US fiduciary duty rules: a Labored delivery

Seismic changes rattle the market, but structured products could stand to gain

annuitiesMost annuities will be ineligible for exemptions from new fiduciary rules in the US

As hastily written rulemakings go, the US Department of Labor's (DoL) new fiduciary standards take some beating. The rules – which effectively bar intermediaries servicing retirement accounts from receiving commissions that could create a conflict of interest – were in stasis for five years amid a well-publicised spat between the DoL and the Securities and Exchange Commission.

That changed suddenly last April, when the DoL – at the behest of President Barack Obama – issued a fresh draft proposal, firing the starting gun on a year of frantic comment and redrafting before the rule's final publication on April 6 this year. The market now has a year to implement it.

The outgoing administration's efforts to railroad the rules through ahead of a regime change early next year are obvious enough. But the breakneck pace at which the rule has been drafted, and the speed at which it is expected to be implemented, has rightly set alarm bells ringing.

"Every step this DoL process has gone through, it has gone through faster than almost any other federal rule in history in light of the size and complexity of the project," Kent Mason, a partner at law firm Davis & Harman, tells

Seeking to protect investors is not an ignoble aim; establishing consumer confidence and trust in any market, financial or otherwise, is crucial to its healthy functioning. The trouble is that when regulators write rules in a hurry, they tend to make mistakes.

When the dust has settled, the US structured products industry might well have cause for quiet celebration; the real loser amid the changes looks set to be the US annuities market

Already, it seems certain the rules will be detrimental to clients deemed to have low dollar value that are currently serviced on a pay-as-you-go basis by brokerage accounts. These clients may be forcibly migrated to advisory accounts, raising costs for end-investors and creating operational and legal headaches for advisers, brokers say. Some may be cut off altogether.

Another knock-on effect of the rules – intentional or not – may be further consolidation among broker-dealers. "For some of the smaller commission-only brokers, the writing's probably on the wall," says one New York-based structured products lawyer. Few broker-dealers want to discuss the impact, but many privately talk of setting up dedicated "war rooms" to run through the impact of the changes on a client-by-client, account-by-account basis.

Issuers say the impact on them will ultimately depend on the number of retirement accounts in their client mix – but all are monitoring the seismic changes required within their distribution networks carefully.

Yet when the dust has settled, the US structured products industry might well have cause for quiet celebration; the real loser amid the changes looks set to be the US annuities market. While variable annuities (VAs) had long been singled out for greater scrutiny by the DoL, fixed indexed annuities (FIAs) were also caught in the final scope of the rules.

VAs and most FIAs will also be ineligible for exemptions that permit the sale of some relatively vanilla products on a commission basis under certain circumstances – arguably putting less complex structured products at an advantage when it comes to selling to retirement accounts.

The rulemaking will also subject sales of mutual funds to the same fiduciary standards – a move welcomed by the structured products industry, which has long complained that the size of the US mutual and exchange-traded funds lobbies mean they get an easier ride from regulators than equivalent rules impacting the structured products market.

As one New York-based head of structured products sales puts it: "The two main reasons people give for not buying structured products is that they are complex and include a lot of fees, yet neither of those things is true. If we have advisers that have a fiduciary duty to actually look at structured products fairly, they might realise they are a lot less complex than a VA, and way cheaper than an exchange-traded fund that will charge you 70 basis points per annum for the rest of your life."

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