Brokers would have to reveal how much they earn on bond transactions that involve retail clients under a US regulator’s plan for cracking down on inflated commissions.
The Financial Industry Regulatory Authority (Finra) proposal, if approved by the Securities and Exchange Commission, would force brokers to report markups on bonds they hold for no more than one day, according to a recent statement.
The requirement would add transparency as it will close a loophole that allows brokers avoid disclosing markups on bond sales, while commissions on stock trades have to be reported.
“Finra has found that some individual investors pay considerably more than others for similar trades,” Chief Executive Officer Richard Ketchum said in the regulator’s statement. “Providing meaningful and useful pricing information will assist customers in monitoring costs, promote transparency into firms’ pricing practices, and help enhance investor confidence.”
Securities regulators have struggled for decades to improve transparency in the bond market, where the majority of trades are still completed by telephone and most price quotes are never made public. Some retail investors pay markups that are more than 2 percent of the value of their investment-grade bond trade, according to Finra data.
Institutional investors on average pay much less — about .05 percent, according to data from MarketAxess, which operates an electronic bond-trading platform.
If the rule had been in effect early last year, its disclosure requirement would have covered 98 percent of all retail bond trades, Finra said in September. It won’t apply to trades between dealers and institutional investors.
The SEC and Finra began a campaign for the disclosure almost two years ago, after SEC Chair Mary Jo White told Finra and the Municipal Securities Rule making Board to draft a rule to protect the interests of the retail investors.
In the US, Finra is a private corporation that acts as a self-regulatory organisation (SRO).