Muni Bond Markups: Soon No Longer a Secret for Some Trades

If a dealer had a bond in inventory and then sells it to a customer, that markup won't be disclosed. Nor will it be when a customer buys bonds issued on the first day of an initial offering.

Still, the requirements will affect a sizable number of trades. The MSRB, which writes regulations for the market, said it may affect more than 8,000 retail transactions each day.

The exceptions may bring some initial confusion, as markups are disclosed on some trades but not others. Brokers will need to spend time explaining the discrepancy and how the markups are calculated, said Patrick Luby, an analyst who follows the municipal securities industry for CreditSights Inc. And determining the market price used to gauge the markups can be complicated depending on when the trades occur.

"Asking them to take more time to explain a municipal bond trade isn't a welcome proposition, because they're already stretched pretty thin," said Luby. Time pressures on brokers may also lead them to pitch clients fee-based accounts, he said.

Municipal-bond fund managers have welcomed the rule, anticipating that new clients may emerge when they see how costly it can be to build a portfolio of sequentially maturing bonds — a practice known as laddering — on their own.

"The perception up to this point is that laddering a municipal portfolio is 'cheaper' than hiring an active manager," said Andrew Clinton, founder of Stamford, Connecticut-based Clinton Investment Management, which oversees $430 million of municipal bonds. "The clients never saw the actual transaction costs and assumed, inappropriately, that they were getting that service for free."

Gurtin Municipal Bond Management charges 0.14 percentage point to ladder a portfolio, depending on the strategy, said chief executive officer, Bill Gurtin. His firm oversees $14 billion municipal assets.

"Not only are you getting proper execution and proper value, you're also getting ongoing surveillance," transparency of fees and returns, and a manager that, unlike a broker, is legally required to act in a client's best interest, said Gurtin.

"It's hard to argue that the resources behind a professional manager aren't substantially greater than behind a broker buying bonds on behalf of a client," he said.