SIPC coverage for Irish-domiciled ETFs

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Topic Author
orenplen
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SIPC coverage for Irish-domiciled ETFs

Post by orenplen » Tue Apr 11, 2017 4:16 pm

Hi everybody,

So as a non american trying to avoid estate tax, i chose to invest in Irish-domiciled ETFs (IWDA, EIMI and WDSC).

I do so via Interactive Brokers. One of the reasons is that IB provides insurance by the SIPC for up to 500k usd.

HOWEVER, i have heard a claim that non-us etfs are not covered by the SIPC. IB themselves give differing answers varying between "yes, since your account as a whole is covered by SIPC, all securities in it, regardless of their nature, are covered", to "no, non-us securities are not covered, BUT we have an additinal insurance up to several million usd, provided by Loyds of the uk, which applies for non-us securities".

I have tried reaching out to SIPC which said that 2 conditions must occur to get their coverage : 1. The broker is a member of SIPC (which is true for IB). 2. The specific security must be registered under the SEC. When i asked them whether my ETFs (issued by ishares and spdr) would qualify, they referred me to the SEC.

So i wrote to the SEC (still waiting) and to ishares uk (still waiting).

Has anyone tried to figure out this issue? Can anyone comment on this?

In the meanwhile, I am trying to assess which is worse, taking on tbe risk of estate tax or the risk of IB going bankrupt and losing all my money...

Thanks.

TedSwippet
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Re: SIPC coverage for Irish-domiciled ETFs

Post by TedSwippet » Tue Apr 11, 2017 5:45 pm

orenplen wrote:In the meanwhile, I am trying to assess which is worse, taking on the risk of estate tax or the risk of IB going bankrupt and losing all my money...
The US estate tax is the larger risk. This is because even if IB does go bankrupt you are extremely unlikely(*) to lose any of your money. Death, on the other hand, is a certainty.

Brokers are required to segregate client assets from their own assets and securities. If a broker goes bankrupt there will be a period when you cannot access your money, but provided they have segregated customer holdings as required by law, your assets should still be there. Whoever cleans up after the failed broker -- some other broker, SIPC, whoever -- will then recover your holdings from their silo and make them available to you once again.

From FINRA's notes on this:
In addition, the SEC's Rule 15c3-3—the "Customer Protection Rule"—requires brokerage firms that have custody of customer assets to keep those assets separate from their own accounts. In other words, customers' cash must be placed in a special, separate "reserve" account; and fully paid customer securities must be kept separate from firm and customer margin securities.
(*) The exception would be outright fraud, Bernie Madoff style. It seems unlikely that IB is just a believable web site with nothing behind it but a bunch of scammers rapidly scooping up client cash into wheelbarrows and hauling it off to untraceable parts of the globe. Or Vanguard and iShares for that matter. But stranger things have happened.

At the end of the day all you can do is take a leap of faith. Making it the smallest leap possible is best, though, and your question here is a good one to ask.

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Nate79
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Re: SIPC coverage for Irish-domiciled ETFs

Post by Nate79 » Tue Apr 11, 2017 7:35 pm

Why do you think you need SIPC? What does it cover that has you worried about this?

Topic Author
orenplen
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Re: SIPC coverage for Irish-domiciled ETFs

Post by orenplen » Wed Apr 12, 2017 12:21 pm

This is because even if IB does go bankrupt you are extremely unlikely(*) to lose any of your money.
Hi Ted, thanks for your detailed answer.
If I understand correctly, your claim is that regardless of SIPC coverage, I will not be damaged by IB bankruptcy?

In that case- why is SIPC coverage so important? Is it for other cases such as fraud by one of their employees or something of that sort? Or am I missing something here?
Why do you think you need SIPC? What does it cover that has you worried about this?
Hi Nate.

I guess I wish to make sure my money won't be lost due to one of several problems: IB going bankrupt, fraud by one of IB employees, fraud by someone who broke into IB computers and drained my account and I presume that several other bad scenarios that I can't even think about.

In addition, SIPC protection must be pretty important, otherwise, why bother creating this entity? or am I mistaken?

TedSwippet
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Re: SIPC coverage for Irish-domiciled ETFs

Post by TedSwippet » Wed Apr 12, 2017 12:55 pm

orenplen wrote:In that case- why is SIPC coverage so important? Is it for other cases such as fraud by one of their employees or something of that sort?
That would be my understanding (though you should note that I'm not an expert in the field, just an amateur). My impression is that they step in to cover fraud and other areas where the failed broker did not follow regulations -- badly kept records, incorrect segregation, that sort of thing.

