Excessive Markups/Markdowns – Municipal Securities

“deal fairly and must not engage in any deceptive, dishonest, or unfair practice”

Brokerage firms and financial advisors are required to refrain from charging excessive markups and markdowns for the purchase and sale of municipal bonds to investors. The Municipal Securities Rulemaking Board (MSRB) establishes rules relating to the determination of reasonable commissions, markups and markdowns for the purchase or sale of municipal bonds. MSRB Rule G-17 states that dealers in municipal securities, must “deal fairly with all persons and must not engage in any deceptive, dishonest, or unfair practice.” According to MSRB Rule G-30, Brokerage firms must supervise its financial advisors to whether a retail investor has paid an excessive markup or markdown for the purchase or sale of municipal bonds certain factors should be taken into consideration, including:

  • availability of security;
  • expenses related to execution of trade;
  • value of the service rendered to customer;
  • other compensation received by the financial brokerage firm; and
  • overall profits derived by financial brokerage firm.

As a general rule, the MSRB holds that transactions in municipal bonds are considered to have been executed at a reasonable price, if the bond’s yield on the transaction at issue is comparable to other municipal securities of a similar:

  • Credit Rating Quality;
  • Maturity Date;
  • Call to Maturity Date;
  • Coupon Rate; and
  • Transaction Block Size.

According to MRSB Rule G-17, brokerage firms that act as in the capacity as an Underwriter of municipal securities have a duty to deal fairly with bond issuers and investors (both retail and institutional). Historically, retail investors represent a significant portion of the total investments made in tax free municipal securities. MSRB interpret the conduct rules applied to retail investors to include disclosure of all material information concerning a specific municipal bond, at or prior to a purchase or sale that is reasonably accessible from securities industry sources. The required disclosures include: a complete description of security features; issuer information concerning credit quality and economic information related to the issuer that is necessary to fully assess the risks of the municipal security and determine its reasonable price.

Brokerage firms are generally not required to disclose on a confirmation the markup or markdown on a municipal bond trade. However, these charges can significantly impact a client’s investment return. Frequent trading in municipal bonds can be evidence of churning when a financial advisor engages in trades simply to earn greater commissions.

KlaymanToskes can help you determine whether an investment loss is the result of excessive markups and/or markdowns in municipal securities by your brokerage firm and financial advisor. If an investor suffers losses as a result of excessive markups and/or markdowns in municipal securities they may be able recover their losses in a FINRA arbitration claim for damages.

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