Order Making Fiscal 2003 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. 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. 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.

Sections 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. 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. 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. For fiscal 2003, the target offsetting collection amount is $849,000,000.

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

II. Determination of the Need for a Mid-Year Adjustment in Fiscal 2003

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 2003 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 ($33,158,519,250,001) is reasonably likely to be 10% (or more) greater or less than the actual aggregate dollar volume of sales for fiscal 2003. To make this determination, the Commission must estimate the actual aggregate dollar volume of sales for fiscal 2003.

Based on data provided by the national securities exchanges and the national securities association that are subject to section 31, the actual aggregate dollar volume of sales during the first four months of fiscal 2003 was $7,073,980,109,231. Using these data and a methodology for estimating the aggregate dollar amount of sales for the remainder of fiscal 2003 (developed after consultation with the CBO and the OMB), the Commission estimates that the aggregate dollar amount of sales for the remainder of fiscal 2003 to be $14,847,347,328,783. Thus, the Commission estimates that the actual aggregate dollar volume of sales for all of fiscal 2003 will be $21,921,327,438,013.

Because $33,158,519,250,001 is more than 10% greater than the $21,921,327,438,013 estimated actual aggregate dollar volume of sales for fiscal 2003, 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 2003. 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 2003], 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 [$849,000,000].” 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 2003 from $849,000,000, which is the target offsetting collection amount for fiscal 2003. 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 $311,031,169 in fees for the period prior to the effective date of the mid-year adjustment and $22,100 in assessments on round turn transactions in security futures products during all of fiscal 2003. Using the methodology referenced in part II above, the Commission estimates that the aggregate dollar volume of sales for the remainder of fiscal 2003 following the effective date of the new rate will be $11,505,683,278,185. Based on these estimates, the uniform adjusted rate is $46.80 per million of the aggregate dollar amount of sales of securities.

The Commission recognizes that this fee rate is higher than the fee rate in effect prior to the enactment of the Fee Relief Act. However, this higher fee rate is a direct consequence of the decline in dollar volume in fiscal 2003 compared to the CBO's January 2001 projection of dollar volume for fiscal 2003. The recent decline in dollar volume for securities transactions 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 $46.80 per million for sales of securities transacted on April 1, 2003, and thereafter until the annual adjustment for fiscal 2004 is effective.

V. Conclusion

Accordingly, pursuant to section 31 of the Exchange Act,

It is hereby ordered that each of the fee rates under sections 31(b) and (c) of the Exchange Act shall be $46.80 per $1,000,000 of the aggregate dollar amount of sales of securities subject to these sections effective April 1, 2003.

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 1993—January 2003). The data obtained from the exchanges and Nasdaq 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 0.014 and the standard deviation 0.116. Assume the monthly percentage change in ADS follows a random walk. The expected monthly percentage growth rate of ADS is 2.0 percent.

Now, use the expected monthly percentage growth rate to forecast total dollar volume. For example, one can use the ADS for January 2003 ($80,998,598,695) to forecast ADS for February 2003 ($82,654,487,385 = $80,998,598,695 × 1.020). Multiply by the number of trading days in February 2003 (19) to obtain a forecast of the total dollar volume forecast for the month ($1,570,435,260,311). 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 = 0.014 and σ = 0.116, 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 = 1.020 × ADS_t−1.

6. For February 2003, this gives a forecast ADS of 1.020 × $80,998,598,695 = $82,654,487,385. Multiply this figure by the 19 trading days in February 2003 to obtain a total dollar volume forecast of $1,570,435,260,311.

7. For March 2003, multiply the February 2003 ADS forecast by 1.020 to obtain a forecast ADS of $84,344,228,109. Multiply this figure by the 21 trading days in March 2003 to obtain a total dollar volume forecast of $1,771,228,790,287.

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 10/1/02 and 3/21/03 to be $9,909,578,791,175. (Allocate the projected aggregate dollar volume in March 2003 based on the number of trading days in the periods—15 trading days during 3/1/03 and 3/21/03, and 6 trading days during 3/22/03 and 3/31/03.) Multiply this amount by the fee rate of $30.10 per million dollars in sales during this period and get an estimate of $298,278,322 in actual and projected fees collected during 10/1/02 and 3/21/03. Determine the projected aggregate dollar volume of sales between 3/22/03 and 3/31/03 to be $506,065,368,653. Multiply this amount by the fee rate of $25.20 per million dollars in sales during this period and get an estimate of $12,752,847 in projected fees collected during 3/22/03 and 3/31/03.

2. Estimate the amount of assessments on securities futures products collected during 10/1/02 and 9/30/03 to be $22,100 by summing the amounts collected through January of $4,747 with projections of a 2% monthly increase in subsequent months.

3. Using the data from Table A, determine the projected aggregate dollar volume of sales between 4/1/03 and 9/30/03 to be $11,505,683,278,185.

4. The rate necessary to collect the target $849,000,000 in fee revenues is then calculated as: ($849,000,000 − $298,278,322 − $12,752,847 − $22,100) ÷ $11,505,683,278,185 = .000046755.

5. Consistent with the system requirements of the exchanges and the NASD, round the rate to the seventh decimal point, yielding a rate of .0000468 (or $46.80 per million).

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