As already noted, though, SIPC is in effect the 'coverage of last resort', an insurance policy. Ahead of it lie both segregation rules and capitalization requirements. The only way you lose is if all of these fail at the same time. That's probably not impossible, but it's apparently designed to be as close to impossible as is practical. It seems that historically, very few brokerages have actually imploded.

alex_686
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Re: SIPC coverage for Irish-domiciled ETFs

Post by alex_686 » Wed Apr 12, 2017 1:21 pm

I think it was posted in this thread that only securities that file with the SEC are covered by SPIC. This kind of makes sense. One has to draw the line someplace. I would not think that Irish domiciled would file with the SEC. The is a expense in preparing the required reports, the audits, etc. So I could see how they would be out of bounds.

TedSwippet is mostly correct. Firms are audited to ensure that client's assets are kept in segregated accounts. If the firm goes bust your assets are protected. There were issues back in the 1960s when segregation was not as tight. One note - this is only true for cash accounts. Assets are co-mingled in margin accounts. You should still be good here. A example would be when Lehman Brothers went bust. Those who were in margin accounts might not get their stock back. There were all made whole, even those which exceeded SPICs coverage. They got cash equivalents based on the market values of when the firm went under. These are taxable events - it basically is classified as a sale. Money was tied up for a while so everything could be sorted out. So not the end of the world but not fun either.

Topic Author
orenplen
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Re: SIPC coverage for Irish-domiciled ETFs

Post by orenplen » Fri Apr 21, 2017 12:53 pm

but it's apparently designed to be as close to impossible as is practical.
Hi Ted,

I feel in a big dilemma since while the risk, as you rightfully mention, is tiny, the effect of the damage (i.e. losing all of my money during MY lifetime) is massive.
In contrast, regarding the estate tax risk, although it is larger, the effect (at least the way I see it now as a 31 year old married guy without children) of my heirs inheriting "only" ~65% of my money, seems much less terrible.

TedSwippet
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Re: SIPC coverage for Irish-domiciled ETFs

Post by TedSwippet » Fri Apr 21, 2017 2:20 pm

orenplen wrote:I feel in a big dilemma ...
I don't think there is anything more here that anyone can offer you.

Philosophically -- and practically, for that matter! -- losing a chunk of cash to US estate taxes is not really your problem, it is one for your heirs. If you don't mind the thought that they might curse you at your funeral for not using Irish domiciled ETFs then using US domiciled ETFs resolves your dilemma.

If not that, go to half US domiciled and half Irish domiciled as a way to minimise regret? Split Irish domiciled holdings across several brokers?

Personally I have a lot more in Irish domiciled funds and ETFs than the UK's protection limits, themselves much lower than the SIPC ones, and I don't lose any sleep over worries that my broker or platform will go bankrupt. The segregation of assets required of brokers under government regulation means that even if they do there would be no loss of customer's funds, only the broker's/platform's own, but it appears that you don't see that as comforting or protective.

Ultimately there is unfortunately no magic bullet, so only you can decide which route makes you feel the least uneasy.

DXBinvest
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Re: SIPC coverage for Irish-domiciled ETFs

Post by DXBinvest » Sun Jul 14, 2019 9:19 am

alex_686 wrote:
Wed Apr 12, 2017 1:21 pm
I think it was posted in this thread that only securities that file with the SEC are covered by SPIC. This kind of makes sense. One has to draw the line someplace. I would not think that Irish domiciled would file with the SEC. The is a expense in preparing the required reports, the audits, etc. So I could see how they would be out of bounds.
[...]
So the conclusion is that Irish domiciled ETFs are not covered by SIPC, since they are not registered with SEC. But the shares are not held directly under your name, they are held by IB LCC which is US based. Would that mean US based custodian of your Irish domiciled ETFs is covered covered by SIPC, so are you shares? :confused

alex_686
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Re: SIPC coverage for Irish-domiciled ETFs

Post by alex_686 » Sun Jul 14, 2019 9:34 am

DXBinvest wrote:
Sun Jul 14, 2019 9:19 am
alex_686 wrote:
Wed Apr 12, 2017 1:21 pm
I think it was posted in this thread that only securities that file with the SEC are covered by SPIC. This kind of makes sense. One has to draw the line someplace. I would not think that Irish domiciled would file with the SEC. The is a expense in preparing the required reports, the audits, etc. So I could see how they would be out of bounds.
[...]
So the conclusion is that Irish domiciled ETFs are not covered by SIPC, since they are not registered with SEC. But the shares are not held directly under your name, they are held by IB LCC which is US based. Would that mean US based custodian of your Irish domiciled ETFs is covered covered by SIPC, so are you shares? :confused
For a broker with SPIC insurance, only certain classes of assets are covered by that insurance. I have seen some bizarre things within a brokerage account that I would not think would be covered. It like if you car caught fire while parked on the street - I don't think you house insurance would cover it. Wrong property, wrong location.

