2011-10964. Order Making Fiscal Year 2012 Annual Adjustments to Section 31 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 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]

The Investor and Capital Markets Fee Relief Act (“Fee Relief Act”) ^[4] amended Section 31 of the Exchange Act to require the Commission to make annual adjustments to the fee rates applicable under this section for each of the fiscal years 2003 through 2011, and one final adjustment to fix the fee rates under these sections for fiscal year 2012 and beyond.^[5]

II. Fiscal Year 2012 Annual Adjustment to the Fee Rates Applicable Under Sections 31(b) and (c) of the Exchange Act

Section 31(b) of the Exchange Act requires each national securities exchange to pay the Commission a fee at a rate, as adjusted by our order pursuant to Section 31(j)(1),^[6] which currently is $19.20 per million of the aggregate dollar amount of sales of specified securities transacted on the exchange. Similarly, Section 31(c) requires each national securities association to pay the Commission a fee at the same adjusted rate on the aggregate dollar amount of sales of specified securities transacted by or through any member of the association otherwise than on an exchange. Section 31(j)(1) 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.^[7] Section 31(j)(3) requires the Commission to make one final adjustment for fiscal year 2012.^[8]

Section 31(j)(3) specifies the method for determining the annual adjustment for fiscal year 2012. Specifically, 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 fiscal year 2012, is reasonably likely to produce aggregate fee collections under [Section 31] in fiscal year 2012 (including assessments collected under [Section 31(d)]) that are equal to the target offsetting collection amount for fiscal year 2011.”

Section 31(l)(1) specifies that the “target offsetting collection amount” for fiscal year 2011 is $1,321,000,000. Section 31(l)(2) defines the “baseline estimate of the aggregate dollar amount of sales” as “the baseline estimate of the aggregate dollar amount of sales of securities * * * to be transacted on each national securities exchange and by or through any member of each national securities association (otherwise than on a national securities exchange) during fiscal year 2012 as determined by the Commission, after consultation with the Congressional Budget Office and the Office of Management and Budget . * * *”

To make the baseline estimate of the aggregate dollar amount of sales for fiscal year 2012, the Commission is using the same methodology it developed in consultation with the CBO and OMB to project dollar volume for purposes of prior fee adjustments.^[9] Using this methodology, the Commission calculates the baseline estimate of the aggregate dollar amount of sales for fiscal year 2012 to be $85,673,432,736,834. Based on this estimate, and an estimated collection of $27,453 in assessments on security futures transactions under Section 31(d) in fiscal year 2012, the uniform adjusted rate for fiscal year 2012 is $15.10 per million.^[10]

III. Effective Dates of the Annual Adjustments

Section 31(j)(4)(A) of the Exchange Act provides that the fiscal year 2012 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, 2011, or 30 days after the date on which a regular appropriation to the Commission for fiscal year 2012 is enacted.

It is important to note, however, that Section 991 of the Dodd-Frank Act amends Section 31 of the Exchange Act effective on the later of October 1, 2011 or the date of enactment of an Act making a regular appropriation to the Commission for fiscal year 2012. Once, the amendments become effective, new lapse in appropriations provisions will apply such that, if a regular appropriation to the Commission for fiscal year 2012 is not enacted on or before October 1, 2011, the new fee rates will not become effective until 60 days after the date such a regular appropriation is enacted.

Moreover, once the amendments to Section 31 become effective, the Commission will be required to make a new adjustment to the fee rates under Section 31 for fiscal year 2012. The new fee rates will be determined no later than 30 days after the date on which an Act making a regular appropriation to the Commission for fiscal year 2012 is enacted,^[11] and they will become effective on the later of October 1, 2011 or 60 days after the date such a regular appropriation is enacted.

As a result of these amendments, if a regular appropriation to the Commission for fiscal year 2012 is not enacted on or before October 1, 2011, the fee rate adjustments under this order will never become effective. Rather the fee rate adjustments for fiscal year 2012 will be determined in accordance with the amendments to Section 31 made by the Dodd-Frank Act and will become effective 60 days after the date such a regular appropriation is enacted.

IV. Conclusion

Accordingly, pursuant to Section 31 of the Exchange Act,^[12]

It is hereby ordered that, if a regular appropriation to the Commission for fiscal year 2012 is enacted on or before October 1, 2011, the fee rates applicable under Sections 31(b) and (c) of the Exchange Act shall be $15.10 per million effective on the later of October 1, 2011, or 30 days after the date on which a regular appropriation to the Commission for fiscal year 2012 is enacted.

By the Commission.

Cathy H. Ahn,

Deputy Secretary.

Appendix A

With the passage of the Investor and Capital Markets Relief Act, Congress has, among other things, established a target amount of monies to be collected from fees charged to investors based on the value of their transactions. This appendix provides the formula for determining such fees, which the Commission adjusts annually, and may adjust semi-annually.^[13] In order to maximize the likelihood that the amount of monies targeted by Congress will be collected, the fee rate must be set to reflect projected dollar transaction volume on the securities exchanges and certain over-the-counter markets over the course of the year. As a percentage, the fee rate equals the ratio of the target amounts of monies to the projected dollar transaction volume.

For 2012, the Commission has estimated dollar transaction volume by projecting forward the trend established in the previous decade. More specifically, dollar transaction volume was forecasted for months subsequent to March 2011, the last month for which the Commission has data on transaction volume.

