Americans abroad who have – over the past several years – seen their accounts closed or their access to mutual funds restricted will be forgiven for thinking: “Oh no, not again,” when they learn that another regulation – this time concerning Packaged Retail Investment and Insurance Products (PRIIPs) – is going to increase the difficulty of their investing lives.
The world of ETF investing became complicated as of January 1st, 2018, when a new regulatory behemoth started affecting the dealings of European-based U.S. investors: that of the European Union’s Packaged Retail Investment and Investment Products (PRIIPs) guideline. These rules have required all investment products (including U.S. ETFs but excepting UCITs until 2020) to produce a Key Information Document or KID for EU-domiciled “retail” investors. So far no U.S.-based ETFs have produced KIDs. PRIIPs and KIDs are part of the comprehensive regulatory reform known as Markets in Financial Instruments Directive (MiFID) II, this directive has “extra-jurisdictional reach,” which means the headquarters of where the products are being produced doesn’t matter. The location of the brokerage or custodian doesn’t matter. The location of the financial advisor handling the products doesn’t matter. The only thing that matters is that investors have an address in the EU.
So far, no U.S. manufacturers of U.S. traded ETFs (such as Vanguard) have produced KIDs and therefore they are prohibited from selling their ETF in the European Union. European Union residents may no longer buy U.S. ETFs.
However, not all brokerages, custodians and advisors are handling these items in the same way and some have reacted more quickly than others. That said, these regulations will soon affect all U.S. ETFs no matter where they are traded. However, as with any cross-border compliance situation, investors need to understand how they are affected and develop a plan to handle the situation.
Below are several frequently asked questions:
Q: The address of my accounts is in the United States, but I spend time in Europe. Will I be affected?
A: No. This only affects EU residential retail clients with EU addresses.
Q: I use a U.S. brokerage but live in Europe. Will I be affected?
A: Yes. Several U.S. brokerages who continue to provide services to European clients have already indicated that they will not continue to sell ETFs to their European resident clients because the law has an “extrajurisdicitonal” reach (for example, TD Ameritrade). Moreover, several U.S. brokerages and custodians are registered with European authorities such as the United Kingdom’s Financial Conduct Authority (for instance, Charles Schwab, which has a London office and is FCA number Firm Reference Number 225116 or Interactive Brokers, UK which is FCA register entry number 208159) and would be affected even if the law didn’t apply extra-jurisdictionally. Finally, 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.”
Q: Is this fearmongering? Why hasn’t my current advisor mentioned this?
A: It is not. 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.
Information on PRIIPs has made its way stateside slowly, with many firms not implementing the restrictions right away as they worked with legal counsel to investigate how the laws have applied. While not all firms are responding with equal speed, eventually they will have to respond– likely by prohibiting the sale of U.S. ETFs to their EU clientele.
Q: Will I have to sell all of my current ETF holdings?
A: No. Investors may continue to hold their U.S. ETFs; however, they may not be able to purchase new ETFs going forward. Consequently, if you are in a situation where you are only drawing down your account, you may be able to manage withdrawals and maintain your risk profile with minimal difficulty.
Q: What should I do?
Investigate it yourself (including reading our white paper on the topic and visiting the various websites mentioned in this article) and speak with an experienced financial advisor to develop a long-term plan to handle this change.
Set up a no-cost, no-obligation appointment with us to explore your investment and financial planning options.