It has been 20 years since I have do this stuff, so if anybody knows better please correct me. Or even better, call IB and ask them.

DXBinvest
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Re: SIPC coverage for Irish-domiciled ETFs

Post by DXBinvest » Sun Jul 14, 2019 9:51 am

Also by what they write https://brokerchooser.com/broker-review ... art-safety, it seems that for europeans (residents or citizens as they don't define?...) the IB UK protection may apply for non-US stocks...

alex_686
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Re: SIPC coverage for Irish-domiciled ETFs

Post by alex_686 » Sun Jul 14, 2019 9:59 am

DXBinvest wrote:
Sun Jul 14, 2019 9:51 am
Also by what they write https://brokerchooser.com/broker-review ... art-safety, it seems that for europeans (residents or citizens as they don't define?...) the IB UK protection may apply for non-US stocks...
I don't think citizenship matters. Where is your brokerage account located? If in the US, then under SPIC. If you account is located in the EU, then FCA. etc.

DXBinvest
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Re: SIPC coverage for Irish-domiciled ETFs

Post by DXBinvest » Sun Jul 14, 2019 10:46 am

alex_686 wrote:
Sun Jul 14, 2019 9:59 am
I don't think citizenship matters. Where is your brokerage account located? If in the US, then under SPIC. If you account is located in the EU, then FCA. etc.
Nowhere yet but it would fall under US if I would open it being UAE resident. I am still contemplating whether IB is actually the safest choice (as it initially looks) for non-US person investing in Irish domiciled ETFs or not really, as it may turn out that non-US securities do not fall under SIPC protection at all.

alex_686
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Re: SIPC coverage for Irish-domiciled ETFs

Post by alex_686 » Sun Jul 14, 2019 10:57 am

DXBinvest wrote:
Sun Jul 14, 2019 10:46 am
Nowhere yet but it would fall under US if I would open it being UAE resident. I am still contemplating whether IB is actually the safest choice (as it initially looks) for non-US person investing in Irish domiciled ETFs or not really, as it may turn out that non-US securities do not fall under SIPC protection at all.
Personally, this would be pretty far down on my list.

I am not sure what the tax impact of a UAE resident holding Irish Domiciled ETFs in the US would be, but it would be somewhere between complex and bad. US tax treatment of accumulating funds is complex.

I would start by figuring out what country to hold my assets first.

TedSwippet
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Re: SIPC coverage for Irish-domiciled ETFs

Post by TedSwippet » Sun Jul 14, 2019 12:47 pm

alex_686 wrote:
Sun Jul 14, 2019 10:57 am
I am not sure what the tax impact of a UAE resident holding Irish Domiciled ETFs in the US would be, but it would be somewhere between complex and bad.
Not sure I follow. Did you mean a UAE resident holding Ireland domiciled ETFs in a US based broker? If that, then US tax doesn't come into things. These are non-US assets held by non-US persons.

The only US tax danger comes from holding more than $60k in cash in a US based broker -- that could be at risk from US estate taxes. Because a broker account is not the right place to keep cash, that danger is relatively easily either minimised or avoided entirely.

typical.investor
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Re: SIPC coverage for Irish-domiciled ETFs

Post by typical.investor » Mon Jul 15, 2019 12:35 am

orenplen wrote:
Tue Apr 11, 2017 4:16 pm
I have tried reaching out to SIPC which said that 2 conditions must occur to get their coverage : 1. The broker is a member of SIPC (which is true for IB). 2. The specific security must be registered under the SEC. When i asked them whether my ETFs (issued by ishares and spdr) would qualify, they referred me to the SEC.
Interesting. I would like to see the exact text of their statement.

If IB did go bankrupt while you were holding Irish-domiciled ETFs, I would encourage you to get legal representation and participate in the settlement.

