(Adds comment from Senator Coburn)
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 grows among U.S.
securities regulators to increase transparency in the combined
$13 trillion-plus municipal and corporate bond markets.
"The goal of the legislation is to bring transparency and
clarity to the often-opaque municipal bond market and, in
particular, to protect individual investors from paying a year's
worth of interest in excessive 'markups' when buying or selling
a bond," said John Hart, communications director for Coburn.
This week, executives from Charles Schwab met with
lawmakers, Securities and Exchange Commission officials and
other regulators to advocate for requiring disclosure on
municipal bond markups.
"It's very opaque," 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, 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 prices ran from
$120.938 to $124.10, meaning on a $10,000 trade there was a
$316.40 difference in prices.
The current federal push on 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.
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 "would enable
customers to assess the fairness of the execution prices."
Meanwhile, the two self-regulatory organizations helping the
SEC oversee the bond markets are focusing on the issue.
The Municipal Securities Rulemaking Board is 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, recently told reporters.
(Reporting by Sarah N. Lynch; Editing by Lisa Shumaker)