Muni Customers Should Get Fair Prices, Says MSRB

The Municipal Securities Rulemaking Board (MSRB) has requested comments on a proposal to standardize the way brokers and dealers set market prices for municipal securities. At present, dealers determine prevailing market prices for securities, which form the basis on which they mark them up or down. These calculations influence how much the dealers are compensated and how much customers pay.

The MSRB's interpretive guidance, issued on April 21, says that a muni dealer will not buy or sell a security for its own account except at a "fair and reasonable" aggregate price (including any mark-down or mark-up) and taking into account all relevant factors. A "fair and reasonable" price, the guidance says, encompasses two principles: that the customer's price be reasonably related to the market value of the muni in the transaction, and that the mark-up or mark-down on a transaction not exceed a fair and reasonable amount.

The proposal, if put into effect, would harmonize the MSRB's methodology for muni transactions with that of the Financial Industry Regulatory Authority (FINRA) for other types of debt securities.

The municipal bond market is valued at some $3 trillion, according to the MSRB. At present, 1.3 million munis are outstanding. In 2009, there were 10.4 million trades, with $3.8 trillion in face value traded.

The MSRB's proposal is intended to ensure that retail investors get fair prices when buying or selling bonds, according to the organization's executive director Lynnette Hotchkiss. "You really have to do what you can to protect those people," Hotchkiss said in an interview with Dow Jones Newswire. "If retail investors don't think they're getting a fair deal, that could drive up borrowing costs for governments and there could be a ripple effect."

The MSRB's fair pricing rules caused a red flag to go up at the Securities Industry and Financial Markets Association. The organization issued this statement on April 21:

"The existing fair pricin rules for municipal securities are well understood and flexible enough to accommodate rapidly changing market conditions. SIFMA has concerns that the MSRB's proposed interpretive guidance on mark-ups for municipal securities may have implications on the willingness of firms to make markets and hold inventory. We will be reviewing the proposal in detail with our members and look forward to working with the MSRB on this issue."

The MSRB set a June 4 deadline for receipt of all comments on its draft interpretive guidance.

Michael S. Fischer (msf7@columbia.edu) is a New York-based financial writer and editor and a frequent contributor to Wealth Manager.

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