Bond Dealers Required to Report Retail Markups in Finra Plan

  • Brokerage regulator moves to crack down on abusive commissions
  • Rule subject to Securities and Exchange Commission approval

Brokers would have to reveal how much they earn on bond transactions that involve retail clients under a U.S. regulator’s plan for cracking down on inflated commissions.

The Financial Industry Regulatory Authority proposal, if approved by the Securities and Exchange Commission, would force brokers to report markups on bonds they hold for no more than one day, according to a statement released Friday. The requirement would close a loophole that allows brokers avoid disclosing markups on bond sales, while commissions on stock trades have to be reported.

“Finra has found that some individual investors pay considerably more than others for similar trades,” Chief Executive Officer Richard Ketchum said in the regulator’s statement. “Providing meaningful and useful pricing information will assist customers in monitoring costs, promote transparency into firms’ pricing practices, and help enhance investor confidence.”

Improve Transparency

Securities regulators have struggled for decades to improve transparency in the bond market, where the majority of trades are still completed by telephone and most price quotes are never made public. Some retail investors pay markups that are more than 2 percent of the value of their investment-grade bond trade, according to Finra data. Institutional investors on average pay much less -- about .05 percent, according to data from MarketAxess, which operates an electronic bond-trading platform.

If the rule had been in effect early last year, its disclosure requirement would have covered 98 percent of all retail bond trades, Finra said in September. It won’t apply to trades between dealers and institutional investors.

The SEC and Finra began a campaign for the disclosure almost two years ago, after SEC Chair Mary Jo White told Finra and the Municipal Securities Rulemaking Board to draft a rule to protect retail investors.

The MSRB plans to vote on a final version of its proposal after considering public comment on how to measure the markup, Michael Post, the organization’s general counsel for regulatory affairs, said Friday. Under an earlier version of its rule, brokers would have to disclose markups on sales of debt they hold for two hours or less. Investors who bought $100,000 or less of investment-grade municipal debt in December 2013 paid an average transaction cost of 1.73 percent, twice that of corporate bonds, according to a report by Standard & Poor’s.

Public Databases

Some Wall Street firms and trade groups such as the Securities Industry and Financial Markets Association criticized the requirement, arguing that most markups are fair and that retail investors can already research prices using public databases maintained on Finra’s and MSRB’s websites.

“Markups have been greatly reduced and while outliers exist, trading data demonstrates that markups have narrowed and that the market is not as uncompetitive as some critics have noted,” Craig Noble, managing director and head of capital markets trading at Wells Fargo Advisors LLC, told an SEC advisory panel last month.

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