Broker’s Profit From Muni Bond Sales Under Attack

On May 14, 2018 the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority issued a new rule meant to curb abusive sales practices by municipal and corporate bond brokers.  Brokers will have to disclose their purchase price when they buy bonds and sell them to retail customers a higher price later that same day.  The general rule is that these dealer “Mark-Ups” must be reasonable.  Mark-ups of 3% or greater will draw additional scrutiny from regulators but are not prohibited.  Some tax exempt bond issues have mark-ups of 4% or more.

While the method of disclosure through paper confirmations mailed to customers has been criticized as inadequate disclosure, over time customers should benefit from lower prices.  While this is good news for investors, this will be bad news for issuers.

Municipal and tax exempt bond houses are unlikely to accept diminished compensation without attempting to pass this profit loss on to issuers in some form of additional issuance costs.  Lower dealer mark-ups will lead to higher costs to issuers over time.

For a more detailed discussion of this new disclosure rule see the following Wall Street Journal article.  Starting Next Week You Can See Brokers Profits From Bond Sales