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November 21, 2016 at 11:07 PM
Financial advisors who buy and sell individual bonds in the secondary market on behalf of their clients know all too well how difficult it can be to know exactly how much of the prices they pay or receive are pocketed by the firm on the other side of those transactions.
There are no commissions charged, as in the stock market, but markups and markdowns of a bond’s price ranging between 1% and 5%. They are hidden, built into the price an advisor pays when buying a bond or receiving when selling one. They are not disclosed.
That will change for some bond market transactions as a result of new rules from FINRA and MSRB (Municipal Securities Rulemaking Board) rule just approved by the SEC.
The new FINRA rule requires that a firm selling a corporate or agency bond to a retail investor disclose the markup from the prevailing market price if it bought the bond from another party that same day.
Similar disclosures are required when a firm buys a corporate or agency bond from a retail investor that it sells the same day.
Firms will have to include this information on the customer’s confirmation, with the exact time of the trade and a reference to trade-price data from TRACE, FINRA’s Trade Reporting and Compliance Engine.
The MSRB’s rule is similar to FINRA’s. Municipal securities dealers will be required to provide retail investors information about markups and markdowns when the sale or purchase of a muni bond involving retail investors occur on the same day as an offsetting purchase or sale from a third party.
