Industry, investor advocates clash on bond-price-transparency proposals

Rules proposed by Finra and MSRB would require brokers to detail the price differences they and the clients pay for corporate and municipal bonds

Dec 14, 2015 @ 2:04 pm

By Mark Schoeff Jr.

While the financial industry wants to limit regulatory proposals to shed more light on the cost to retail investors for corporate and municipal bonds, investor advocates claim the proposals don't go far enough.

The Financial Industry Regulatory Authority Inc. proposed a rule that would require a broker to disclose to a customer the amount the brokerage paid for a corporate or agency bond, or reference price, and the amount the customer paid — making clear the difference between the two.

A revision to the initial rule gives financial firms some flexibility in determining the reference price, and in some cases allows it to omit the reference price.

The Municipal Securities Rulemaking Board proposed a rule that would require disclosure of the mark-up or mark-down for retail sales of municipal bonds within a two-hour window.

“They are a good beginning,” said Marilyn Cohen, founder and chief executive of Envision Capital Management. “I know how the do-it-yourself investor gets slaughtered when they're buying or selling municipal or corporate bonds themselves.”

Financial and investor groups took opposite sides in comment letters that were due last Friday.

The Securities Industry and Financial Markets Association said it favors increasing price transparency in bond markets, but warned that the Finra and MSRB proposals are flawed.

The major financial-services trade group argued in favor of the two-hour limit, while asserting that the rules should only apply to trades in which a firm is connecting a buyer and a seller, rather than holding bonds overnight, and should permit flexibility in determining reference prices.

“As currently formulated, the proposals lack necessary specificity, present unworkable challenges in application and operation, risk misleading the very customers they are intended to protect, and have the potential to undermine bond market liquidity,” Sean Davy, managing director of the SIFMA capital markets division, and Leslie Norwood, managing director of the SIFMA municipal securities division, wrote in a Dec. 11 comment letter.

The Public Investors Arbitration Bar Association, however, said the proposals should be more comprehensive.

The group said the rules should apply to all fixed-income retail sales, not just those that are so-called “riskless” transactions, where the brokerage does not hold the bonds. It also said the price information should be unlimited, rather than restricted to two-hour or same-day windows.

“There is nothing to indicate that unfair pricing or excessive markups and markdowns only occur when the transaction is sourced from a same-day principal trade,” Hugh Berkson, PIABA president, wrote in a Dec. 8 comment letter. “Abuse of undisclosed markups and markdowns is not a hypothetical problem. The last few years have seen Finra pursue a number of disciplinary actions … concerning excessive markups and markdowns of debt instruments.”

Although she worries about unintended consequences of any regulation, Ms. Cohen said the Finra and MSRB rules could help improve price transparency.

“It is the honest and honorable way for any firm to sell its bonds to retail investors,” Ms. Cohen said.


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