.

“(2) At the time of filing a registration statement, the applicant shall pay to the Commission a fee of 32 of 1 percent of the maximum aggregate price at which such securities are proposed to be offered, but in no case shall such fee be less than $100. “(3) The fees required by this subsection are subject to adjustment by the Commission pursuant to section 31A of the Securities Exchange Act of 1934. The authority to collect such fees and the total amount of such fees are subject to subsection (e) of such section.".

(3) SELF-TENDERING TRANSACTIONS.-Section 13(e)(3) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(e)(3)) is amended—

(A) by inserting after “(3)” the following: "The Commission shall, in accordance with this paragraph and subject to section 31A(e), collect fees to recover the costs of supervision and regulation of, and enforcement with respect to, disclosure relating to transactions subject to this subsection. Such costs shall include a proportional share of related Commission expenses in the following areas: enforcement activities, policy and rulemaking activities, administration, legal services, investor information services, and international regulatory activities."; and

(B) by striking 0 of 1 per centum" and inserting "32 of 1 percent"; and (C) by adding at the end thereof the following: "The fees required by this paragraph are subject to adjustment by the Commission pursuant to section 31A of the Securities Exchange Act of 1934. The authority to collect such fees and the total amount of such fees are subject to subsection (e) of such section.".

(4) PROXY FILING FEES.-Section 14(g) of the Securities Exchange Act of 1934 (15 U.S.C. 78n(g)) is amended

(A) by striking "so of 1 per centum" each place it appears in paragraphs (1)(A)(i), (1)(A)(ii), and (3) and inserting "32 of 1 percent";

(B) by redesignating paragraphs (1) through (4) as paragraphs (2) through (5);

(C) by striking such subsection designation and by inserting before such redesignated paragraph (2) the following:

"(g)(1) The Commission shall, in accordance with this paragraph and subject to section 31A(e), collect proxy filing fees to recover the costs of supervision and regulation of the proxy filing and disclosure process. Such costs shall include a proportional share of related Commission expenses in the following areas: enforcement activities, policy and rulemaking activities, administration, legal services, investor information services, and international regulatory activities."; and

(D) by adding at the end thereof the following new paragraph:

(6) The fees required by this subsection are subject to adjustment by the Commission pursuant to section 31A of this title. The authority to collect such fees and the total amount of such fees are subject to subsection (e) of such section.".

(c) EFFECTIVE DATES.-Except as otherwise provided therein, the amendments made by this section are effective for fiscal years after fiscal year 1993.

SEC. 4. FEE STRUCTURE STUDY.

(a) STUDY REQUIRED.-The Securities and Exchange Commission shall conduct a study of the structure and procedures for the collection of fees by the Commission pursuant to the amendments made by this Act. Such study shall include (but not be limited to) an examination of—

(1) the expanding statutory mandate and regulatory responsibilities of the Commission,

(2) the adequacy of current fees to meet Commission resource needs,

(3) the possible need for new fees in specific program areas,

(4) the extent to which beneficiaries of Commission regulatory activities equitably share fee burdens, and

(5) the impact of specific fees on the international competitiveness of United States markets.

(b) REPORT REQUIRED.-Not later than March 31, 1995, the Commission shall submit to the Congress a final report containing a detailed statement of findings made and conclusions drawn from the study conducted under this section, including such recommendations for administrative and legislative action as the Commission determines to be appropriate.

PURPOSE AND SUMMARY

This legislation amends Section 35 of the Securities Exchange Act of 1934 (Exchange Act) to authorize appropriations for the Securities and Exchange Commission (Commission) $281,900,000 and $317,700,000 for fiscal years 1994 and 1995, respectively, to carry out the activities of the Commission. It also amends the Exchange Act to create a new Section 31A that is designed to establish a "full-cost recovery" mechanism for funding the Commission's activities and operations. A number of conforming amendments also are made to the Exchange Act and the Securities Act of 1933 (Securities Act) to effectuate the operation of this new funding mechanism. For details, see discussion under Full-Cost Recovery and Section-by-Section Analysis infra.

BACKGROUND AND NEED FOR THE LEGISLATION

OVERVIEW

The Commission is responsible for administering the various Federal securities laws that provide for the regulation of the nation's securities markets. Its basic mission is to protect investors and to maintain fair and orderly markets. The Commission thus implements mandatory registration and reporting requirements for all publicly held companies; oversees the securities industry, including broker-dealers and self-regulatory organizations; administers the regulation and examination of all registered investment companies (including mutual funds) and investment advisers; regulates public utility holding companies; and investigates and initiates civil actions and administrative proceedings for violations of the securities laws.

Since the last authorization, the activities over which the Commission has jurisdiction have increased significantly both in size and complexity. Trading on the exchanges and in the over-thecounter market (OTC) has reached record levels, and new products, entities, and trading strategies and mechanisms spanning industry

lines have proliferated. These changes have strained the Commission's existing supervisory, surveillance, and enforcement capabilities. The massive influx of investment dollars into mutual funds and the accelerated pace at which investors have been turning to investment advisers for financial advice have strained the inspection resources of the Commission. The Commission's enforcement activities has also accelerated greatly in recent years in response to a series of abuses, ranging from those in the government securities market to those involving penny stocks and limited partnerships. The volume of new securities registered with the Commission has surpassed all prior levels, while novel securities and financing techniques are used with increasing frequency, thereby placing increased demands on the Commission's disclosure review process. Furthermore, as the markets become increasingly internationalized, complex multi-jurisdictional enforcement, surveillance and disclosure issues strain the Commission's ability to maintain the integrity of the U.S. capital markets and the protection of U.S. investors.

