2013-10194. Order Making Fiscal Year 2013 Annual Adjustments to Transaction Fee Rates

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 (“covered sales”) 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 covered sales transacted by or through any member of the association other than on an exchange.^[3]

Section 31 of the Exchange Act requires the Commission to annually adjust the fee rates applicable under Sections 31(b) and (c) to a uniform adjusted rate.^[4] Specifically, the Commission must adjust the fee rates to a uniform adjusted rate that is reasonably likely to produce aggregate fee collections (including assessments on security futures transactions) equal to the regular appropriation to the Commission for the applicable fiscal year.^[5]

The Commission is required to publish notice of the new fee rates under Section 31 not later than 30 days after the date on which an Act making a regular appropriation for the applicable fiscal year is enacted.^[6] On March 26, 2013, the President signed a continuing resolution that funds the SEC at FY 2012 levels through the remainder of FY 2013. Consistent with past practice [and guidance from OMB], the SEC is treating this continuing resolution, which lasts through the remainder of the fiscal year, as a regular appropriation for FY 2013 for purposes of Section 31 of the Exchange Act.

II. Fiscal Year 2013 Annual Adjustment to the Fee Rate

The new fee rate is determined by (1) subtracting the sum of fees estimated to be collected prior to the effective date of the new fee rate ^[7] and estimated assessments on securities futures transactions to be collected under Section 31(d) of the Exchange Act for all of fiscal year 2013 ^[8] from an amount equal to the regular appropriation to the Commission for fiscal year 2013, and (2) dividing the difference by the estimated aggregate dollar amount of sales for the remainder of the fiscal year following the effective date of the new fee rate.

The regular appropriation to the Commission for fiscal year 2013 is $1,321,000,000. The Commission estimates that it will collect $895,226,704 in fees for the period prior to the effective date of the new fee rate and $37,356 in assessments on round turn transactions in securities futures products during all of fiscal year 2013.^[9] Using a methodology for estimating the aggregate dollar amount of sales for the remainder of fiscal year 2013 (developed after consultation with the Congressional Budget Office and the Office of Management and Budget), the Commission estimates that the aggregate dollar amount of covered sales for the remainder of fiscal year 2013 to be $24,458,583,925,062.

As described above, the uniform adjusted rate is computed by dividing the residual fees to be collected of $425,735,940 by the estimate of the aggregate dollar amount of covered sales for the remainder of fiscal year 2013 of $24,458,583,925,062. This results in a uniform adjusted rate for fiscal year 2013 of $17.40 per million.^[10]

III. Effective Date of the Uniform Adjusted Rate

Under Section 31(j)(4)(A) of the Exchange Act, the fiscal year 2013 annual adjustments to the fee rates applicable under Sections 31(b) and (c) of the Exchange Act shall take effect on the later of October 1, 2012, or 60 days after the date on which a regular appropriation to the Commission for fiscal year 2012 is enacted.^[11] The regular appropriation to the Commission for fiscal year 2013 was enacted on March 26, 2013, and accordingly, the new fee rates applicable under Sections 31(b) and (c) of the Exchange Act will take effect on May 25, 2013.^[12]

IV. Conclusion

Accordingly, pursuant to Section 31 of the Exchange Act,

It is hereby ordered that the fee rates applicable under Sections 31(b) and (c) of the Exchange Act shall be $17.40 per $1,000,000 effective on May 25, 2013.

By the Commission.

Elizabeth M. Murphy,

Secretary.

Appendix A

This appendix provides the formula for determining the annual adjustment to the fee rates applicable under Sections 31(b) and (c) of the Exchange Act for fiscal year 2013. Section 31 of the Exchange Act requires the fee rates to be adjusted so that it is reasonably likely that the Commission will collect aggregate fees equal to its regular appropriation for fiscal year 2013.

To make the adjustment, the Commission must project the aggregate dollar amount of covered sales of securities on the securities exchanges and certain over-the-counter markets over the course of the year. The fee rate equals the ratio of the Commission's regular appropriation for fiscal year 2013 (less the sum of fees to be collected during fiscal year 2013 prior to the effective date of the new fee rate and aggregate assessments on security futures transactions during fiscal year 2013) to the projected aggregate dollar amount of covered sales for fiscal year 2013 (less the aggregate dollar amount of covered sales prior to the effective date of the new fee rate).

For 2013, the Commission has estimated the aggregate dollar amount of covered sales by projecting forward the trend established in the previous decade. More specifically, the dollar amount of covered sales was forecasted for months subsequent to February 2013, the last month for which the Commission has data on the dollar volume of covered sales.^[13]

The following sections describe this process in detail.

A. Baseline Estimate of the Aggregate Dollar Amount of Covered Sales for Fiscal Year 2013

First, calculate the average daily dollar amount of covered sales (ADS) for each month in the sample (February 2003-February 2013). The monthly aggregate dollar amount of covered sales (exchange plus certain over-the-counter markets) is presented in column C of Table A.

