04-4802. Order Making Fiscal 2004 Mid-Year Adjustment to the Fee Rates Applicable Under Sections 31(b) and (c) of the Securities Exchange Act of 1934

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 to 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 to the Commission fees based on the aggregate dollar amount of sales of certain securities transacted by or through any member of the association other than on an exchange.^[3]

Section 31(j)(1) and (3) require 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 year 2012 and beyond.^[4] Section 31(j)(2) requires the Commission, in certain circumstances, to make a mid-year adjustment to the fee rates in fiscal 2002 through fiscal 2011.^[5] 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 section 31(l)(1) for that fiscal year.^[6] For fiscal 2004, the target offsetting collection amount is $1,028,000,000.^[7]

Congress established the target offsetting collection amounts in the Investor and Capital Markets Fee Relief Act (“Fee Relief Act”) by applying reducing fee rates to the Congressional Budget Office's (“CBO”) January 2001 projections of dollar volume for fiscal years 2002 through 2011.^[8] In any fiscal year through fiscal 2011, the annual, and in certain circumstances, mid-year adjustment mechanism 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 2004

Under Section 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 year 2004 if it determines, based on the actual aggregate dollar volume of sales during the first five months of the fiscal year, that the baseline estimate ($25,918,721,642,549) is reasonably likely to be 10% (or more) greater or less than the actual aggregate dollar volume of sales for fiscal 2004.^[9] To make this determination, the Commission must estimate the actual aggregate dollar volume of sales for fiscal 2004.

Based on data provided by the national securities exchanges and the national securities association that are subject to section 31,^[10] the actual aggregate dollar volume of sales during the first four months of fiscal 2004 was $8,654,590,961,387.^[11] Using these data and a methodology for estimating the aggregate dollar amount of sales for the remainder of fiscal 2004 (developed after consultation with the CBO and the OMB),^[12] the Commission estimates that the aggregate dollar amount of sales for the remainder of fiscal 2004 to be $22,548,401,329,881. Thus, the Commission estimates that the actual aggregate dollar volume of sales for all of fiscal 2004 will be $31,202,992,291,268.

Because the baseline estimate of $25,918,721,642,549 is more than 10% less than the $31,202,992,291,268 estimated actual aggregate dollar volume of sales for fiscal 2004, section 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

Section 31(j)(2) specifies the method for determining the mid-year adjustment for fiscal 2004. 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 2004], is reasonably likely to produce aggregate fee collections under section 31 (including fees collected during such 5-month period and assessments collected under [section 31(d)]) that are equal to [$1,028,000,000].”^[13] 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 2004 from $1,028,000,000, which is the target offsetting collection amount for fiscal 2004. That difference 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 $622,904,612 in fees for the period prior to the effective date of the mid-year adjustment^[14] and $23,900 in assessments on round turn transactions in security futures products during all of fiscal 2004. Using the methodology referenced in part II above, the Commission estimates that the aggregate dollar volume of sales for the remainder of fiscal 2004 following the effective date of the new rate will be $17,307,204,075,317. Based on these estimates, the uniform adjusted rate is $23.40 per million of the aggregate dollar amount of sales of securities.^[15]

This fee rate is substantially lower than the current fee rate of $39.00 per million, but it is still higher than the fee rate in effect upon to the enactment of the Fee Relief Act. The fee rate remains above the initial fee rate as a direct consequence of the decline in the aggregate dollar amount of sales of securities in fiscal 2004 compared to the CBO's January 2001 projection of the aggregate dollar amount of sales for fiscal 2004. The aggregate dollar amount of sales of securities subject to section 31 fees is illustrated in Appendix A.

IV. Effective Date of the Uniform Adjusted Rate

Section 31(j)(4)(B) of the Exchange Act provides that a mid-year adjustment shall take effect on April 1 of the fiscal year in 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 $23.40 per million for sales of securities transacted on April 1, 2004, and thereafter until the annual adjustment for fiscal 2005 is effective.^[16]

V. Conclusion

Accordingly, pursuant to section 31 of the Exchange Act,^[17] it is hereby ordered that each of the fee rates under sections 31(b) and (c) of the Exchange Act shall be $23.40 per $1,000,000 of the aggregate dollar amount of sales of securities subject to these sections effective April 1, 2004.

