Securities Law

Professor: Transparency Hasn't Helped Retail Buy New Bonds

ALEXANDRIA, Va. — Regulatory efforts to promote municipal market transparency have not helped reduce prices that retail investors pay for newly issued munis, according to study of muni bond trades by University of Notre Dame finance professor Paul Schultz.

Schultz was among three panelists who spoke Thursday morning at the National Association of Independent Public Finance Advisors’ annual meeting here. Other panelists discussed the effect of interdealer trading on retail prices and argued that issuers can take steps to help ensure their bonds reach retail investors efficiently and at fair prices.

Also speaking at the conference was Dave Sanchez, an attorney-fellow in the Securities and Exchange Commission’s office of municipal securities, who told attendees that the muni office now reports to directly to SEC chairman Mary Schapiro and its top goal is to finalize the definition of municipal advisor.

The Municipal Securities Rulemaking Board’s new board chairman Jay Goldstone also made comments, as did MSRB executive director Lynnette Kelly, who said the board may consider assessing fees on MAs and other regulated entities.

During a morning session, Schultz told attendees that he has examined new-issue municipal bond trades between 1999 and June 2010 in order to determine the effect of transparency on retail prices.

He paid particular attention to dealers’ markups during the two years before and after Jan. 31, 2005, the day the MSRB began requiring muni dealers to report most trades to its Real-Time Transaction Reporting System within 15 minutes of execution. The data included some 125,000 trades and more than one million individual bonds.

Schultz said data shows that many muni bonds “pass through five or six dealers on the their way to retail customers,” and that “every one of the dealers adds a little bit of a markup.”

The size of those markups were similar before and after the MSRB’s real-time reporting requirements. “Transparency did not have a huge impact,” said Schultz, adding that he conducted the study independently through Notre Dame.

Real-time reporting, however, did reduce the volatility in retail prices, he said. In other words, different retail investors are now paying similar prices for the same bonds on the same day.

Schultz said his results will be published in the Journal of Financial Economics early next year.

The MSRB’s Kelly declined to comment on Schultz’s report, noting she hasn’t examined the results. But she said a number of studies show transparency benefits retail investors.

Among those is a study by Babson University finance professor Eric Sirri, who the MSRB commissioned last year to examine the impact of transparency on pricing of secondary-market securities. Sirri, who formerly headed the SEC’s trading and markets division, said in August that preliminary results indicate “trading costs fell when transparency came to the bond markets.”

Another speaker, Johan Rosenberg of Blue Rose Capital Advisors, said issuers should do more to ensure bonds reach retail investors at fair prices. He said issuers should understand how bond sales are structured and may want to tell underwriters that they will be held accountable for how bonds are distributed.

Rosenberg said issuers and financial advisers should use technology and the Internet to more efficiently distribute bonds to retail buyers.

The SEC’s Sanchez later addressed attendees, telling them that the commission’s muni office now directly reports to the SEC chairman, as required by the 2010 Dodd Frank Act. The SEC’s muni office was created in 1995 and reported to the chairman until 2000, when it moved under the division of trading and markets.

Sanchez, who noted that his opinions do not necessarily reflect those of the SEC, said that four commission officials were between the office and the chairman under the old reporting structure.

“It made it more complicated to advance the agenda of the office,” he said.

The muni office currently has four staffers, but Sanchez said it could hire more employees.

Sanchez said the primary priority of the office is to complete a final definition of municipal advisor, which has been in the works since late 2010. Market participants have been frustrated by the SEC’s lack of action on the rule, noting that non-dealer affiliated MAs are not regulated.

“It is the highest priority of the office, and my highest priority,” Sanchez said of the MA definition.

The MSRB’s Kelly and Goldstone, chief financial officer and chief operating office of San Diego, addressed attendees during lunch.

Kelly discussed the board’s budget, which she said is mostly funded by assessments on dealers. She said the board “has plans to diversify our revenue stream” and will consider assessments on MAs and dealers involved in 529 plans, which also are regulated by the MSRB.  In addition, the board may create new subscription packages for online EMMA trade data, Kelly said.

One attendee asked Kelly and Goldstone if the MSRB would expand its public outreach efforts for issuers, noting that some small issuers have little familiarity with the board or its rules.

Outreach is key to the board’s work, Kelly said, but she noted that the MSRB has limited staff and resources. She said the board will continue to make more educational  resources available online.

Goldstone discussed recent improvements to EMMA, including the addition of yield data and the new Trade Monitor, which allows issuers to download trade data. He also reviewed regulatory changes, including new rules restricted dealers from using the term “not reoffered” or NRO in communications.



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