On May 15, 2018, the Municipal Securities Rulemaking Board’s (MSRB) new rule, G-15, was implemented requiring full disclosure to investors of the true price of a bond purchase. While trades in fixed income, or bonds, don’t involve a commission, the sales price typically includes a premium that is often undisclosed to the purchasing investor. The new rule forces brokerage firms to disclose the premium, or mark up. This is good news for investors, but bad news for brokerage firms that may feel exposed.
Since full transparency is at the forefront of our practice at True North, we find this new ruling to be a positive one, though there is certainly a contingent of market participants who are unhappy with this change. For example, now that broker-dealers are required to detail costs and markups, they can no longer hide fees at the expense of investors. We think this is likely to cause a shakeup in the bond market, including a renewed push for electronic trading and for investors to continue to shift their money into ETFs or other fee-based options. This new regulatory environment is also a good reason for bond traders to polish their resumes and make a clean break before their paychecks stop coming.
In examining the bond market, it must be noted to investors that our country has reached an all-time high in borrowing by the Federal Government, municipal entities, agencies, and corporations who have refinanced their balanced sheet with cheap debt as a result of the financial crisis. This has us concerned about the short-term repercussions for the fixed income market, and whether it can support additional dilution, MSRB Rule G-15, rising interest rates, and the likelihood of fewer bodies selling. Longer term, we hope to see more bonds traded electronically via an exchange, like their equity counterparts. This would create broader efficiencies and improve transparency for investors and advisors alike.
While the industry and individual states continue to battle over the Fiduciary Rule, MSRB Rule G-15 was passed and implemented courtesy of the SEC. As is always the case, we believe investors benefit from transparency. Along the way, we expect the bond market to become more efficient too.