By the Commission.

J. Lynn Taylor,

Assistant Secretary.

Appendix A

A. Baseline Estimate of the Aggregate Dollar Amount of Sales.

First, calculate the average daily dollar amount of sales (ADS) for each month in the sample (January 1994-January 2004). The data obtained from the exchanges and NASD are presented in Table A. The monthly aggregate dollar amount of sales (exchange plus Nasdaq) is contained in column E.

Next, calculate the change in the natural logarithm of ADS from month-to-month. The average monthly change in the logarithm of ADS over the entire sample is 0.015 and the standard deviation 0.118. Assume the monthly percentage change in ADS follows a random walk. The expected monthly percentage growth rate of ADS is 2.2 percent.

Now, use the expected monthly percentage growth rate to forecast total dollar volume. For example, one can use the ADS for January 2004 ($120,604,513,953) to forecast ADS for February 2004 ($123,288,117,886 = $120,604,513,953 × 1.022).^[1] Multiply by the number of trading days in February 2004 (19) to obtain a forecast of the total dollar volume forecast for the month ($2,342,474,239,842). Repeat the method to generate forecasts for subsequent months.

The forecasts for total dollar volume are in column I of Table A. The following is a more formal (mathematical) description of the procedure:

1. Divide each month's total dollar volume (column E) by the number of trading days in that month (column B) to obtain the average daily dollar volume (ADS, column F).

2. For each month t, calculate the change in ADS from the previous month as Δ_t = log (ADS_t/ADS_{t −1}), where log (x) denotes the natural logarithm of x.

3. Calculate the mean and standard deviation of the series {Δ₁, Δ₂, * * *, Δ₁₂₀}. These are given by μ = 0.015 and σ = 0.118, respectively.

4. Assume that the natural logarithm of ADS follows a random walk, so that Δ_s and Δ_t are statistically independent for any two months s and t.

5. Under the assumption that Δ_t is normally distributed, the expected value of ADS_t/ADS_t−1 is given by exp (μ + σ²/2), or on average ADS_t = 1.022 × ADS_t − 1.

6. For February 2004, this gives a forecast ADS of 1.022 × $120,604,513,953 = $123,288,117,886. Multiply this figure by the 19 trading days in February 2004 to obtain a total dollar volume forecast of $2,342,474,239,842.

7. For March 2004, multiply the February 2004 ADS forecast by 1.022 to obtain a forecast ADS of $126,031,435,423. Multiply this figure by the 23 trading days in March 2004 to obtain a total dollar volume forecast of $2,898,723,014,722.

8. Repeat this procedure for subsequent months.

B. Using the Forecasts From A to Calculate the New Fee Rate

1. Using the data from Table A, determine the actual and projected aggregate dollar volume of sales between 10/1/03 and 2/21/04 to be $10,380,624,611,797. (Allocate the projected aggregate dollar volume in February 2004 based on the number of trading days in the periods—14 trading days during 2/1/04 and 2/21/04, and 5 trading days during 2/22/04 and 2/29/04.) Multiply this amount by the fee rate of $46.80 per million dollars in sales during this period and get an estimate of $485,813,231 in actual and projected fees collected during 10/1/03 and 2/21/04. Determine the projected aggregate dollar volume of sales between 2/22/04 and 3/31/04 to be $3,515,163,604,154. Multiply this amount by the fee rate of $39.00 per million dollars in sales during this period and get an estimate of $137,091,381 in projected fees collected during 2/22/04 and 3/31/04.

2. Estimate the amount of assessments on securities futures products collected during 10/1/03 and 9/30/04 to be $23,900 by summing the amounts collected through January of $7,700 with projections of a 2.2% monthly increase in subsequent months.

3. Using the data from Table A, determine the projected aggregate dollar volume of sales between 4/1/04 and 9/30/04 to be $17,307,204,075,317.

4. The rate necessary to collect the target $1,028,000,000 in fee revenues is then calculated as: ($1,028,000,000 − $485,813,231 − $137,091,381 − $23,900) ÷ $17,307,204,075,317 = .000023405.

