(Refiles to fix spelling error of FINRA head's name to Richard
Ketchum in penultimate paragraph)
By Lisa Lambert and Sarah N. Lynch
WASHINGTON, June 5 Municipal and corporate bond
dealers would have to tell investors how much they charge to
cover their compensation under bipartisan legislation currently
in the U.S. Senate to end secret price markups.
The proposal, quietly introduced earlier this year by
Virginia Democratic Senator Mark Warner and Oklahoma Republican
Senator Tom Coburn, comes as momentum is growing among U.S.
securities regulators to bring more transparency to the combined
$13 trillion-plus municipal and corporate bond markets.
This week, executives from Charles Schwab met with
federal lawmakers, Securities and Exchange Commission officials
and other regulators to advocate for requiring disclosure on
municipal bond markups.
"It's very opaque and somewhat confusing to investors," said
Peter Crawford, a senior vice president at Charles Schwab.
"One of the things we have found in this over-the-counter
market is the degree of price difference from one dealer to the
next can be significant."
Most individual investors, the $3.7 trillion municipal bond
market's backbone, are in the dark about how much dealers add to
prices in trades.
Complicating matters, regulation on compensation is hazy.
Currently, dealers must disclose if they act as agents
facilitating trades but not if they act as principals in the
trades. For most trades in the municipal market, then, dealers
are "riskless principals," purchasing securities from their
customers and immediately reselling them to other dealers.
Crawford, whose firm levies a flat charge of $1 per bond
transaction to customers, said Charles Schwab has studied the
lack of disclosure for about seven years.
The brokerage analyzed a California general obligation bond
with a 5.25 percent coupon bond offered by five different
dealers on its trading platform. It found the prices ran from
$120.938 to $124.10, which meant on a $10,000 trade there was a
$316.40 difference in prices.
The current federal push on dealer compensation in the
municipal market began two years ago, when a comprehensive SEC
report found individual investors pay more for bonds than
institutions because they lack information, specifically about
markups and markdowns.
In recent months the call for change has grown louder, with
SEC Republican Commissioner Michael Piwowar saying in January
retail investors must be given a better sense of markups.
Last month, his fellow SEC Republican Commissioner Daniel
Gallagher said "'riskless principal' is basically just a fancy
name for 'agency,'" and disclosing markups and markdowns "would
enable customers to assess the fairness of the execution
Meanwhile, the two self-regulatory organizations helping the
SEC oversee the bond markets are focusing on the issue.
The Municipal Securities Rulemaking Board is currently
taking steps that may lead to new rules on riskless principal
transactions. At the same time the Financial Industry Regulatory
Authority is "reviewing" the issue for corporate bonds, Richard
Ketchum, its head, told reporters last month.
Crawford said this was the firm's first visit to Washington
policymakers about markups, which was inspired by Piwowar's
(Reporting by Sarah N. Lynch)