Next, calculate the change in the natural logarithm of ADS from month to month. The average monthly percentage growth of ADS over the entire sample is 0.0102 and the standard deviation is 0.122. Assuming the monthly percentage change in ADS follows a random walk, calculating the expected monthly percentage growth rate for the full sample is straightforward. The expected monthly percentage growth rate of ADS is 1.78%.

Now, use the expected monthly percentage growth rate to forecast total dollar volume. For example, one can use the ADS for February 2013 ($252,666,501,426) to forecast ADS for March 2013 ($257,167,513,594 = $252,666,501,426 x 1.0178).^[14] Multiply by the number of trading days in March 2013 (20) to obtain a forecast of the total dollar volume for the month ($5,143,350,271,889). Repeat the method to generate forecasts for subsequent months.

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

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

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 = 0.0102 and σ = 0.122, 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 = 1.0178 × ADS_t-1.

6. For March 2013, this gives a forecast ADS of 1.0178 × $252,666,501,426 = $257,167,513,594. Multiply this figure by the 20 trading days in March 2013 to obtain a total dollar volume forecast of $5,143,350,271,889.

7. For April 2013, multiply the March 2013 ADS forecast by 1.0178 to obtain a forecast ADS of $261,748,706,992. Multiply this figure by the 22 trading days in April 2013 to obtain a total dollar volume forecast of $5,758,471,553,822.

8. Repeat this procedure for subsequent months.

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

1. Use Table A to estimate fees collected for the period 10/1/12 through 5/24/13. The projected aggregate dollar amount of covered sales for this period is $39,965,477,866,718. Actual and projected fee collections at the current fee rate of 0.0000224 are $895,226,704.

2. Estimate the amount of assessments on securities futures products collected during 10/1/12 and 9/30/13 to be $37,356 by projecting a 1.78% monthly increase from a base of $3,038 in February 2013.

3. Subtract the amounts $895,226,704 and $37,356 from the target offsetting collection amount set by Congress of $1,321,000,000 leaving $425,735,940 to be collected on dollar volume for the period 5/25/13 through 9/30/13.

4. Use Table A to estimate dollar volume for the period 5/25/13 through 9/30/13. The estimate is $24,458,583,925,062. Finally, compute the fee rate required to produce the additional $425,735,940 in revenue. This rate is $425,735,940 divided by $24,458,583,925,062 or 0.0000174064.

5. Round the result to the seventh decimal point, yielding a rate of .0000174 (or $17.40 per million).

Footnotes

1.  15 U.S.C. 78ee.

2.  15 U.S.C. 78ee(b).

3.  15 U.S.C. 78ee(c).

4.  In some circumstances, the SEC also must make a mid-year adjustment to the fee rates applicable under Sections 31(b) and (c).

5.  15 U.S.C. 78ee(j)(1) (the Commission must adjust the rates under Sections 31(b) and (c) to a “uniform adjusted rate that, when applied to the baseline estimate of the aggregate dollar amount of sales for such fiscal year, is reasonably likely to produce aggregate fee collections under [Section 31] (including assessments collected under [Section 31(d)]) that are equal to the regular appropriation to the Commission by Congress for such fiscal year.”).

6.  15 U.S.C. 78ee(g).

7.  The sum of fees to be collected prior to the effective date of the new fee rate is determined by applying the current fee rate to the dollar amount of covered sales prior to the effective date of the new fee rate. The exchanges and FINRA have provided data on the dollar amount of covered sales through February 28, 2013. To calculate the dollar amount of covered sales from that date to the effective date of the new fee rate, the Division is using the same methodology it developed in consultation with the CBO and OMB to estimate the dollar amount of covered sales in prior fiscal years. An explanation of the methodology appears in Appendix A.

8.  The Division is using the same methodology it has used previously to estimate assessments on securities future transactions to be collected in fiscal year 2013. An explanation of the methodology appears in Appendix A.

9.  The estimate of fees to be collected prior to the effective date of the new fee rate is determined by applying the current fee rate to the dollar amount of covered sales prior to the effective date of the new fee rate.

10.  Appendix A shows the purely arithmetical process of calculating the fiscal year 2013 annual adjustment. The appendix also includes the data used by the Commission in making this adjustment.

11.  15 U.S.C. 78ee(j)(4)(A).

12.  As noted above, consistent with past practice [and guidance from OMB], the SEC is treating the continuing resolution enacted on March 26, 2013 as a regular appropriation for FY 2013.

13.  To determine the availability of data, the Commission compares the date of the appropriation with the date the transaction data are due from the exchanges (10 business days after the end of the month). If the business day following the date of the appropriation is equal to or subsequent to the date the data are due from the exchanges, the Commission uses these data. The appropriation was signed on March 26, 2013. The first business day after this date was March 27, 2013. Data for February were due from the exchanges on March 14. So the Commission used February 2013 and earlier data to forecast volume for March 2013 and later months.

14.  The value 1.0178 has been rounded. All computations are done with the unrounded value.