The definition of security in the Securities Investor Protection Act of 1970 does not state that "the specific security must be registered under the SEC". I think that is a misunderstanding. See https://www.sipc.org/about-sipc/statute ... tute#78lll

Thus foreign stocks I do believe are definately covered per the SIPC definition of security.

What it does state though, is that "any investment contract or certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or mineral royalty or lease" must be registered with the SEC (referred to as "the Commission" by definition in the document) for it to be covered.
any investment contract or certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or mineral royalty or lease (if such investment contract or interest is the subject of a registration statement with the Commission pursuant to the provisions of the Securities Act of 1933 [15 U.S.C. 77a et seq.])
I'm really not sure how foreign domiciled ETFs would be classified.

In any case, I don't think your question to the SEC should be "are my foreign ETFs registered with you" because the answer is most likely not too helpful. I would ask how ETFs are classified. Are they "stocks" or "transferrable shares" (both covered by definition), or are they "investment contracts" or "certificates of interest"?

Perhaps there is no legal ruling to rely on yet.

The most interesting case I could find was the the SEC vs the SIPC in the Stanford Ponzi case where the SEC argued SIPC should cover investors for loss of Foreign CDs (which the Stanford brokerage sold). The court ruling was that SIPC covers lost/missing investments, and that the Stanford brokerage didn't hold the CD. Thus nothing was returned. In actuality, it was a Stanford affiliated bank outside the US that received the money as part of an ongoing Ponzi scheme.

If it makes you feel better, SIPC offered a 50% settlement before the ruling which was rejected.

In a way, it's understandable though. SIPC doesn't cover against security loss of value and the customers still hold title to their worthless CDs.

In any case, it's clearly not a foreign vs US issues. It's clear that CD's count as securities per SIPC definition, and that even foreign CDs would be covered had they been held at a SIPC broker dealer and gone missing. A foreign security (or any security) going to zero though isn't covered.

So are foreign ETFs securities or not per SIPC definition. You guess is as good as mine.

DXBinvest
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Re: SIPC coverage for Irish-domiciled ETFs

Post by DXBinvest » Mon Jul 15, 2019 6:49 am

alex_686 wrote:
Sun Jul 14, 2019 9:34 am
For a broker with SPIC insurance, only certain classes of assets are covered by that insurance. I have seen some bizarre things within a brokerage account that I would not think would be covered. It like if you car caught fire while parked on the street - I don't think you house insurance would cover it. Wrong property, wrong location.

It has been 20 years since I have do this stuff, so if anybody knows better please correct me. Or even better, call IB and ask them.
From SIPC (found on another forum): "SIPC protects customers of SIPC-member brokerage firms such as Interactive Brokers LLC (IB LLC), regardless of whether or not those customers are U.S. citizens or residents. SIPC also protects investments in foreign securities, so long as those securities are held by a SIPC-member brokerage firm. Thus, SIPC would protect an investment in securities listed on the London Stock Exchange if those securities are held at a SIPC member. The liquidation trustee will review the debtor firm’s books and records in order to determine where the securities are held."

So it seems Ireland-domiciled ETFs held at US broker would be covered by SIPC. There is no mention of SEC registered securities.

typical.investor
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Re: SIPC coverage for Irish-domiciled ETFs

Post by typical.investor » Mon Jul 15, 2019 7:05 am

DXBinvest wrote:
Mon Jul 15, 2019 6:49 am
alex_686 wrote:
Sun Jul 14, 2019 9:34 am
For a broker with SPIC insurance, only certain classes of assets are covered by that insurance. I have seen some bizarre things within a brokerage account that I would not think would be covered. It like if you car caught fire while parked on the street - I don't think you house insurance would cover it. Wrong property, wrong location.

It has been 20 years since I have do this stuff, so if anybody knows better please correct me. Or even better, call IB and ask them.
From SIPC (found on another forum): "SIPC protects customers of SIPC-member brokerage firms such as Interactive Brokers LLC (IB LLC), regardless of whether or not those customers are U.S. citizens or residents. SIPC also protects investments in foreign securities, so long as those securities are held by a SIPC-member brokerage firm. Thus, SIPC would protect an investment in securities listed on the London Stock Exchange if those securities are held at a SIPC member. The liquidation trustee will review the debtor firm’s books and records in order to determine where the securities are held."

