WASHINGTON Feb 19 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.