MiFID and Overseas Americans

More Difficult for Overseas Americans to Invest in ETF's

Several brokerage firms, including Charles Schwab made a change to the detriment of overseas Americans. It has now become difficult or impossible for some overseas Americans—especially those with lower incomes and savings amounts—to buy U.S.-listed exchange traded funds (ETFs).  In September, Charles Schwab, to the surprise of many of their European-based clients, announced that residents of the EU, including the U.K., would no longer be able to purchase U.S.-based ETFs, it is necessary for them to have the residence and if not contact an immigration lawyer that explains the tier 3 visa. Clients would be allowed to retain their current holdings and to sell existing positions and only in limited cases would they be able to buy new U.S. listed ETFs.

Markets in Financial Instruments Directive (MiFID)

The limited exceptions are either that the individual is a client of an investment advisor and/or they are a qualified investor under the (Markets in Financial Instruments Directive) MiFID and packaged retail investment and insurance-based products (PRIIPS) rules. Briefly, to qualify, one must show that they meet two of the three following criteria:

• Employment in the financial services industry

• Investable assets of over 500,000 euros

• Experience in buying and selling U.S. ETFs.

So in essence, if you don't work in the financial services industry, you must have investable assets over 500,000 euros to qualify.

Interactive Brokers had already implemented such rules, and now there very, very few brokerage firms that allow individuals of modest means who live in the EU to buy U.S. based ETFs.

MiFID rules were meant to “protect” European investors from non-EU listed funds and to require fund providers to give more detailed information about the risks of investing in their funds. Most ETF providers in the U.S. have not made their U.S.-listed funds EU compliant; rather they have created European versions of the same Index funds, often listed in Ireland, Germany, or elsewhere.

Unfortunately, these European-listed funds create other challenges for U.S. based investors. The European ETFs not only tend to be more expensive, less liquid, and with fewer alternatives than their U.S. equivalents, they are also PFICs under the U.S. tax code.

PFIC's Explained

U.S. taxpayers who buy and hold non-U.S.-listed investment funds, PFICs, end up with punitive tax treatment and complex annual reporting for each fund that they hold. Unless held in an IRA or other structure that would avoid annual reporting and punitive taxes, PFICS are generally not a good idea for most U.S. taxpayers. There are some non-U.S. funds that go through the hassle of U.S. reporting requirements, but again the choice is quite limited compared to the thousands of ETFs available in the U.S. markets.