So it seems Ireland-domiciled ETFs held at US broker would be covered by SIPC. There is no mention of SEC registered securities.
I saw that too. However, I don't believe any conclusion can be drawn. It's not clear to me where ETFs are classified under the definition of "securities" in the Securities Investor Protection Act of 1970. Sure investments in foreign securities are covered, but do ETFs meet the definition?

It might be that unregistered ETFs aren't covered. For instance, US REITS that are not registered with the SEC are not covered because they are classified as “investment contracts” (which require registration).

Maybe the SEC itself doesn't know what a court would rule. The Stanford case I mentioned earlier was interesting in that the SEC sued to get SIPC protections for investors but failed as a judge ruled against them saying the case fell out of SIPC territory (wasn't held at a US broker dealer despite the US broker selling the CDs and the broker owned (foreign) bank issuing them).

alex_686
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Re: SIPC coverage for Irish-domiciled ETFs

Post by alex_686 » Mon Jul 15, 2019 7:13 am

DXBinvest wrote:
Mon Jul 15, 2019 6:49 am
So it seems Ireland-domiciled ETFs held at US broker would be covered by SIPC. There is no mention of SEC registered securities.
For clarification, I was working off a statement in a earlier part of this thread, where there was a definitive statement that foreign ETFs. If that is not true, then I don't know.

On the flip side, I have had a front row seat with a couple of brokerage firms collapsing and I don't think they every touched SPIC. I have worked in custody and transfer and am fairly familiar with the steps firms must take to segregate and protect clients assets from their own so even if the firm were to collapse clients would walk away intact. Or at least made whole.

alex_686
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Re: SIPC coverage for Irish-domiciled ETFs

Post by alex_686 » Mon Jul 15, 2019 7:17 am

TedSwippet wrote:
Sun Jul 14, 2019 12:47 pm
alex_686 wrote:
Sun Jul 14, 2019 10:57 am
I am not sure what the tax impact of a UAE resident holding Irish Domiciled ETFs in the US would be, but it would be somewhere between complex and bad.
Not sure I follow. Did you mean a UAE resident holding Ireland domiciled ETFs in a US based broker? If that, then US tax doesn't come into things. These are non-US assets held by non-US persons.

The only US tax danger comes from holding more than $60k in cash in a US based broker -- that could be at risk from US estate taxes. Because a broker account is not the right place to keep cash, that danger is relatively easily either minimised or avoided entirely.
Are you sure? The assets are held in the US, so the broker is going to be cranking out tax reporting documents to both the client and to the IRS. The ETFs hold US companies paying out US dividends. Maybe after all of the tax paperwork it is a wash.

TedSwippet
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Re: SIPC coverage for Irish-domiciled ETFs

Post by TedSwippet » Mon Jul 15, 2019 8:12 am

alex_686 wrote:
Mon Jul 15, 2019 7:17 am
Are you sure? The assets are held in the US, so the broker is going to be cranking out tax reporting documents to both the client and to the IRS.
Yes. Confirmed by Interactive Brokers directly (eventually!) in this thread.
alex_686 wrote:
Mon Jul 15, 2019 7:17 am
The ETFs hold US companies paying out US dividends.
They do, but what matters here, at least for US tax reporting and withholding purposes on the investor, is the domicile of the fund or ETF, not what it holds.

In essence, a US domiciled ETF is, for US tax reporting, just another US share. It could contain anything, perhaps even not a single US stock but only non-US ones, but for US tax the dividends it pays to the investor are US withholdable, and it is a US situs asset for US estate taxes. Symmetrically, a non-US domiciled ETF is, for US tax reporting, a foreign (that is, non-US) share. It could contain anything, including perhaps only US stocks, yet for US tax the dividends it pays to the investor(*) are not US withholdable and it is not a US situs asset for US estate taxes.

So non-US investors can (and should!) hold non-US domiciled ETFs at a broker with no US tax interference. The only remaining danger with a specifically US based broker is a $60k cash holding, which is not an exception to the US situs rules on estate taxes. Ideally, nonresident alien investors should avoid both US situs assets and US based brokers, but realistically the danger from a US based broker is low provided one completely avoids holding US situs assets.


(*) Note however that any US source dividends received by a non-US domiciled ETF come with US tax already withheld. In the case of an Ireland domiciled ETF, that would be at a 15% rate. US source dividends received by a US domiciled ETF come with no US tax withheld, but the investor then faces US tax on the entire ETF's dividend when paid out. Without a tax treaty, the US tax rate on dividends for nonresident aliens is 30%. For many, not a wash after paperwork, then.

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