SEC’s Investor Advisory Committee Urges Full Transparency on Bond Trades

The Investor Advisory Committee (IAC) of the US Securities and Exchange Commission (SEC), chaired by Kurt Schacht, JD, CFA, managing director of Standards and Advocacy at CFA Institute, unanimously passed recommendations to enhance information for the bond investor market this week.

“For too long, the fixed-income market has had a veil of secrecy around fees, bid-offer spreads, and the mark-ups charged by broker/dealers,” Schacht said. “Retail investors in particular are looking for some sunshine.”

The IAC recommends that the SEC engage with the Municipal Securities Rulemaking Board (MSRB) and the Financial Industry Regulatory Authority (FINRA) to require dealers to provide much more detail to retail investors so they can see the full transaction costs of purchasing or selling a bond before they purchase or sell a bond. This pre-trade transparency would be in addition to the information they currently receive on price and yield.

The 22-member IAC approved the recommendations after several industry presentations and meetings with SEC staff and others on how best to improve bond market transparency.

Can Regulation S-K and Broader Disclosure Efforts Be Improved? 

In other action, the IAC also drafted a letter responding to the SEC’s Division of Corporation Finance concept release on “Business and Financial Disclosure Required by Regulation S-K” and broader work on disclosure effectiveness. (We blogged about the concept release in early May and issued a member alert in April). The following are key points that the IAC makes in the letter:

• The current disclosure for US issuers overall is appropriate and a source of strength for the US capital markets. The current system greatly benefits retirees, pension funds, endowments, and households that are directly and indirectly market participants.
• The Disclosure Effectiveness Project will find cost-effective ways not only to eliminate redundant and useless disclosure but also to increase the disclosure of areas critical to investor understanding of the financial risks associated with the companies in which they invest.
• There needs to be an increase in focus on proxy-related disclosure enhancements in such areas as executive compensation and corporate governance under Regulation S-K.

The IAC’s letter notes a series of overarching principles that should be “top of mind” as they relate to the Disclosure Effectiveness Project as well as addresses other considerations, including manner of information delivery, layering disclosure, and structured data and quality.

How Work of IAC Dovetails with That of CFA Institute

The mission of the IAC complements the work we do at CFA Institute on behalf of our members, investors, and the investment management profession, Schacht said. “We believe it is essential to maintain and improve the transparency of information provided by registrants as well as to ensure that disclosure requirements are updated as markets and technology evolve. Based on our years of advocacy efforts and outreach to investors, CFA Institute published “Financial Reporting Disclosures: Investor Perspectives on Transparency, Trust, and Volume” in late 2013, providing investor and member views on improving disclosure effectiveness for investors. In late 2014, we specifically commented to the SEC in anticipation of this concept release and provided our member and investor views on key issues addressed in the release. Both our letter and our disclosure report are referenced extensively in the concept release.”

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