Daily Agenda: Fiduciary Rule, Tax Inversion Regs Shake Up Financial Services

Treasury rules threaten M&A boom as Pfizer deal craters; Labor Department slaps retail advisers with fiduciary rule; German bond yields remain negative; Cruz, Sanders take Wisconsin.


Scott Eisen

Wall Street, already struggling with post-crisis regulations, capital requirements and litigation, is facing new challenges. The announcement of new Treasury regulations to curb tax inversions — mergers that result in U.S. companies relocating abroad for tax savings — has resulted in a breakup of the $160 billion merger between New York drug giant Pfizer and Ireland’s Allergan. After a record year in 2015 for both M&A volumes and advisory fees, the new regulations present fresh headwinds for investment banks, putting pressure on one of their most profitable businesses. Simultaneously, the decision by the Department of Labor to alter the sales process by deeming investment advisors as fiduciaries for retirement investment products may weigh heavily on Wall Street’s retail-investment units.

Brokers face new hurdles as fiduciaries. After years of debate, lobbying and infighting, the Department of Labor yesterday introduced what has come to be known as the fiduciary rule, regulations that raised the requirements for financial advisers overseeing retirement accounts in the U.S. By requiring advisers to higher fiduciary standards, the government aims to curb conflicts of interest. Policy analysts anticipate legal challenges to the new regulations as financial-services firms face roadblocks to traditional sales practices for investment products.

Cruz, Sanders secure Wisconsin. Both frontrunners in the Republican and Democratic presidential primaries in Wisconsin came away in second place yesterday night. Texas Senator Ted Cruz defeated real estate developer Donald Trump in the GOP contest. Commentators note that it will be difficult for Cruz to secure the full 1,237 delegates needed to win the party’s nod, but that Wisconsin’s win does make Trump’s path to the nomination more difficult. Meanwhile Vermont Senator Bernie Sanders won the state’s Democratic race, his sixth victory in seven recent contests. Both parties now face hotly contested primaries in New Jersey, New York and Pennsylvania.

German bond auction brings negative yield. An auction for two-year government bonds in Germany resulted in an average yield of almost –0.5 percent, a blow to confidence for inflation expectations in the euro zone. While still higher than the record lows of March, the inversion of European sovereign debt markets as investors cling to perceived safe harbors has caused multiple sellside analysts to conclude that the rally will continue as the European Central Bank’s quantitative easing program picks up steam.

Iceland’s prime minister steps down. Yesterday Iceland Prime Minister Sigmundur David Gunnlaugsson resigned in response to public outrage over exposure of offshore accounts used to avoid taxation linked to him. Gunnlaugsson is one of more than a dozen public figures around the world shown to have conducted tax-avoidance transactions in Panama after the International Consortium of Investigative Journalists released a massive leak of cosuments from a Panamanian law firm over the weekend.