Muni Regulators May Force Brokers to Disclose Bond Trade Prices

U.S. regulators may require brokers to disclose the prices paid for municipal bonds that are resold to their customers, a shift aimed at injecting more transparency into the market.

The Municipal Securities Rulemaking Board, which writes regulations for the $3.7 trillion market, said today it will solicit comments on whether brokers should be required to reveal what they paid for bonds that are then resold on the same day. It would be a first step toward imposing new obligations on brokers, a process that takes months.

The added disclosure could foster competition by helping investors understand what they are being charged by their brokers. Such fees are embedded in prices they charge customers for securities, which can make it difficult for investors to shop comparatively.

“It’s reasonable to believe there’s some value in knowing what the dealer paid,” Dan Heimowitz, the chairman of the Alexandria, Virginia-based board told reporters on a conference call today.

Officials from the U.S. Securities and Exchange Commission have pushed for greater disclosure of the fees to protect individuals, who are the biggest holders of munis. Those investors, who seek tax-exempt income with little risk of default, hold about 44 percent of all municipal bonds directly in their own accounts, according to the Federal Reserve.

Favorable Terms

While current regulations prevent brokers from charging customers unfair prices, a study by the Government Accountability Office in 2012 found that institutional investors, who have greater access to market information and trade larger blocks of bonds, received more favorable terms. In May, SEC Commissioner Daniel Gallagher told municipal-market regulators that investors may be overpaying because commissions aren’t disclosed.

Craig McCann, an economist with Securities Litigation & Consulting Group, a Fairfax, Virginia, company that consults on lawsuits, estimates that the investors may have paid more than $10 billion in excessive markups on municipal bonds from 2005 to 2013.

“Regulators could save investors hundreds of millions a year if they would extend the protection of a little sunshine,” he said last month.

Same Day

The initial step by the municipal regulators would ask whether to require brokers to disclose the price they paid for a security that they turn around and sell that same day, Heimowitz said. The same would apply in cases where brokers purchase a bond from a customer and then resell it that day.

Heimowitz said the request for comments will be made in the next few months, and the regulator is interested in rival proposals for making investors better informed. Lynnette Kelly, the executive director of the municipal regulator, said it will also ask if brokers should disclose how much bonds are marked up, a figure that would be based on the prevailing market price instead of what the broker paid.

“There are many issues that need to be explored,” Heimowitz said.

The fees charged by dealers in the bond market have drawn renewed attention from Washington this year. A bipartisan bill introduced in March, sponsored by Senators Mark Warner of Virginia and Tom Coburn of Oklahoma, would require disclosure of the fees. In June, SEC Chair Mary Jo White said the agency would work with regulators to develop such rules.

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