04-10399. Order Making Fiscal Year 2005 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

I. Background

The Commission collects fees under various provisions of the securities laws. Section 6(b) of the Securities Act of 1933 (“Securities Act”) requires the Commission to collect fees from issuers on the registration of securities.^[1] Section 13(e) of the Securities Exchange Act of 1934 (“Exchange Act”) requires the Commission to collect fees on specified repurchases of securities.^[2] Section 14(g) of the Exchange Act requires the Commission to collect fees on proxy solicitations and statements in corporate control transactions.^[3] Finally, sections 31(b) and (c) of the Exchange Act require national securities exchanges and national securities associations, respectively, to pay fees on transactions in specified securities to the Commission.^[4]

The Investor and Capital Markets Fee Relief Act (“Fee Relief Act”) ^[5] amended section 6(b) of the Securities Act and sections 13(e), 14(g), and 31 of the Exchange Act to require the Commission to make annual adjustments to the fee rates applicable under these sections 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.^[6]

II. Fiscal Year 2005 Annual Adjustment to the Fee Rates Applicable Under Section 6(b) of the Securities Act and Sections 13(e) and 14(g) of the Exchange Act

Paragraph 6(b)(5) of the Securities Act requires the Commission to make an annual adjustment to the fee rate applicable under paragraph 6(b) of the Securities Act in each of the fiscal years 2003 through 2011.^[7] In those same fiscal years, paragraphs 13(e)(5) and 14(g)(5) of the Exchange Act require the Commission to adjust the fee rates under Sections 13(e) and 14(g) to a rate that is equal to the rate that is applicable under Section 6(b). In other words, the annual adjustment to the fee rate under section 6(b) of the Securities Act also sets the annual adjustment to the fee rates under sections 13(e) and 14(g) of the Exchange Act.

Paragraph 6(b)(5) sets forth the method for determining the annual adjustment to the fee rate under Section 6(b) for fiscal year 2005. Specifically, the Commission must adjust the fee rate under Section 6(b) to a “rate that, when applied to the baseline estimate of the aggregate maximum offering prices for [fiscal year 2005], is reasonably likely to produce aggregate fee collections under [Section 6(b)] that are equal to the target offsetting collection amount for [fiscal year 2005].” That is, the adjusted rate is determined by dividing the “target offsetting collection amount” for fiscal year 2005 by the “baseline estimate of the aggregate maximum offering prices” for fiscal year 2005.

Paragraph 6(b)(11)(A) specifies that the “target offsetting collection amount” for fiscal year 2005 is $570,000,000.^[8] Paragraph 6(b)(11)(B) defines the “baseline estimate of the aggregate maximum offering price” for fiscal year 2005 as “the baseline estimate of the aggregate maximum offering price at which securities are proposed to be offered pursuant to registration statements filed with the Commission during [fiscal year 2005] 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 maximum offering price for fiscal year 2005, the Commission is using the same methodology it developed in consultation with the Congressional Budget Office (“CBO”) and Office of Management and Budget (“OMB”) to project aggregate offering price for purposes of the fiscal year 2004 annual adjustment. Using this methodology, the Commission determines the “baseline estimate of the aggregate maximum offering price” for fiscal year 2005 to be $4,842,692,718,337.^[9] Based on this estimate, the Commission calculates the annual adjustment for fiscal 2005 to be $117.70 per million. This adjusted fee rate applies to Section 6(b) of the Securities Act, as well as to sections 13(e) and 14(g) of the Exchange Act.

III. Fiscal Year 2005 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 paragraph 31(j)(2), which currently is $23.40 per million of the aggregate dollar amount of sales of specified securities transacted on the exchange.^[10] 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. Paragraph 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.^[11]

Paragraph 31(j)(1) specifies the method for determining the annual adjustment for fiscal year 2005. 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 2005], is reasonably likely to produce aggregate fee collections under [Section 31] (including assessments collected under [Section 31(d)]) that are equal to the target offsetting collection amount for [fiscal year 2005].”

Paragraph 31(l)(1) specifies that the “target offsetting collection amount” for fiscal year 2005 is $1,220,000,000.^[12] Paragraph 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 2005] 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 2005, 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.^[13] Using this methodology, the Commission calculates the baseline estimate of the aggregate dollar amount of sales for fiscal year 2005 to be $37,902,443,515,254. Based on this estimate, and an estimated collection of $61,356 in assessments on securities futures transactions under section 31(d) in fiscal year 2005, the uniform adjusted rate is $32.90 per million.^[14]

IV. Effective Dates of the Annual Adjustments

Subparagraph 6(b)(8)(A) of the Securities Act provides that the fiscal year 2005 annual adjustment to the fee rate applicable under section 6(b) of the Securities Act shall take effect on the later of October 1, 2004, or five days after the date on which a regular appropriation to the Commission for fiscal year 2005 is enacted.^[15] Subparagraphs 13(e)(8)(A) and 14(g)(8)(A) of the Exchange Act provide for the same effective date for the annual adjustments to the fee rates applicable under sections 13(e) and 14(g) of the Exchange Act.^[16]

Subparagraph 31(j)(4)(A) of the Exchange Act provides that the fiscal year 2005 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, 2004, or thirty days after the date on which a regular appropriation to the Commission for fiscal year 2005 is enacted.

