New Rule Requires Disclosure of Costs In Muni Bond Transactions

muni bonds bigstock 187420153One of the primary disadvantages to investing in individual municipal bonds is cost. “Markups” on individual muni bonds can be large. The lack of transparency of these costs made it very hard for an individual investor to quantify trading expenses, however, a new rule took effect on May 14, 2018 requiring more transparency for muni bond transactions.

While this rule should make it easier to see the costs in implementing an individual muni bond portfolio, we don’t believe that it takes away any of the advantages of investing in municipal bond funds. (To read about municipal bond funds vs. individual bonds, please click here.)

The new Municipal Securities Ruling Board (MSRB) rule, approved by the SEC, went into effect on May 14, 2018. This rule requires broker dealers to disclose “markups” on most municipal bond trades to individual investors. It is designed to provide transparency on trading costs of individual municipal bonds. A “markup” is similar to the bid/ask spread for equities and is the difference between the price that the dealer buys or sells the bond and the price that the dealer sells it to or buys it from the investor. Prior to this rule taking effect, it was very difficult for individual investors to estimate the costs associated with trading individual bonds. The new rule will help investors assess their true transaction costs.

There is some concern that reduced dealer participation may result in reduced liquidity in the muni market and some dealers feel that the rule is unfair because it only focuses on cost and doesn’t consider the quality of the transaction. However, we believe that increasing transparency through required disclosures is good for investors. This rule may help investors to realize that a municipal bond fund manager, in many cases, can more efficiently create a muni bond portfolio that helps them achieve their financial goals by lowering costs and increasing risk adjusted returns.

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