The following sections describe this process in detail.

A. Baseline Estimate of the Aggregate Dollar Amount of Sales for Fiscal Year 2012

First, calculate the average daily dollar amount of sales (ADS) for each month in the sample (March 2001—March 2011). The monthly aggregate dollar amount of sales (exchange plus certain over-the-counter markets) is presented in column C of Table B.

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 0.0074 and the standard deviation is 0.123. 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 1.5%.

Now, use the expected monthly percentage growth rate to forecast total dollar volume. For example, one can use the ADS for March 2011 ($282,580,668,926) to forecast ADS for April 2011 ($286,849,029,708 = $282,580,668,926 × 1.015).^[14] Multiply by the number of trading days in April 2011 (20) to obtain a forecast of the total dollar volume for the month ($5,736,980,594,157). Repeat the method to generate forecasts for subsequent months.

The forecasts for total dollar volume 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 = 0.0074 and σ = 0.123, 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 = 1.015 × ADS_t-1.

6. For April 2011, this gives a forecast ADS of 1.015 × $282,580,668,926 = $286,849,029,708. Multiply this figure by the 20 trading days in April 2011 to obtain a total dollar volume forecast of $5,736,980,594,157.

7. For May 2011, multiply the April 2011 ADS forecast by 1.015 to obtain a forecast ADS of $291,181,863,773. Multiply this figure by the 21 trading days in May 2011 to obtain a total dollar volume forecast of $6,114,819,139,242.

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 10/1/11 through 10/31/11. The projected aggregate dollar amount of sales for this period is $6,590,802,501,369. Projected fee collections at the current fee rate of 0.0000192 are $126,543,408.

2. Estimate the amount of assessments on securities futures products collected during 10/1/11 and 9/30/12 to be $27,453 by projecting a 1.5% monthly increase from a base of $1,960 in March 2011.

3. Subtract the amounts $126,543,408 and $27,453 from the target offsetting collection amount set by Congress of $1,321,000,000 leaving $1,194,429,139 to be collected on dollar volume for the period 11/1/11 through 9/30/12.

4. Use Table A to estimate dollar volume for the period 11/1/11 through 9/30/12. The estimate is $79,082,630,235,466. Finally, compute the fee rate required to produce the additional $1,194,429,139 in revenue. This rate is $1,194,429,139 divided by $79,082,630,235,466 or 0.0000151036.

5. Round the result to the seventh decimal point, yielding a rate of .0000151 (or $15.10 per million).

Footnotes

1.  15 U.S.C. 78ee.

2.  15 U.S.C. 78ee(b).

3.  15 U.S.C. 78ee(c).

4.  Public Law 107-123, 115 Stat. 2390 (2002).

5.  See 15 U.S.C. 77f(b)(5), 77f(b)(6), 78m(e)(5), 78m(e)(6), 78n(g)(5), 78n(g)(6), 78ee(j)(1), and 78ee(j)(3). Section 31(j)(2) of the Exchange Act, 15 U.S.C. 78ee(j)(2), also requires the Commission, in specified circumstances, to make a mid-year adjustment to the fee rates under Sections 31(b) and (c) of the Exchange Act in fiscal years 2002 through 2011.

6.  Order Making Fiscal Year 2011 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. No. 33-9122 (April 29, 2010), 75 FR 24757 (May 5, 2010).

7.  The annual adjustments, as well as the mid-year adjustments required in specified circumstances under Section 31(j)(2) in fiscal years 2002 through 2011, 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.

8.  The final adjustment for fiscal year 2012 is designed to adjust the fee rate in 2012 and subsequent years so that, when applied to the aggregate dollar volume of sales for fiscal year 2012, it is reasonably like to produce total fee collections under Section 31 equal to the “target offsetting collection amount” for fiscal year 2011. Note, however, that Section 31 will be amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) effective on the later of October 1, 2011 or the date of enactment of an Act making a regular appropriation to the Commission for fiscal year 2012. Once the amendments become effective, the Commission will be required to make a new adjustment to the fee rates under Section 31 for fiscal year 2012 and subsequent fiscal years.

9.  Appendix A explains how we determined the “baseline estimate of the aggregate dollar amount of sales” for fiscal year 2012 using our methodology, and then shows the purely arithmetical process of calculating the fiscal year 2012 annual adjustment based on that estimate. The appendix also includes the data used by the Commission in making its “baseline estimate of the aggregate dollar amount of sales” for fiscal year 2012.

10.  The calculation of the adjusted fee rate assumes that the current fee rate of $19.20 per million will apply through October 31, 2012, due to the operation of the effective date provision contained in Section 31(j)(4)(A) of the Exchange Act.

11.  In the event an Act making a regular appropriation to the Commission for fiscal year 2012 is enacted more than 30 days prior to October 1, 2011, the Commission will need to defer making a new adjustment until October 1, 2011, because the amendments requiring the new adjustment will not be effective until that date.

12.  15 U.S.C. 77f(b), 78m(e), 78n(g), and 78ee(j).

13.  Congress requires that the Commission make a mid-year adjustment to the fee rate if four months into the fiscal year it determines that its forecasts of aggregate dollar volume are reasonably likely to be off by 10% or more.

14.  The value 1.015 has been rounded. All computations are done with the unrounded value.