The board overseeing much of the U.S. municipal bond market is investigating whether prices charged and paid by brokers and dealers are fair to customers, according to a notice released on Wednesday.
The Municipal Securities Rulemaking Board (MSRB) may change the system of deciding the prevailing market price of bonds, which could affect broker and dealers' mark-downs and mark-ups, the statement said.
A mark-down is the difference between the prevailing market price of a bond and the lower price a broker-dealer pays a customer to buy it. A mark-up is the mirror opposite -- the difference between the market price and the higher price paid by a customer to the broker-dealer.
According to the notice, mark-ups or mark-downs must not exceed a fair and reasonable amount, and the total price a customer pays must be reasonably related to the market value of the security.
Liquidity in the U.S. municipal market can be thin at times, a problem that has recently grown worse as many dealers were made nervous by the credit crunch and have become reluctant to stock inventory and make markets. That, in turn, can put individuals who buy small lots at a disadvantage.
The board, which writes the rules for the market that the Securities and Exchange Commission enforces, is not addressing the size of the mark-ups and mark-downs, said an MSRB spokeswoman.
Instead, it is seeking ways to standardize how the prevailing market price is set.
The board would harmonize how the prevailing market prices for municipal securities are determined with the method the Financial Industry Regulatory Authority has created for deciding the market prices of other debt securities, according to the notice.
The existing fair pricing rules for municipal securities are well understood and flexible enough to accommodate rapidly changing market condition, said Leslie Norwood, co-head of the municipal securities division at the Securities Industry and Financial Markets Association.
SIFMA is concerned that the MSRB proposal may have implications on the willingness of firms to make markets and hold inventory, she said.
Right now, the MSRB is taking comments on the idea through June 4.
For much of 2010 the board, a self-regulatory organization made up mostly of bankers, has sought to offer more protections to bond buyers, following SEC Chairwoman Mary Schapiro's pledge to treat investors in the municipal bond market the same as those in the equities markets.
It has proposed that underwriters give priority to customer orders over their own orders or related accounts and is evaluating how to keep qualifying examinations for brokers and dealers up to date.
(Reporting by Lisa Lambert; Editing by Andrew Hay and Leslie Adler)