updated 6:36 PM CET, Mar 18, 2023

Charles Schwab unveils MiFID II-related changes to ETFs for investors in Europe

Charles Schwab Corp., the San Francisco-based financial services giant that has a significant client base of Americans resident outside of the U.S., has announced that after Sept. 19, Schwab clients who are resident in the EU will no longer be able to purchase U.S.-registered exchange-traded funds (ETFs) and exchange-traded notes (ETNs).

The change is coming in as a result of what is known as the Markets in Financial Instruments Directive II (MiFID II), a 2018 update of a 2004 EU directive known as MiFID, which created a framework to facilitate the cross-border trade of investment services throughout the European Economic Area.

 In a statement, Schwab informed its European retail clients that from the 19th of September, they would: 

• Still be able to maintain any existing U.S. ETF or ETN positions that they held, "but you will not be able to purchase more"

• Any dividends they received from such holdings could "no longer be reinvested in [their] U.S. ETFs or ETNs"

• They would be able to liquidate any U.S. ETFs or ETNs they currently hold, but they would "not be able to repurchase them".

Exchange-traded funds are a type of investment product that is traded on a stock exchange, in the manner of stocks, but which holds its assets in such a way that it tracks a stock or bond index, rather than being chosen by "active" managers who are looking to outperform the market. Such ETFs are increasingly popular among investors because they tend to be lower-cost than most actively-managed investment alternatives. 

Options for European clients

European clients of Charles Schwab are being told they have some options.

One, Schwab says, is "alternative ETFs" that the company is offering, that it says have been authorized as Undertakings for Collective Investment in Transferable Securities (UCITS), a type of collective investment structure that was designed to enable free trading across EU borders on the basis of the authorization of a single EU member state.

However, Schwab stresses, U.S. investors will not be able to purchase such Schwab UCITS funds. 

Some Europe-residents who are clients of Thun Financial Advisors, a Madison, Wisconsin-based advisory firm that specializes in looking after expatriate Americans, will have another option, it seems. In an email alert to its clients, a copy of which has been seen by the American Expat Financial News Journal, Thun has explained that the new MiFID II restrictions on Schwab's ETFs will "not apply to clients of Schwab whose accounts are managed by U.S.-based Registered Investment Advisors (RIAs), such as Thun Financial Advisors."

RIAs will continue to be able to trade the full range US ETFs on behalf of their EU clients, according to the Thun client alert.

Thun added that it had been working with Schwab "for several months" to prepare for this change in ETF trading policy.

"Schwab has communicated to us that they are responding to the new (2018) EU MiFID II regulations," the Thun notice went on. 

"Schwab and many other U.S. brokers have concluded that direct sale of U.S. ETFs to EU residents is not permitted under the MiFID rules. At the same time, unlike some other U.S. brokers, Schwab has also concluded that MiFID rules allow EU residents to have U.S. ETFs bought and sold on their behalf in their accounts by U.S. RIAs.

"Thun Financial fully concurs with this interpretation of the MiFID rules."

Thun stressed that it is "working with Schwab" to ensure that the message that the new MiFID II ETF restrictions "do not apply to Schwab Institutional clients" – such as Thun – reaches the companies' investors.

Thun concluded its client alert by noting: " ETFs remain the best available financial tools for building well-diversified, cost and tax efficient investment portfolios for investors located in the U.S., the EU and around the world.

"Thun Financial will continue to build on its success using these products for EU resident investor-clients, working with Schwab as a custodian partner." 

Schwab was founded in 1971 by Charles R Schwab, who remains its chairman. Its shares are traded on the New York Stock Exchange, where it is a component of the S&P 500 index, and it currently looks after around US$3.7trn on behalf of its investment clients.