These dramatic changes are illustrated by the following statistics, as set forth in the authorization request submitted to this Committee by the Commission: 1

The dollar value of annual public offerings of securities by all issuers has nearly tripled in the three years between 1989 and 1992 to a record level;

Initial public offerings of common stock have quadrupled in the last three years, to a level that was 33 percent more than the prior record;

Investment company assets grew more than 50 percent in the last three years;

Trading volumes in 1992 were approximately 25 percent higher than trading levels two years before, in 1990;

The value of public offerings increased 45 percent in the one year between 1991 and 1992; and

Since 1981, the number of registered investment advisers grew by 253 percent and assets under management grew by nearly 2000 percent.

At the same time, however, the Commission's authorized positions in staff years have failed to keep pace with such dramatic growth. After declining 4 percent between 1981 and 1986,2 full time equivalents (FTE) at the Commission began to increase somewhat, but not nearly at a level commensurate with the increased complexity and sophistication of the markets, and certainly not on a par with the explosive growth in trading and other activity in the universe of registered entities. From fiscal year 1990, when the Commission had 2,130 FTE, to the present year, the Commission's staffing grew by only 25.6 percent, to 2,677 FTE.3

While productivity-enhancing technology can substitute for people to some extent, it cannot make up the shortfall in resources re

1 See Authorization for Appropriation, Fiscal Years 1994-1995, U.S. Securities and Exchange Commission (May 1993) (Authorization for Appropriation).

2 See H.R. Rep. No. 296, to accompany H.R. 2600, the Securities and Exchange Commission Authorization Act of 1987, 100th Cong., 1st Sess. 3 (1987).

See Testimony of Richard C. Breeden, Chairman, Securities and Exchange Commission, before the Subcommittee on Commerce, Justice, and State, the Judiciary, and Related Agencies of the House Committee on Appropriations (March 23, 1993) (Breeden testimony).

quired as workload expands at a rate of 20-25 percent per year.4 The problem is especially acute with respect to inspections, which are extremely labor-intensive. While innovations may ease some of the Commission's resource burden, they will not produce a significant diminution in personnel needs. Although Commission enforcement is supplemented by the existence of certain private rights of action, for example, the workload remains such as to demand additional funding. In the absence of new resources, the Commission has been compelled to shift personnel among program areas, as a means of regulatory "triage", in order to address the most compelling regulatory needs. For example, the General Accounting Office (GAO), in its 1992 update of a 1990 report on Commission regulation of investment advisers, reported that the number of Commission inspectors actually declined from 64 staff members in 1990 to 46 in 1992, with 18 employees being shifted to the mutual fund inspection program.5 While registered investment advisers are currently inspected only about once approximately every 27 years, the Commission nevertheless determined that understaffing in the mutual fund inspection area presented a greater danger to markets and investors.7 Similarly, the Commission has projected that in order to further accommodate its staffing needs in the investment company area, additional personnel, most likely from the enforcement division, would have to be transferred.8

In the last few years, the Commission has struggled to keep pace with the tremendous growth in its oversight responsibilities, and the Committee commends the Commission for its efforts, despite scarce resources. In view of the increasing pressure that the Commission will continue to face in fulfilling its responsibilities, the Committee believes it is critical to ensure that the Commission's funding is adequate to meet the significant challenges it now faces and will confront as the U.S. markets continue to evolve. The Committee is therefore recommending authorizing appropriations for the Commission in the amounts of $281,900,000 for fiscal year 1994 and $317,700,000 for fiscal year 1995. In addition, the Committee is recommending the implementation of a full-cost recovery funding mechanism to ensure continued adequate funding for the Commission.

SIGNIFICANT PROGRAM AREAS

Investment management regulation

The recent unprecedented growth in the investment adviser and investment company sectors of the securities industry will require enhanced regulatory scrutiny over the next several years. In the investment adviser area, while the number of registered investment

• Id.

See Investment Adviser Industry Reform: Hearings before the House Subcommittee on Telecommunications and Finance, Serial No. 102-128 (June 4, 1992) (Statement of Richard L. Fogel, Assistant Comptroller General) at 7, 11. See also General Accounting Office, "Investment Advisers: Current Level of Oversight Puts Investors at Risk” (GAO-GGD-90–83, June 1990).

• See H.R. Rep. No. 75, to accompany H.R. 578, the Investment Adviser Regulatory Enhancement and Disclosure Act of 1993, 103d Cong., 1st Sess. (April 29, 1993) (Investment Adviser Report).

*See generally Congressional Budget Estimate for Fiscal 1993 (January 1992) at IV-4. See Breeden testimony, written statement at 10-11. See also Wall Street Journal, March 24, 1993, at A5.