WASHINGTON, Feb 19 (Reuters) - Brokers and dealers would have to seek the most favorable terms for their customers in U.S. municipal bond trades under a proposal to create a "best execution" standard for the $3.7 trillion municipal market.
Currently, the market only has a fair-pricing standard, but no requirement for dealers to put clients' interests first.
The Municipal Securities Rulemaking Board said the draft rule, released Wednesday, resembles best-execution standards for equities and corporate bonds.
"The draft rule requires brokers, dealers and municipal securities dealers to use reasonable diligence in seeking to obtain for their customer transactions in municipal securities the most favorable terms available under prevailing market condition," the board, a self-regulatory organization made up of banks, brokers, issuers and advisers, said in its proposal.
Retail investors are the backbone of the municipal market, and regulators are growing increasingly alarmed that they are not given fair prices on the debt.
A report from the Government Accountability Office in 2012 found that individual investors typically pay more when buying bonds and make less when selling them, mostly because they do not have data and other details for comparing prices.
The deadline for comments on the draft is March 21, and then the board will release a final version to be approved by the Securities and Exchange Commission. The SEC enforces the rules written by the MSRB.
"The draft rule could foster price competition among dealers and result in reduced effective spreads and reduced transaction costs for market participants," the MSRB said. "It is possible, however, that the improvements on each individual transaction may be small, even if the aggregate improvement across all transactions were large."
The SEC will likely approve the standard quickly. In its sweeping 2012 review of the municipal market, the SEC called for improving investor protections and specifically suggested establishing a best-execution standard.