Effective May 14, 2018, new regulations will be adopted aimed at increasing the transparency of bond pricing. The new rules require dealers of corporate, municipal and agency bonds to clearly disclose bond markups and provide retail investors with relevant price comparisons.

Although this initiative was spearheaded by the Municipal Securities Regulatory Board (MSRB) to cover municipal bonds, the Financial Industry Regulatory Authority (FINRA) has been working in tandem with the MSRB on language that covers corporate and agency bonds as well. Ultimately, the two regulatory agencies came up with similar sets of rules approved by the Securities and Exchange Commission that will be unveiled on the same timeline.

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As retail investors discover the real cost of owning individual bonds, we believe these regulatory changes will strengthen the case for both fixed income exchange-traded funds (ETFs) and active fixed income investment managers.

What are bond markups?

When selling bonds, a dealer may acquire the bonds at one price and then sell them for a higher price as compensation for the dealer’s services. Markups represent the spread between the price paid for a bond and the price the dealer receives when selling the bond.

Seeing the need to “enhance the transparency of costs associated with municipal securities transactions,” in November 2016 the MSRB amended existing Rules G-15 and G-30, which cover confirmation, clearance, prices and commissions. Working in concert with the MSRB, FINRA drafted disclosure requirements that are “materially the same” as the MSRB’s.1 The rule changes for both agencies take effect on May 14 and target non-institutional investors.

What has changed?

1. Increased disclosure around bond markups

In a nutshell, the new rules require bond dealers to disclose any markups (or markdowns) on bonds bought and sold to retail investors on the same day. Markups and markdowns must be expressed both in dollar terms and as a percentage of each bond’s prevailing market price.

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