Sept. 3 (Bloomberg) -- Municipal bond regulators have a message for bond dealers: We're watching you.

The message is contained in two legal documents filed last month; the first, a complaint by the National Association of Securities Dealers, and the second, an opinion by the Securities and Exchange Commission. Both concern municipal bond prices.

This is an area of the municipal market that seems desperately in need of guidance, as evidenced by the wide price disparities that turn up every day in the Municipal Securities Rulemaking Board's transaction reports.

There are no standards for prices in the municipal market. The MSRB, which oversees the market, has a rule, G-30, which says that a bond's price should be ``fair and reasonable, taking into consideration all relevant factors.''

The MSRB this summer was supposed to release a new interpretation of the rule on what constitutes fair pricing. The board hasn't yet done so. Maybe it will this fall.

Until then, the NASD complaint and the SEC opinion both show what regulators are thinking about the subject. What could be more important for bond buyers than the prices they pay for their securities?

Fair

Both documents contain the words ``markups'' and ``markdowns,'' and both carry tables showing transactions, with the price a bond dealer paid for a particular security and the price at which he sold the same security. For our discussion, further detail is irrelevant.

The six-page NASD complaint has an accompanying table listing 15 transactions.

The case boils down to two sentences: On four sales, ``the transactions were executed with markups ranging from 7.068 percent to 9.571 percent.'' On 11 sales, ``the transactions were executed with markups ranging from 10.685 percent to 27.090 percent.''

Such markups aren't ``fair and reasonable,'' says the NASD.

To put this a little more starkly, the NASD says it's not fair and reasonable to buy a municipal bond for 75 cents on the dollar and sell it for 93 or 95 cents on the dollar, or to buy bonds at 106.88 and sell them for 114.43, or to buy bonds at 102.50 and sell them for 110.50. The NASD didn't elaborate in its complaint.

Reasonable

The SEC complaint, at 25 pages, contains a lot more information, and features 68 footnotes. The story line is approximately the same, although the numbers are smaller.

The dealer in question charged markups ranging from 1.42 percent to 5 percent. He charged markdowns of 3.02 percent to 5.64 percent.

An expert witness examined each of the transactions, and concluded ``these markups and markdowns substantially exceeded accepted industry practice.''

One particular bond issue was bought from a customer at a price of 101.89, and sold to another customer at 106.29, a 4.32 percent markdown. The more appropriate markdown, the witness said, would have been .5 percent to 1.5 percent.

Perhaps the most interesting bit in the whole complaint is contained in footnote 45, which explains how we got here.

``In 1980, the MSRB proposed establishing a pricing guideline for municipal securities of `1 point to 2.5 points,''' says the footnote. ``After receiving comments on the proposal, the MSRB determined not to set any numerical guideline. In a 1980 Report on Pricing, the MSRB concluded that such a guideline `would not be feasible' because of `the heterogeneous nature of municipal securities transactions and municipal securities dealers.'''

The SEC agreed with the MSRB's approach. To focus on particular percentages ``might encourage charging markups as high as the specified figure.''

Someone's Watching

Christopher Taylor, the executive director of the MSRB, commented on the use of the term markups and markdowns earlier this year. ``It is an equity market term applied to the difference between the price quoted by a market maker and the price sold to a customer,'' he said.

``We do not have quoted markets, nor do we have market makers, thus the term has no meaning in our market,'' said Taylor.

In May, the MSRB said it was concerned about the wide price disparities that were showing up in the transaction reports, and intended to send out a notice interpreting ``fair and reasonable'' pricing.

Until it does, we have the NASD complaint and the SEC opinion. The documents show that someone is watching. They also show that that someone has the key to the weird pricing disparities that show up in the MSRB's transaction reports, and intends to do something about it.