Bond Investors Must Prepare for Rate Spike: SEC’s Walter

SEC Commissioner Elisse Walter (left) addressed a number of top issues for the industry on Monday—chief among them the immediate need to educate bond investors about spiking interest rates, which are inevitable.

“We need investor education now before rates go up,” Walter told attendees at the Financial Industry Regulatory Authority’s annual conference in Washington.

During a session moderated by FINRA’s chief legal officer Bob Colby, Walter responded to questions from the audience of 1,000 attendees, made up primarily of chief compliance officers. Walter also gave her views on the pace of various SEC rules, including the agency’s fiduciary standard rule for brokers, the ban on general solicitation of private placement offerings and a rule on 12b-1 fees.

One attendee asked Walter to give her take on the “looming disaster for bond investors when interest rates go up.” In response, Walter said she agreed that most bond investors don’t understand how rising rates would negatively impact their bond portfolios. Investors “need to understand” how rates impact their bond portfolios “because they are making investment decisions today that will be impacted by that.”

Walter said that she continues to be “disturbed” by how the SEC has essentially “ignored” the fixed-income market. “The fixed-income market structure, or lack thereof,” which includes the municipal and corporate bond markets, is “hugely important to investors,” she said. “We tweak the equity markets constantly … but we have largely ignored the fixed-income markets” and how to make them better.

Walter added that she worries about bond investors’ inability to access price data on bonds. “If you are a retail investor and you choose to sell a bond, you don’t have a price discovery mechanism to look to—to make sure you’ve gotten a fair price,” Walter said. “We need more pre-trade transparency.”

As to the SEC’s rule to put brokers under a fiduciary mandate, Walter said she believes it’s time for the commission to “get to the nitty-gritty” of how the rule should take shape.

While using information culled from the latest round of public comments on the costs and benefits of a fiduciary rule will help the agency get there, Walter said that she hoped the second round of comments the agency receives will include more data, as the first set of comments have not.

Reiterating her support for a uniform fiduciary duty for brokers, Walter said she believed “the cost of brokers becoming fiduciaries is very low.”