What Is Section 31 Fee?
The Section 31 fee is a small charge levied by the U.S. government on certain securities transactions, primarily the sale of exchange-listed equities and options. This fee falls under the broader category of securities regulation and is authorized by Section 31 of the Securities Exchange Act of 1934. Its primary purpose is to fund the operations and regulatory activities of the Securities and Exchange Commission (SEC)31, 32.
The Section 31 fee is not directly imposed on individual investors, but rather on Self-Regulatory Organizations (SROs) like national securities exchanges and the Financial Industry Regulatory Authority (FINRA)29, 30. These SROs, and subsequently their broker-dealers, typically pass these costs on to investors through transaction charges28.
History and Origin
The Section 31 fee's origins trace back to the Securities Exchange Act of 1934, a landmark piece of legislation enacted to restore public confidence in the U.S. financial markets following the 1929 stock market crash and the ensuing Great Depression27. Section 31 was specifically designed to provide a funding mechanism for the newly established SEC, ensuring it had the resources to oversee and regulate the burgeoning securities industry effectively25, 26.
Initially, the fee aimed to directly cover the costs of the government's supervision and regulation of the securities markets. Over time, as market trading volume increased significantly, concerns arose that the collected fees often exceeded the SEC's annual budget, leading to discussions about whether the fee functioned more as a "tax on capital" than a direct funding mechanism for regulatory oversight24. The SEC regularly adjusts the fee rate to align collections with its congressional appropriations, sometimes resulting in mid-year changes23. For instance, for a period in fiscal year 2025, the fee rate for most securities transactions was adjusted to $0.00 per million dollars after the SEC determined it had collected its full appropriation for the fiscal year21, 22.
Key Takeaways
- The Section 31 fee funds the U.S. Securities and Exchange Commission's regulatory activities.
- It is imposed on the sale of certain securities, primarily exchange-listed equities and options.
- The fee is technically paid by Self-Regulatory Organizations (SROs) to the SEC, but these costs are typically passed on to investors.
- The SEC adjusts the fee rate periodically to match its annual congressional appropriation.
- This fee is distinct from brokerage commissions, which are charges for a broker's services.
Formula and Calculation
The Section 31 fee is calculated based on the aggregate dollar amount of covered sales of securities. The specific formula is:
Where:
- Aggregate Dollar Amount of Covered Sales refers to the total monetary value of securities sold that are subject to the fee.
- Fee Rate is the rate set by the SEC, expressed per million dollars of sales. For example, a rate of $27.80 per million dollars means for every $1,000,000 in sales, $27.80 is assessed20.
For security futures transactions, a separate assessment charge applies per "round turn transaction," which remains largely unchanged even when other Section 31 fees are adjusted18, 19. The fee liability is generally determined based on the settlement date of the transaction17.
Interpreting the Section 31 Fee
The Section 31 fee represents a minor component of the overall transaction costs associated with selling securities in the U.S. market. For an individual investor, it often appears as a small, separate line item on a trade confirmation statement. While the dollar amount for a single trade is typically negligible, the cumulative effect across millions of transactions ensures the SEC receives substantial funding for its market oversight and investor protection efforts15, 16.
The fee rate is not static; the SEC has the authority to adjust it annually or even mid-year, primarily to ensure that the total collections align with the Commission's appropriated budget for a given fiscal year14. This means that the per-transaction cost can fluctuate, depending on market volume and the SEC's funding needs.
Hypothetical Example
Imagine an investor sells 100 shares of XYZ stock at $50 per share.
The aggregate dollar amount of the covered sale is:
If the Section 31 fee rate set by the SEC at the time of the sale is $27.80 per $1,000,000 of sales, the calculation would be:
In this example, the investor would typically see a charge of approximately $0.14 for the Section 31 fee on their trade confirmation, in addition to any other fees or brokerage commissions charged by their broker.
Practical Applications
The Section 31 fee is a foundational element in the funding of U.S. financial market regulation. It is applied across various aspects of the securities industry:
- Market Operation: National securities exchanges and other SROs collect this fee from their member firms to fulfill their statutory obligations to the SEC13. This process ensures the continuous funding of regulatory functions crucial for orderly markets.
- Regulatory Funding: The fee provides the financial backbone for the SEC's broad mandate, which includes enforcing securities laws, overseeing exchanges, registering market participants, and protecting investors from fraud and manipulation11, 12.
- Broker-Dealer Operations: Broker-dealers incorporate the Section 31 fee into their pricing models and typically pass it on to clients who sell securities. This is a standard compliance requirement for firms operating in the U.S. equities and options markets.
- Congressional Oversight: The mechanism for setting and adjusting the fee rate involves consultation with the Congressional Budget Office and the Office of Management and Budget, highlighting congressional oversight of the SEC's funding10. The SEC regularly publishes advisories regarding these fee rates on its official website9.
Limitations and Criticisms
While essential for funding the SEC, the Section 31 fee has faced scrutiny and criticism over its history. One significant point of contention has been that the collected funds sometimes exceed the SEC's budget, leading critics to label it an indirect "tax" on capital formation and investment rather than a pure fee for services rendered8.
For individual investors, the fee is a minor transaction cost, but it can accumulate for active traders or institutional investors with high trading volumes. The mechanics of how the fee is collected by SROs from their members and then passed on to customers can also lead to complexities in reconciliation for firms7. Furthermore, the frequent adjustments to the fee rate, while necessary to align with the SEC's appropriation, can require system updates and communication efforts within the financial industry6.
Section 31 Fee vs. Brokerage Commission
The Section 31 fee and a brokerage commission are both charges associated with securities transactions, but they differ fundamentally in their purpose and recipient. A brokerage commission is a payment made by an investor to their broker for executing a trade, providing advice, or offering other services. It is the broker's direct revenue for facilitating the transaction. In contrast, the Section 31 fee is a regulatory charge mandated by the government. While it is collected by the broker or exchange, it is ultimately remitted to the U.S. Treasury to fund the SEC's regulatory activities, not as revenue for the financial intermediary5. Importantly, the Section 31 fee applies only to sales of covered securities, whereas brokerage commissions can apply to both purchases and sales, depending on the broker's fee structure.
FAQs
What is the primary purpose of the Section 31 fee?
The Section 31 fee's primary purpose is to fund the operations and regulatory activities of the Securities and Exchange Commission, ensuring the effective oversight and regulation of U.S. securities markets4.
Who actually pays the Section 31 fee?
While investors typically see the Section 31 fee as a line item on their trade confirmations, the fee is technically levied on Self-Regulatory Organizations (like stock exchanges and FINRA). These organizations then assess charges on their broker-dealers, who in turn pass the cost onto their clients3.
Does the Section 31 fee apply to all securities transactions?
No, the Section 31 fee primarily applies to the sale of exchange-listed equities and options. It does not apply to the purchase of stocks or to bonds and other debt instruments2.
How often does the Section 31 fee rate change?
The SEC is required to adjust the Section 31 fee rate annually as part of its fiscal year budget appropriation. In some circumstances, mid-year adjustments may also occur to align fee collections with the SEC's funding needs1.
Is the Section 31 fee included in my brokerage commission?
No, the Section 31 fee is a separate regulatory charge. While it may appear on the same trade confirmation, it is distinct from your brokerage commission, which is the fee your broker charges for their services.