Section 31 transaction fee

What Is a Section 31 Transaction Fee?

A Section 31 transaction fee is a regulatory charge imposed by the U.S. Securities and Exchange Commission (SEC) on certain securities sales. These fees fall under the broader category of market regulation within financial economics, serving to fund the SEC's operations and oversight activities in the securities markets. The fee is assessed on the aggregate dollar amount of sales of exchange-listed equities, options, and other specified securities. While the SEC requires self-regulatory organizations (SROs) like national securities exchanges and the Financial Industry Regulatory Authority (FINRA) to pay these fees, the SROs typically pass these costs on to their member broker-dealers, who may then pass them on to investors.¹⁰⁹, ¹¹⁰

History and Origin

The Section 31 fee finds its statutory basis in Section 31 of the Securities Exchange Act of 1934. This legislation granted the SEC the authority to impose fees to cover the costs of supervising and regulating the U.S. securities markets.¹⁰⁸ Initially, the fee was structured as a small percentage of the dollar value of equities sold. Over the years, the fee rate has been subject to annual adjustments and, sometimes, mid-year revisions by the SEC, influenced by factors such as market volume and the SEC's funding needs.¹⁰⁷ Historically, there has been discussion and some criticism regarding the amount collected from these fees, with arguments suggesting that the fees sometimes generated revenue significantly exceeding the SEC's budget, effectively acting as a "tax on capital" rather than solely a funding mechanism for regulatory functions.¹⁰⁶

Key Takeaways

• The Section 31 transaction fee is a regulatory charge on certain securities sales, authorized by the Securities Exchange Act of 1934.
• The primary purpose of the fee is to fund the operational and regulatory activities of the Securities and Exchange Commission (SEC).¹⁰⁵
• Fees are initially paid by self-regulatory organizations (SROs) to the SEC, which are then typically passed through to broker-dealers and, in turn, may be passed to investors.¹⁰³, ¹⁰⁴
• The fee rate is periodically adjusted by the SEC based on market activity and funding requirements.¹⁰²
• It applies to the sale of equities and equity-related options but not to their purchase.

Formula and Calculation

The Section 31 fee is calculated based on the aggregate dollar amount of covered sales. While the exact rate is subject to change based on SEC advisories, the general formula involves multiplying the sale amount by the specified fee rate.

The formula can be expressed as:

The SEC publishes fee rate advisories that announce the current and upcoming rates. For example, recent advisories have seen the rate change from $8.00 per million dollars to $27.80 per million dollars, and in some cases, to $0.00 per million dollars if the SEC anticipates collecting its full appropriation.⁹⁹, ¹⁰⁰, ¹⁰¹ The calculation involves truncating the result at a certain decimal place and rounding up to the nearest cent.⁹⁸

Interpreting the Section 31 Transaction Fee

The Section 31 transaction fee is a direct cost associated with selling securities in the U.S. markets. For individual investors, this fee typically appears as a small deduction on their trade confirmation for sell orders. It's important to understand that this fee is distinct from brokerage commissions or other trading costs. While the amount per transaction is usually minimal, it contributes to the overall cost of trading and portfolio management. The fee's existence underscores the regulatory framework governing market participants and helps fund essential oversight functions that promote market integrity and investor protection.

Hypothetical Example

Suppose an investor sells 1,000 shares of XYZ stock at $50 per share. The total value of the sale is $50,000. If the prevailing Section 31 fee rate set by the SEC is $27.80 per million dollars in transactions (or 0.0000278 per dollar)⁹⁷:

The Section 31 fee would be calculated as:

This $1.39 would be a component of the total costs deducted from the gross proceeds of the sale, in addition to any applicable brokerage fees or exchange fees.

Practical Applications

The Section 31 transaction fee is a recurring element in the operational landscape of the U.S. securities industry. Its primary practical application is to provide funding for the SEC, enabling it to carry out its regulatory mandate. This includes funding enforcement actions against market misconduct, conducting market surveillance to ensure fair trading practices, and implementing initiatives aimed at investor education.⁹⁶

For broker-dealers, managing and remitting Section 31 fees is a critical compliance function. They are responsible for collecting these fees from their customers on sell transactions and ensuring proper remittance to the relevant SROs, such as FINRA or national securities exchanges.⁹⁴, ⁹⁵ These SROs then pay the aggregated fees to the SEC. The fee also plays a role in how firms structure their pricing and communicate transaction costs to clients, often being itemized separately from commission structures.⁹², ⁹³

Limitations and Criticisms

While essential for funding market regulation, the Section 31 transaction fee has faced limitations and criticisms over time. One recurring critique has been that the fee collections can at times significantly exceed the SEC's annual appropriation, leading some to characterize it more as a "tax" than a true fee.⁹¹ This surplus revenue is then directed to the U.S. Treasury rather than being directly reinvested into the SEC's regulatory activities, which has been a point of contention among industry participants and policymakers.⁸⁹, ⁹⁰

Another point of discussion relates to the transparency and communication of the fee to individual investors. While firms are required to disclose such charges, the terminology used on customer confirmations can sometimes lead to confusion. The Securities Industry Association (SIA), now part of SIFMA, has previously recommended consistent terminology like "Regulatory Fee" or "Reg Fee" to improve clarity for investors, acknowledging that the fee's true nature as a pass-through cost from the SEC via SROs to broker-dealers and then customers can be complex.⁸⁷, ⁸⁸

Section 31 Transaction Fee vs. FINRA Trading Activity Fee

The Section 31 transaction fee and the FINRA Trading Activity Fee (TAF) are both regulatory charges on securities transactions, but they serve different purposes and are collected by different entities.

While both fees contribute to the overall regulatory costs in the securities markets and are typically borne by investors when selling securities, the key distinction lies in their beneficiaries and the specific regulatory functions they support. The Section 31 fee directly supports the federal regulator (SEC), whereas the TAF supports the self-regulatory organization (FINRA).⁷⁰

FAQs

Who pays the Section 31 transaction fee?

The fee is initially paid by self-regulatory organizations (SROs) like stock exchanges and FINRA to the SEC. These SROs then charge their member broker-dealers, who in turn typically pass the cost on to investors who sell securities.⁶⁸, ⁶⁹

Does the Section 31 fee apply to buying stocks?

No, the Section 31 transaction fee applies only to the sale of exchange-listed equities and certain other securities, not to their purchase.

How often does the Section 31 fee rate change?

The Securities and Exchange Commission (SEC) is required to adjust the Section 31 fee rate annually, and sometimes makes mid-year adjustments, based on factors such as market volume and the SEC's budgetary needs.⁶⁷

Is the Section 31 fee the same as a brokerage commission?

No, the Section 31 fee is a separate regulatory charge imposed by the SEC, distinct from the brokerage commission charged by a broker for executing a trade. It is a pass-through fee that contributes to market regulation.

Where can I find the current Section 31 fee rate?

The Securities and Exchange Commission (SEC) publishes official fee rate advisories on its website, which detail the current and upcoming Section 31 fee rates.⁶⁵, ⁶⁶ Financial Industry Regulatory Authority (FINRA) also publishes notices regarding these rates.^{6412345678910111213141516171819202122232425262728293031323334353637383940414243444546474849}