Bond mark-up transparency rule could help investors, cause more work for brokers

New regulation requiring brokers to disclose their markup or markdown on corporate and municipal bonds goes into effect today

May 14, 2018 @ 2:23 pm

By Mark Schoeff Jr.

New regulations designed to illuminate the cost of bonds, which went into effect on Monday, are likely to help retail investors but cause more work for brokers.

The regulations — one from the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulator, and one from the Municipal Securities Rulemaking Board — would require that brokers selling municipal and corporate bonds to retail investors disclose their markup or markdown on bonds that they bought and resold on the same day.

The difference between what the customer paid and the prevailing market price would have to be recorded on the customer confirmation, along with a link to online publicly available trading data and the execution time.

The move should bring more transparency to the often-opaque bond market.

"It's long, long, long overdue," said Bill Gurtin, chief executive of Gurtin Municipal Bond Management. "Investors were in many cases misled because it was never disclosed to them what type of markups were being put on bonds. Investors are shocked when we've shown them [what] they've been paying."

Cost is one of the most important factors in helping a retail investor determine whether a bond strategy is appropriate and the bond manager is effective, said Ronald Bernardi, chief executive of Bernardi Securities Inc.

"An investor is entitled to know what he or she is paying for a particular service, and I, as a professional, should be able to explain why I'm worth the charge," Mr. Bernardi said.

The new information on the customer confirmation is going to require an explanation from the broker, said Michael Ruvo, chief executive of BondWave, a financial technology firm.

"There's going to have to be a lot of education as to what the markup disclosure means and what the market price is," Mr. Ruvo said.

And coming up with the prevailing market price to provide to customers could be a difficult calculation because different brokers are buying different amounts of bonds at slightly varying prices, according to Mr. Bernardi.

"The prevailing market price in the municipal market is very complicated," he said. "It creates an extra workload for brokers."

Although retail investors will have better insight into what they're paying for bonds, the added complexities introduced by the new rules might turn off brokers and investors.

"It could result in fewer advisers wanting to sell bonds because of all the compliance and regulatory burdens," Mr. Ruvo said.

The requirements of the markup rules could also cause a change in where sales occur.

"Money is going to move to managed platforms," Mr. Gurtin said. "You'll see more money flowing toward [registered investment advisers] and municipal money managers."

Although the MSRB has been working to make bond markets and prices more transparent through its EMMA website, and the new markup rule also will shed more light, customers may decide they're tired of trying to discern what they're paying for bonds.

"The investor might say, 'It's too complicated, I'm just going to buy an ETF,'" Mr. Bernardi said. "I'm fearful that market liquidity is going to be hurt because of it."

(More: Mutual funds stand to gain as muni investors get first look at fees)


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