Members of the Bond Dealers of America (BDA) recently completed a 10-year retrospective survey on the cost of regulation and the associated impact to regional, middle-market, and small firms exclusively focused on the U.S. fixed income markets. Our members were asked to compare their firm’s legal and compliance costs from the beginning of the 2008 credit crisis to present.
The survey presents a distinctive image of the rising cost of service to the investor as the increased cost of regulations and examinations have ultimately been passed on to the end user.
- The results of this survey can be found here.
Middle-Market Dealers Report Steep Regulatory Costs
By: Kyle Glazier
WASHINGTON — Bond Dealers of America members have spent an average of more than $17 million on regulatory costs since the beginning of the 2008 credit crisis, according to a BDA member survey.
The survey, conducted from December 2018 to February 2019, was made available to The Bond Buyer this week. BDA members, primarily middle-market and regional broker-dealers, reported spending about 20% more money and time on regulatory compliance than they did before 2010.
“The goal of this survey is to paint a picture on how burdensome and onerous” fixed-income regulation has become in the years since the crisis, BDA said.
Muni market dealers, like other capital markets participants, have had to adjust to a raft of new regulations over the past decade. The 2010 Dodd-Frank Act led to the creation of an entirely new municipal advisor regulatory regime, including new MSRB rules governing firms and individuals who provide bond advice to state and local governments.
In addition, the past 10 years have also seen new best execution requirements for dealers and a mandate that they provide certain customers with disclosures of the markups and markdowns on a transaction.
A Securities and Exchange Commission enforcement program, the Municipalities Continuing Disclosure Cooperation initiative, also sent underwriters scrambling to review several years’ worth of offering documents and continuing disclosure by the issuers they underwrote for, in an effort to determine whether any investors might have been misled about issuers’ compliance with continuing disclosure requirements.
According to the survey, over 70% of BDA members reported that compliance costs have increased by 20% or more since the Dodd-Frank Act. The average firm reported that over the past 10 years it has spent $9.9 million on staff, $6.2 million on technology $1.4 million on legal and outside counsel, and $300,000 in fines.
BDA member firms reported spending most of their compliance costs on new staff and technology investments.
Compliance personnel have increased by an average of three persons at each BDA member firm since 2008, according to the survey, with over 30% expecting to hire between one and three more compliance personnel this year. On average, new rule implementation has increased the firm workload by 15 hours per week, per person at BDA member firms, those firms said, and 20% of BDA members said they have spent $1million or more on legal fees associated with new rule implementation and/or examinations.
“There is less liquidity for investors and profitability for a regional broker dealer is terrible,” according to the survey. “The return on capital does not meet the risk required to operate a regional broker dealer.”
Regulators and others have pointed out that regulations put in place since the crisis have improved transparency for investors and particularly improved the quality of secondary-market disclosure. But data reveal attrition among muni dealers as mergers and exits from the business have piled up since 2009. The number of MSRB-registered dealers has fallen by almost one-third since then, according to an MSRB report released last year. There were 1,346 MSRB-registered dealers in 2017, down from 1,967 in 2009.