Our colleagues' recent paper on municipal bond markups, which showed that retail investors were charged nearly $11 billion in markups from 2005-2013, has generated a lot of attention. In June we spent an entire week covering the background, methodology, findings, and implications of that paper, which we think has important implications for the municipal bond investors.
On Tuesday, the Municipal Securities Rulemaking Board (MSRB) proposed a new "fair-pricing" rule that could help address the issue. According to Kathryn Brenzel at Law360:
Current rules require dealers to trade with customers at “fair and reasonable” prices and to assess market value of municipal securities, according to MSRB. The new rule would address how firms handle bond orders, requiring dealers to evaluate the market, the size and speed of the transaction, the opportunity to get a better price, and the likelihood that the trade will go through, according to regulators.Kathryn also notes that the proposal stems from a joint Government Accountability Office report (PDF) issued in July 2012, which called on Congress to improve the transparency in the municipal bond market. The rule may also derive from a proposal last week from the Securities Industry and Financial Markets Association (SIFMA).
The proposal may evolve into a "best-execution" rule similar to FINRA's Rule 5310 ("Best Execution and Interpositioning"). According to the MSRB, the proposed rule is not meant to dilute existing execution requirements but are meant "to impose requirements that are properly tailored for the municipal market".
The "fair-pricing" rule does not, however, propose a hard and fast rule regarding markups. It will be interesting to see if the new rule is adopted, and if it is, it is specific enough to prevent the kind of excessive markups we have been highlighting for the past few months.