WASHINGTON Aug 5 U.S. regulators are stepping up their push to unmask municipal bond dealers' compensation, and could soon require dealers to post reference prices on trade confirmations sent to investors.
Most individual investors are in the dark about how much dealers add to prices in trades to cover their compensation.
Under a proposal the Municipal Securities Rulemaking Board (MSRB) will release this fall, a retail investor would be able to compare a price paid or received for a bond with a market price, and discern how much the dealer made in the trade.
The reference prices would be based on "a corresponding dealer transaction in the same security that occurred on the same day," said Daniel Heimowitz, chair of the MSRB, on a call with reporters.
In its proposal, the board will ask for comments on alternatives to providing reference prices. Heimowitz said one possible method would be simply to have dealers post the compensation they tack on to trades, frequently called "markups."
In a sweeping report on the market released two years ago, the Securities and Exchange Commission specifically recommended requiring dealers to disclose how much they add to trades for compensation.
The MSRB, a self-regulatory organization made up of bankers, issuers and advisers, writes the rules for the $3.7 trillion U.S. municipal bond market that the SEC enforces. The SEC will have to approve the MSRB proposal, after a comment period.
This year the chair of the SEC, Mary Jo White, and two of its Republican commissioners, Daniel Gallagher and Michael Piwowar, have all taken issue with the practice of not disclosing markups.
At the same time, Virginia Democratic Senator Mark Warner and Oklahoma Republican Senator Tom Coburn have introduced legislation calling for better markups information.
The requirements for posting compensation are different, depending on the role of a dealer in a trade. The SEC commissioners and others have said the distinctions are not clear.
Currently, municipal bond dealers must disclose compensation if they act as agents facilitating trades but not if they act as principals in the trades. For most trades in the municipal market, dealers are considered riskless principals, purchasing securities from their customers and immediately reselling them to other dealers. As such, dealers' compensation information is rarely disclosed. (Reporting By Lisa Lambert; Editing by Tom Brown)