Muni Bond Investors Pay Twice More In Commissions than When Investing in Corporate Bonds, Reports The Journal
According to a study for The Wall Street Journal, investors in municipal bonds are paying trading commissions that are around twice as high as those for corporate bonds. Individuals continue to be the largest participants in the muni bond industry, currently valued at $3.7 trillion, because these bonds are considered pretty safe and have interest payments that are not taxed.
The municipal bond industry offers funding to cities, states, school districts, and hospitals. While regulators have largely overlooked municipal debt in the last two decades, lately they are scrutinizing these securities more closely. That said, unlike corporate bond and stock brokers, who are obligated to reveal market price and provide “best execution” on trades to individuals to make sure they get the best prices, brokers in the muni bond industry aren't held to the same duties, making it easier for them to buy bonds at low prices and sell them at high ones.
This can leave many investors vulnerable to fees and pricing that they should be protected from. For example, The Journal cites an example of one Massachusetts man who sold bonds promising a 5% yearly interest from his home state in two lots at $100K each in July 2013. The next day, he sold the same amount of bonds to investor at $1060/bond—making about $112,000. Municipal Securities Rulemaking Board records show that for that month, brokers in Massachusetts sold $1 million in state bonds to investors with a 3% average markup than what they actually paid—that’s a $30,000 profit.
MSRB is reportedly working with the Securities and Exchange Commission, which supervises it and establishes industry rules, and the Financial Industry Regulatory Authority, which enforces the rules, to deal with market structure issues. It was just last month that MSRB proposed its first best-execution rule for transactions involving municipal securities. This would require that municipal securities dealers look for the most favorable price when making trades for retail investors.
Also, today, the Securities and Exchange Commission announced that it wants underwriters and municipal borrowers to report their own violations in exchange for not having to pay stiffer penalties related to investigations. The agency unveiled an enforcement program that would provide standardized settlements for banks and borrowers that report municipal bond violations.
The regulator is tightening its enforcement against local and state governments that borrow in the municipal bond markets so that investors are protected form misleading or insufficient disclosures. Late last year, the SEC fined a district in Washington State for defaulting on bonds for an ice hockey rink. That was the first time the agency ordered a municipal borrower to pay a fine.
SEC Asks Municipal Bond Sellers to Report Disclosure Breach, Bloomberg, March 10, 2014
MSRB PROPOSES TO ESTABLISH FIRST BEST-EXECUTION RULE FOR MUNICIPAL SECURITIES TRANSACTIONS, MSRB, February 19, 2014
Muni Bond Costs Hit Investors in Wallet, Wall Street Journal, March 10, 2014
More Blog Posts:
Puerto Rico Senate Votes to Sell $3.5B in Bonds, Stockbroker Fraud Blog, February 28, 2014
Three Ex-GE Bankers Convicted of Municipal Bond Bid Rigging Are Set Free, Institutional Investor Securities Blog, December 12, 2013
Municipal Bond News : SEC Offers Small Entity Compliance Guide, MSRB Puts Out Video on Issuance Process, CFTC Offers SEF Regulatory Guidance, & Lawmakers Consider SIPC Reforms, Institutional Investor Securities Blog, November 21, 2013