WASHINGTON — SEC member Michael Piwowar has asked the SEC's Office of Municipal Securities to work with him on proposals to improve price transparency in the market.

Piwowar talked about the request in remarks made to U.S. Chamber of Commerce members on Monday, telling them that there is ample opportunity for the SEC to improve the fixed-income markets by picking "low hanging fruit," such as potentially requiring the disclosure of markups and markdowns on riskless principal transactions.

Such transactions occur when a dealer almost simultaneously buys and sells securities, thereby taking on little or no risk that the market will move against the firm during that short time. The SEC's comprehensive 2012 report on the municipal market recommends that the Municipal Securities Rulemaking Board consider requiring dealers to disclose to customers markups and markdowns on riskless principal transactions.

Piwowar said in his speech that riskless principal transactions are "economically equivalent" to trades in which a broker dealer acts as an agent for a customer. Commissions on those transactions currently must be disclosed, he noted.

"Therefore, I have asked the staff of the commission's Office of Municipal Securities to work with me to develop a few proposals to improve how the fixed-income markets operate," he said.

Broker dealers have been opposed to such disclosures in the past.

In an interview following the speech, Piwowar said the muni market is of particular interest to him after scholarly research he did on bond market transparency during his time at the commission's Office of Economic Analysis (now called the Division of Economic and Risk Analysis)] as a visiting academic scholar on leave from Iowa State University and as a senior financial economist.

Piwowar left the SEC in 2008 and most recently served as the Republican chief economist for the U.S. Senate Committee on Banking, Housing, and Urban Affairs before rejoining the commission in August 2013 as the replacement for the departing Troy Paredes.

"The spreads in these markets are still quite high," Piwowar said, noting the disparity between the higher prices paid by retail investors compared with those paid by institutional investors. Piwowar said he wants to get ideas from the SEC's muni office staff as to some initiatives that the commission or the MSRB could take without having to tackle every recommendation from the SEC's 2012 report.

"I still think there are some easy issues we can tee up and get out the door," he said.

This is a good time for action because of the low interest rate environment, he added, and because bonds will become an increasingly popular investment with aging baby boomers looking for less risk.

SEC chairman Mary Jo White also spoke Monday and said the commission has made money market fund reform "a critical priority" to deal with in the "relatively near term of 2014." The SEC has proposed moving most MMFs to a floating net asset value from the current stable NAV of $1 per share. It also has proposed funds have liquidity fees and gates to discourage redemptions. The proposals are aimed at preventing runs on MMFs such as the one that occurred during the financial crisis in 2008 when the Reserve Primary Fund "broke the buck" and led investors to pull more than $300 billion from prime money market funds.

Under the SEC's proposed changes to its 2a-7 rules on MMFs, the floating NAV requirement would not apply to "retail" MMFs, which are defined as those limiting each shareholder's redemptions to $1 million per business day, and to funds holding U.S. government securities. It also would not apply to funds holding Treasuries and federal agency securities. Several lawmakers and muni market groups have said that municipal money market funds should be exempt from a floating NAV requirement, if one is adopted.

"We have received hundreds of letters on the proposals with a wide range of differing views that we are reviewing closely," White said.

Piwowar also spoke about MMF reform, telling the U.S. Chamber audience that he believes action is necessary but is not yet prepared to commit to a specific course.

"I have not reached any conclusions on which alternatives in the commission's outstanding rule proposal best address these investor protection concerns while preserving the benefits of money market funds for investors and the short-term funding markets," he said. "I will be working with commission staff over the coming weeks and months to evaluate the marginal benefits of the various alternatives — floating NAV, fees, gates, additional disclosures, etc. — and their associated costs."

Piwowar, however, expressed frustration that banking regulators may be stepping into SEC territory through the Financial Stability Oversight Council's involvement in studying MMF reform. The FSOC was created by the Dodd-Frank Act and is composed of voting members from the SEC, the Federal Reserve, the Treasury, and other federal agencies. It is tasked with identifying threats to the U.S. financial system.

"Instead of the FSOC spending time enabling bank regulators to encroach on the SEC's jurisdiction in securities regulation, where we have superior expertise, the council should focus on fulfilling its own mission of identifying threats to the financial stability of the United States," Piwowar said.

 

Kyle Glazier covers the securites beat and economic indicators for The Bond Buyer in Washington, D.C.

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