Retail investors buying municipal bonds may overpay for theirtrades because brokers aren't always required to disclose theircommissions, a member of the U.S. Securities and ExchangeCommission (SEC) said today.

Brokers who acquire bonds to fill an immediate customer ordershould be required to disclose how much they mark up the securitiesat sale, SEC Commissioner Daniel M. Gallagher said. Rules onlyrequire the broker to trade with customers at a “fair andreasonable” price, Gallagher said.

Gallagher's comments underscore how regulators are focusing onthe $3.7 trillion municipal bond market, where retail investorsconstitute a majority of participants. The Municipal SecuritiesRulemaking Board is weighing a proposal to require that brokersseek the most favorable prices for clients in the municipal-bondmarket, which lacks a centralized exchange.

“It is still common for investors to place corporate- andmunicipal-bond trades by calling their broker for a quote, withoutmuch insight as to whether they are receiving best execution and afair price,” Gallagher told the rulemaking board's annualregulatory summit in Washington.

Gallagher also criticized state and local governments forunderstating the risk of their bonds by undervaluing pensionliabilities. Lax accounting practices used to estimate those futurepayments “can amount to a fraud on municipal bond investors,”Gallagher said.

“In the private sector, the SEC would quickly bring fraudcharges against any corporate issuer and its officers for playingsuch numbers games,” he said.

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