Subject: File No. SR-MSRB-2014-01
From: Seth M. Yarmis

March 14, 2014

I am a very active and private investor, with over 25 years, in the municipal bond market.

I was reading the text of the proposed rulemaking combining Rule G-18, G-30, and G-17, plus incorporate existing interpretive ruling that would provide clearer guidance to securities brokers in pricing securities. From my perspective, I feel there are real issues in the pricing of municipal bonds by dealers. Spreads have widened over the last 4-5 years and at times have approached levels that I would describe as inappropriate and abusive.

I have watched over the years as the amount of information that is available to retail investors has significantly improved - from online access of the initial Offering Circular, immediate trade data, and access to the most current reported financial information by the issuer/obligor of the bond issue. Also, the addition the use of electronic trading platforms (such as BondDesk Trading) to view available bonds from many dealers in the secondary market provides an excellent way to compare bonds offered for sale. Electronic systems enhance the marketplace and reduce costs to municipal dealers and should result in lower spreads.

However, the biggest problem that I see in the Muni Market is that bond dealers at times either 1) offer prices inconsistent with recently trading activity, sometimes 6-7 points below recent trades of similar size or, 2) attempt to sell muni bonds with a markup of 5, 8, 10 points or more. I have complained to FINRA a few times when I see spreads of over 5 points, but only once so far have I seen any action taken (the broker attempted to sell the bond with a markup of about 15 points - CUSIP 57420VBK8 with a complaint number 20130384089 to FINRA).

How can a broker justify bidding to purchase at a price of 91.5 for a bond that has recently purchased by investors at just shy of 101? How can a broker get away with a spread of almost 8% on a 60,000 par transaction when average spreads for trading a particular bond has been 2.9% (a profit of almost $5,000 for holding a bond for a few days)? These are two recent examples I have seen in the last few months. Details will be provided if you would like.

I find it incredible that there seems to be no action taken by regulators to ensure that dealers are held to a high standard of fair pricing of municipal bond trades. Municipal bond spreads should be falling from when MSRB rule G-30 first came out. The availability of quality and price information has increased, communications and transaction costs have declined, trading volumes have increased, and the use of automated systems are now in place. Spreads for corporate bonds are about 0.8% on average and there is no reason why municipal bonds spreads should exceed this amount. The MSRB and FINRA has a responsibility to ensure that municipal bond pricing is fair and reasonable. Not just fair and reasonable to the brokers who generally receive high profits from municipal bond transactions. With the advent of improved secondary trading platforms, broker spreads should be falling as the cost of performing trades are small. Why shouldn't municipal bond trading using secondary automated systems be similar to stock transactions. That is individuals offer their bonds at a price within a certain price of previous transactions and buyers place orders to purchase bonds at a price until a computer is able to match buy and sell orders where both brokers receive a set fee to ensure that both parties are well informed of the transaction and that the price is not unreasonable for either party.


Seth M. Yarmis