SEC Approves Controversial Bond Markup Disclosure Rules
(Adds in fifth paragraph $15 million penalty imposed on Edward Jones for mispricing bonds.)
Two long-simmering rule proposals aimed at helping retail investors decipher how much brokerage firms mark up municipal, agency and corporate bond prices have been approved by the Securities and Exchange Commission.
The rules from the Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board will require firms to disclose on confirmation statements how much the prices of bonds bought or sold by customers differ from prevailing institutional prices. The rules will apply to trades in which firms act as principal and have made offsetting transactions within 24 hours of the retail trade in the same or greater size.
They will become effective no later than May 2018 and will affect almost 60% of retail corporate bond transactions and even more muni trades, regulators have said.
Regulators, including both Republican and Democrat commissioners of the SEC, have long argued that retail bond customers rarely comparison shop among dealers for prices. Because there are no central marketplaces for bond quotations, as there are for equities, customers are ignorant of wide discrepancies in quotes among broker-dealers, they have said.
The SEC last year fined Edward Jones $15 million and required it to repay $5.2 million to customers for overpricing muni bond issues and misleading bond issuers. It also imposed a $15,000 penalty and two-year industry ban on the former head of Jones’ muni bond syndicate desk.
“The municipal bond market will gain an unprecedented level of transparency when this new rule is put in place,” Colleen Woodell, Chair of the MSRB Board of Directors said in a prepared statement. “We have been working tirelessly to improve transparency for municipal bond investors and the changes set in motion…will allow them to assess their municipal bond transaction costs in a way similar to other markets.”
The brokerage industry has opposed the disclosure rules since they were first proposed by Finra and the MSRB in 2014, arguing that systems changes to calculate and record markups and markdowns are costly and could hurt investors by driving some bond dealers out of the retail business. Regulators twice revised their original proposals to deal with objections about operational complexity for the securities industry.
“The SEC’s approval of the MSRB’s rule requiring disclosure of markups on retail customer confirmations represents a monumental change for broker dealers and a significant change for investors,” said Leslie Norwood, co-head of the municipal securities division of the Securities Industry and Financial Markets Association, the industry’s main trade group. “Now the hard work begins, as the devil is in the details of implementing such a significant change.
The SEC’s approval of the rules late Thursday came amid growing pushback against regulations in the wake of Donald Trump’s unexpected presidential election victory.
Republican congressional leaders earlier this week warned the heads of several federal agencies, including the SEC and the Internal Revenue Service, against finalizing pending rules during the last days of the Obama administration, according to The Bond Buyer newspaper.
“Should you ignore this counsel, please be aware that we will work with our colleagues to ensure that Congress scrutinizes your actions – and, if appropriate, overturns them,” House Majority Leader Kevin McCarthy, R-Calif., and other senior Republicans wrote in letters to the agency and Cabinet department leaders, according to the article.
An SEC spokeswoman did not respond to a request for comment on the letter.