Frequently Asked Questions as interpreted by Keith Poniewaz, Director of International Advisory Services at Walkner Condon Financial Advisors
This week, Charles Schwab announced that it will no longer be selling Exchange Traded Funds or Exchange Traded Notes to clients who are resident in the E.U.: “Beginning September 19, 2019, Schwab clients who are residents of the E.U. will no longer be able to purchase U.S.-registered exchange-traded funds (ETFs) and exchange-traded notes (ETNs)…This restriction results from regulatory changes and affects all residents of the E.U.”
As we noted back in February 2019, this is unsurprising and we have been preparing our clients for this, as Schwab has been a hold-out on these regulatory restrictions. Other brokerages which have worked or work with expats started complying with these restrictions as early as last January. The restrictions are related to MiFID II, which are sweeping regulatory changes to the financial industry. These particular regulations affect what are called PRIIPs (or Packaged Retail Investment and Insurance Products) and KIIDs. As we have written on and been cited on these regulations extensively in order to help investors understand their options, we’ve provided the following FAQ as a service along with links to our relevant white papers and articles. In particular, readers should look at our white paper “Are you KIDing Me? PRIIPs, KIDs and new obstacles for Americans Abroad” and a previous and more technical FAQ on the subject “It’s 2019, Do You Know Where Your KIDs Are?
Q: WHO DO THESE REGULATIONS AFFECT?
Any investor residing in the European Union, American or otherwise.
Q: IS THERE A PLACE I CAN READ MORE ABOUT THE REGULATIONS AND HOW THEY WORK?
We have been warning Americans abroad about this possible complication for quite some time, and we’ve written a number of blog posts on the topic since January of this year:
We’ve also published articles on the topic:
Q: WHAT DOES THIS MEAN FOR MY ACCOUNT?
First, there is no need to panic– any existing positions you hold will be maintained. Your account will not be closed. Everything will remain as is. However, going forward there will be certain restrictions on what you can buy and sell:
As Schwab themselves put it in their letter:
You will be able to maintain any existing U.S. ETF or ETN positions you hold, but you will not be able to purchase more.
Dividends can no longer be reinvested in U.S. ETFs or ETNs.
You may liquidate U.S. ETFs or ETNs, but you will not be able to repurchase them.
Q: WHY ARE THESE PARTICULARLY ONEROUS ON AMERICANS?
While European-based clients can now buy select UCITs (the EU equivalent of ETFs), these are considered Passive Foreign Investment Companies in the United States and are taxed at an extremely high rate if they are held in taxable brokerage accounts (more on that in a blog post by The CPA Journal). Additionally, the filing requirements are quite substantial. More details about PFICs can be found in our Expat Investing Guide.
Q: MY ADVISOR SAID THAT SCHWAB ISN’T EU-REGULATED AND SHOULDN’T BE AFFECTED BY THESE RULES?
First, Schwab is EU-regulated. They register with the Financial Conduct Authority in the UK. Moreover, these regulations are “extra-territorial,” which means that it doesn’t matter where the company performing the business is registered, simply that they are helping a client in the European Union. See the insights of several top international law firms and investment banks who note that the law has extra-jurisdictional reach: KL Miller; Morrison Foerster, Brown Brother Harriman amongst others.
Q: MY ADVISOR SAYS THEY SHOULDN’T BE AFFECTED BECAUSE THEY DON’T HAVE TO REGISTER IN THE EUROPEAN UNION?
It is important to note that this regulation applies to where the client resides and doesn’t exempt Advisors: as the Financial Conduct Authority’s website indicates in their notes on the regulations, it doesn’t simply apply to brokerages or custodians, but anyone offering packaged investment products in the European Union: “The KID Regulation applies to all manufacturers (or remanufacturers) and financial intermediaries (including advisors) who distribute ‘packaged retail and insurance-based investment products’ (or PRIIPs) which are invested in by retail clients.” It is uncertain as to whether there are carve-outs for Registered Investment Advisors (RIAs).
Q: WHAT CAN I INVEST IN?
First, investors can continue to purchase individual securities in both the U.S. and abroad. Thus, a simple solution is to assemble a diversified portfolio of individual stocks and bonds. There are a variety of methods of doing this. We have discussed the various options in a podcast, “The Future of Taxable Investing.” Additionally, we have discussed the options available to Americans abroad in a blog post perhaps inopportunely titled “More than One Way to Skin a Cat.” Finally, we recently published a post regarding SMAs as the best tool for Americans investing abroad since it allows them more precise tax management, helping them reduce their significant tax bills.
Ultimately, Americans should investigate our white paper on investment strategy for Americans abroad.
Q: SHOULD I CONTINUE WITH SCHWAB AS MY CUSTODIAN? MY CURRENT ADVISOR?
We can’t say before discussing your situation and what you would like to accomplish. Set up a no-cost, no-obligation appointment with us to explore your options.
Here is a link to our disclosures.