V. Conclusion

Accordingly, pursuant to section 6(b) of the Securities Act and sections 13(e), 14(g) and 31 of the Exchange Act,^[17]

It is hereby ordered that the fee rates applicable under section 6(b) of the Securities Act and sections 13(e) and 14(g) of the Exchange Act shall be $117.70 per million effective on the later of October 1, 2004, or five days after the date on which a regular appropriation to the Commission for fiscal year 2005 is enacted; and

It is further ordered that the fee rates applicable under sections 31(b) and (c) of the Exchange Act shall be $32.90 per million effective on the later of October 1, 2004, or thirty days after the date on which a regular appropriation to the Commission for fiscal year 2005 is enacted.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

Appendix A

With the passage of the Investor and Capital Markets Relief Act, Congress has established a target amount of monies to be collected from fees charged to issuers based on the value of their registrations. This appendix provides the formula for determining such fees, which the Commission adjusts annually. Congress has mandated that the Commission determine these fees based on the “aggregate maximum offering prices,” which measures the aggregate dollar amount of securities registered with the SEC over the course of the year. 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 aggregate maximum offering prices. As a percentage, the fee rate equals the ratio of the target amounts of monies to the projected aggregate maximum offering prices.

For 2005, the Commission has estimated the aggregate maximum offering prices by projecting forward the trend established in the previous decade. More specifically, an ARIMA model was used to forecast the value of the aggregate maximum offering prices for months subsequent to March 2004, the last month for which the Commission has data on the aggregate maximum offering prices.

The following sections describe this process in detail.

A. Baseline Estimate of the Aggregate Maximum Offering Prices for Fiscal Year 2005

First, calculate the aggregate maximum offering prices (AMOP) for each month in the sample (March 1994-March 2004). Next, calculate the percentage change in the AMOP from month-to-month.

Model the monthly percentage change in AMOP as a first order moving average process. The moving average approach allows one to model the effect that an exceptionally high (or low) observation of AMOP tends to be followed by a more “typical” value of AMOP.

Use the estimated moving average model to forecast the monthly percent change in AMOP. These percent changes can then be applied to obtain forecasts of the total dollar value of registrations. The following is a more formal (mathematical) description of the procedure:

1. Begin with the monthly data for AMOP. The sample spans ten years, from March 1994 to March 2004. There are 4 months in the sample for which the data are omitted because of the impact of extraordinary events (e.g., the 1995 government shutdown).

2. Divide each month's AMOP (column C) by the number of trading days in that month (column B) to obtain the average daily AMOP (AAMOP, column D).

3. For each month t, the natural logarithm of AAMOP is reported in column E.

4. Calculate the change in log(AAMOP) from the previous month as Δ_t = log (AAMOP_t)−log(AAMOP_t-1). This approximates the percentage change.

5. Estimate the first order moving average model Δ_t = α + βe_t-1 + e_t, where e_t denotes the forecast error for month t. The forecast error is simply the difference between the one-month ahead forecast and the actual realization of Δ_t. The forecast error is expressed as e_t = Δ_t− β_t-1. The model can be estimated using standard commercially available software such as SAS or Eviews. Using least squares, the estimated parameter values are α=0.01112 and β = 0.76742.

6. For the month of April 2004, forecast Δ_{t = 4/04} = α + ß_{e = 3/04.} For all subsequent months, forecast Δ_t =α.

7. Calculate forecasts of log(AAMOP). For example, the forecast of log(AAMOP) for June 2004 is given by FLAAMOP_{t = 6/04} = log(AAMOP_{t = 3/04}) + Δ_{t = 4/04} + Δ_{t = 5/04} + Δ_{t = 6/04}.

8. Under the assumption that e_t is normally distributed, the n-step ahead forecast of AAMOP is given by exp(FLAAMOP_t + σ_n²/2), where σ_n denotes the standard error of the n-step ahead forecast.

9. For June 2004, this gives a forecast AAMOP of $16.8 Billion (Column I), and a forecast AMOP of $368.9 Billion (Column J).

10. Iterate this process through September 2005 to obtain a baseline estimate of the aggregate maximum offering prices for fiscal year 2005 of $4,842,692,718,337.

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

1. Using the data from Table A, estimate the aggregate maximum offering prices between 10/1/04 and 9/30/05 to be $4,842,692,718,337.

2. The rate necessary to collect the target $570,000,000 in fee revenues set by Congress is then calculated as: $570,000,000 ÷ $4,842,692,718,337 = 0.00011770 (or $117.70 per million.).

Appendix B

With the passage of the Investor and Capital Markets Relief Act, Congress has 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.^[1] 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 the Nasdaq 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 2005, 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 2004, 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 2005

First, calculate the average daily dollar amount of sales (ADS) for each month in the sample (March 1994-March 2004). The data obtained from the exchanges and the NASD are presented in Table B. 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 percentage growth of ADS over the entire sample is 0.014 and the standard deviation 0.118. 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 2.2 percent.