5. Consistent with the system requirements of the exchanges and the NASD, round the rate to the seventh decimal point, yielding a rate of .0000234 (or $23.40 per million).

Footnotes

1.  15 U.S.C. 78ee.

2.  15 U.S.C. 78ee(b).

3.  15 U.S.C. 78ee(c).

4.  15 U.S.C. 78ee(j)(1) and (j)(3).

5.  15 U.S.C. 78ee(j)(2).

6.  15 U.S.C. 78ee(l)(1).

7.  Id.

8.  The target offsetting collection amounts for fiscal 2002 through 2006 were determined by applying a rate of $15 per million to the CBO's January 2001 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 January 2001 projections of dollar volume for those fiscal years. For example, CBO's January 2001 projection of dollar volume for fiscal 2004 was $68,500,000,000,000. Applying the initial rate under the Fee Relief Act of $15 per million to that projection produces the target offsetting collection amount for fiscal 2004 of $1,028,000,000.

9.  The amount $25,918,721,642,549 is the baseline estimate of the aggregate dollar amount of sales for fiscal year 2004 calculated by the Commission in its Order Making Fiscal 2004 Annual Adjustments to the Fee Rates Applicable Under section 6(b) of the Securities Act of 1933 and sections 13(e), 14(g), 31(b) and 31(c) of the Securities Exchange Act of 1934, Rel. Nos. 33-8225 and 34-47768 (April 30, 2003), 68 FR 24027 (May 6, 2003).

10.  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 NASD Inc. (“NASD”) provides data separately.

11.  Although section 31(j)(2) indicates that the Commission should determine the actual aggregate dollar volume of sales for fiscal 2004 “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, 2004. Dollar volume data on sales of securities subject to section 31 for February 2004 will not be available from the exchanges and the NASD for several weeks.

12.  See Appendix A.

13.  15 U.S.C. 78ee(j)(2). 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 2004 until March 15, the Commission will not “collect” any fees in the first five months of fiscal 2004. See 15 U.S.C. 78ee(e) However, the Commission believes that, for purposes of calculating the mid-year adjustment, Congress by stating in section 31(j)(2) that the “uniform adjusted rate * * * is reasonably likely to produce aggregate fee collections under Section 31 * * * that are equal to [$1,028,000,000],” 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.

14.  This calculation is based on applying a fee rate of $46.80 per million to the projected aggregate dollar volume of sales of securities subject to section 31 through February 21, 2004, and a rate of $39.00 for the period from February 22, 2004, to March 31, 2004. Because the Commission's regular appropriation for fiscal year 2004 was not enacted prior to the end of fiscal year 2003, Exchange Act section 31(k), the “Lapse of Appropriation” provision, required that the fee rate in use at the end of fiscal year 2003, $46.80 per million, remain in effect until 30 days after the appropriation was enacted. See also Order Making Fiscal 2004 Annual Adjustments to the Fee Rates Applicable Under section 6(b) of the Securities Act of 1933 and sections 13(e), 14(g), 31(b) and 31(c) of the Securities Exchange Act of 1934, Rel. Nos. 33-8225 and 34-47768 (April 30, 2003), 68 FR 24027 (May 6, 2003). The Commission's regular appropriation for fiscal year 2004 was enacted on January 23, 2004, and the $39.00 per million rate went into effect 30 days later, by operation of the statute. See Exchange Act section 31(j)(4)(A)(ii).

15.  The calculation is as follows: ($1,028,000,000-$622,904,612-$23,900)/$17,307,204,075,317=$0.0000234047. 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 $23.40 per million.

16.  Section 31(j)(1) and section 31(g) of the Exchange Act require the Commission to issue an order no later than April 30, 2004, adjusting the fee rates applicable under sections 31(b) and (c) for fiscal 2005. These fee rates for fiscal 2005 will be effective on the later of October 1, 2004, or thirty days after the enactment of the Commission's regular appropriation for fiscal 2005.

17.  15 U.S.C. 78ee.

1.  The value 1.022 has been rounded. All computations are done with the unrounded value.