Now, use the expected monthly percentage growth rate to forecast total dollar volume. For example, one can use the ADS for March 2004 ($114,370,494,465) to forecast ADS for April 2004 ($116,834,236,575 = $114,370,494,465 × 1.022) ^[2] . Multiply by the number of trading days in April 2004 (21) to obtain a forecast of the total dollar volume for the month ($2,453,518,968,084). 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 σ = 0.014 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 +² 2), or on average ADS_t = 1.022 × ADS_t-1.

6. For April 2004, this gives a forecast ADS of 1.022 × $114,370,494,465 = $116,834,236,575. Multiply this figure by the 21 trading days in April 2004 to obtain a total dollar volume forecast of $2,453,518,968,084.

7. For May 2004, multiply the April 2004 ADS forecast by 1.022 to obtain a forecast ADS of $119,351,052,035. Multiply this figure by the 20 trading days in May 2004 to obtain a total dollar volume forecast of $2,387,021,040,703.

8. Repeat this procedure for subsequent months.

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

1. Use Table B to estimate fees collected for the period 10/1/04 through 10/31/04. The projected aggregate dollar amount of sales for this period is $2,788,214,479,378. Projected fee collections at the current fee rate of 0.0000234 are $65,244,219.

2. Estimate the amount of assessments on securities futures products collected during 10/1/04 and 9/30/05 to be $61,356 by projecting a 2.2% monthly increase from a base of $3,884 in March 2004.

3. Subtract the amounts $65,244,219 and $61,356 from the target offsetting collection amount set by Congress of $1,220,000,000 leaving $1,154,694,425 to be collected on dollar volume for the period 11/1/04 through 9/30/05.

4. Use Table B to estimate dollar volume for the period 11/1/04 through 9/30/05. The estimate is $35,114,229,035,876. Finally, compute the fee rate required to produce the additional $1,154,694,425 in revenue. This rate is $1,154,694,425 divided by $35,114,229,035,876 or .0000328839.

5. Consistent with the system requirements of the exchanges and the NASD, round the result to the seventh decimal point, yielding a rate of .0000329 (or $32.90 per million).

Footnotes

1.  15 U.S.C. 77f(b).

2.  15 U.S.C. 78m(e).

3.  15 U.S.C. 78n(g).

4.  15 U.S.C. 78ee(b) and (c). In addition, section 31(d) of the Exchange Act requires the Commission to collect assessments from national securities exchanges and national securities associations for round turn transactions on security futures. 15 U.S.C. 78ee(d).

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

6.  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). Paragraph 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.

7.  The annual adjustments are designed to adjust the fee rate in a given fiscal year so that, when applied to the aggregate maximum offering price at which securities are proposed to be offered for the fiscal year, it is reasonably likely to produce total fee collections under Section 6(b) equal to the “target offsetting collection amount” specified in Section 6(b)(11)(A) for that fiscal year.

8.  Congress determined the target offsetting collection amounts by applying reduced fee rates to the CBO's January 2001 projections of the aggregate maximum offering prices for fiscal years 2002 through 2011. In any fiscal year through fiscal year 2011, the annual adjustment mechanism will result in additional fee rate reductions if the CBO's January 2001 projection of the aggregate maximum offering prices for the fiscal year proves to be too low, and fee rate increases if the CBO's January 2001 projection of the aggregate maximum offering prices for the fiscal year proves to be too high.

9.  Appendix A explains how we determined the “baseline estimate of the aggregate maximum offering price” for fiscal year 2005 using our methodology, and then shows the purely arithmetical process of calculating the fiscal year 2005 annual adjustment based on that estimate. The appendix includes the data used by the Commission in making its “baseline estimate of the aggregate maximum offering price” for fiscal year 2005.

10.  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, Rel. No. 34-49332 (February 27, 2004), 69 FR 10278 (March 4, 2004).

11.  The annual adjustments, as well as the mid-year adjustments required in specified circumstances under paragraph 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.

12.  Congress determined the target offsetting collection amounts by applying reduced fee rates to the CBO's January 2001 projections of dollar volume for fiscal years 2002 through 2011. In any fiscal year through fiscal year 2011, the annual and, in specified 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.

13.  Appendix B explains how we determined the “baseline estimate of the aggregate dollar amount of sales” for fiscal year 2005 using our methodology, and then shows the purely arithmetical process of calculating the fiscal year 2005 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 2005.

14.  The calculation of the adjusted fee rate assumes that the current fee rate of $23.40 per million will apply through October 31st due to the operation of the effective date provision contained in subparagraph 31(j)(4)(A) of the Exchange Act.

15.  15 U.S.C. 77f(b)(8)(A).

16.  15 U.S.C. 78m(e)(8)(A) and 78n(g)(8)(A).

17.  15 U.S.C. 77f(b), 78m(e), 78n(g), and 78ee(j).

1.  Congress requires that the Commission make a mid-year adjustment to the fee rate if 4 months into the fiscal year it determines that its forecasts of aggregate dollar volume are reasonably likely to be off by 10% or more.

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