Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Locked
User avatar
Topic Author
Hyperborea
Posts: 956
Joined: Sat Apr 15, 2017 10:31 am
Location: Portugal

Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by Hyperborea »

This is a difficult topic to bring up here because it could easily become derailed. Please keep discussion to the direct questions and please don't stray into politics.

How insulated are brokerage subsidiaries from political influence from the country hosting the parent company? To take one example, if the US were to tell Interactive Brokers to expropriate all non-US citizens' funds that they hold is it possible to do so? Would the laws of the country of the subsidiary, custodians of the funds, etc. be able to prevent that if the funds were held in a subsidiary (EU. Japan, HK, etc)? Similarly, if due to prolonged civil unrest the parent company ceased operation (temporarily or permanently) what would happen to funds held in the subsidiary companies?

On a related question, the same issue as above but for an ETF. How independent is say Vanguard UK and the Irish domiciled funds from home country government influence on the parent company?
It’s not just that facts don’t seem to matter anymore. It’s that it doesn’t seem to matter that facts don’t matter.
masni
Posts: 58
Joined: Thu Sep 04, 2014 5:56 am

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by masni »

Any country can freeze, or take asset from it's citizen or non citizens, and this happens everyday, be in usually in criminals cases. The question is if a asset that is non domical in the country be taken by another country? In theory yes, but it has to be done via the courts.

So, lets say an internet brokers (let's call them IB) opens up a subsidiary in let's say a totally made up country, for example, Hung-guy, and you, are a customer of this broker. Here you buy some Irish ETF and US stock, and they are registered, officially on the books in the US and Ireland registry.

Now lets say that Hung-guy decided to do some for some reason to take the pension of the country, and then also tells the subsidiary of IB to transfer all the shares of all their non resident customers to the gov account. Could this happen?

To my understanding no, as the shares are helds in Ireland and US, the broker will just not comply. I guess they try to do it via the courts and ask the Irish and US courts to do this on some made up excuse that they are illegal and should be taken by the government, If the shares where domical in Hung-guy, maybe, as it can be done via local courts..?

I was told by IB that this is the case, but they said that it all via courts, etc...
User avatar
beyou
Posts: 6915
Joined: Sat Feb 27, 2010 2:57 pm
Location: If you can make it there

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by beyou »

The reason there are different legal business entities in each region/country is that a global broker needs to comply with regulations of each country where they want to do business with citizens (and corporate legal enitites registered in same).

This most certainly affects ability to seize assets, regulate what you can and cannot invest in, how they report information back to you, and what happens in cases of bankruptcy or fraud at your broker.

As to mutual funds, similarly, companies like Vanguard need to open EU or US compliant versions of funds, even if same exact holdings intended, so each set of customers can be sold shares as per local regulations. Even with similar names, strategies, you buy shares in a legally separate entity that is only regulated locally. Mostly US and EU versions of otherwise identical funds exist, but can be in CH, JP, UK (post brexit) etc.

I wouldn’t worry about parent company location, only laws and current events of the country of the legal entities of your specific brokers and funds.

IANAL but worked in the fund and brokerage industries for 35 years. And one of my ongoing projects since 2010 financial crisis was to build software to analyze bankruptcy risk of other brokers affecting our asset managemenr clients. Much was discussed with attorneys and financial risk pros about these subjects ever since Lehman Bros went under. One “gray” area was large bank/brokers that chose to operate under a single legal entity across EU and US (a rare exception). How should we view them ? Answer was we treated them as of 2 separate legal entities anyway since courts in US and EU would likely govern the impact of events of clients in each of those jurisdictions.
Anyway, much is conjecture based on a small number of real world events, since no major mutual fund group like Vanguard has failed, and as far as global brokers, some have but very few. Asset seizure is more common of course and there would be lots of cases an attorney could research if you chose to hire one to find and explain the precedents.
masni
Posts: 58
Joined: Thu Sep 04, 2014 5:56 am

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by masni »

I think was OP wants to know, in theory, a country in which the broker is registered, can, in theory, say, pass a law that says, give me all the asset of non residents, even though these assets are domical in the US, etc?

No individually, just a law that does this..
alex_686
Posts: 13320
Joined: Mon Feb 09, 2015 1:39 pm

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by alex_686 »

masni wrote: Tue Jan 18, 2022 6:57 am I think was OP wants to know, in theory, a country in which the broker is registered, can, in theory, say, give me all the asset of non residents, even though these assets are domical in the US, etc?
Cross broader disputes tend to be very complex and time consuming. It is very hard to generalize. It is deeply political.

It might be a better question on where the custodian of the assets are. To simplify a abstract concept, where is the vault that holds the physical stock certificates located? It is easy for the local government to go in and grab the certificates.

Of course the other country can freeze those certificates which freezes the entire process.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
masni
Posts: 58
Joined: Thu Sep 04, 2014 5:56 am

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by masni »

Thanks for the hint, I will ask this "theoretical" question to the broker. I do remember asking it once, but was given a vague answer. Will ask again
Laurizas
Posts: 519
Joined: Mon Dec 31, 2018 3:44 am
Location: Lithuania

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by Laurizas »

Hyperborea wrote: Tue Jan 18, 2022 3:51 am If the US were to tell Interactive Brokers to expropriate all non-US citizens' funds that they hold is it possible to do so?
Depends on a man pulling the trigger. Imagine that US governmental agency shows up at IB headquarters, comes to the asset manager and tells him to transfer all assets from IB subsidiaries to some governmental account at Fed and for not complying to this request he could get 20 years in prison. Imagine being this guy? Would you really care about all the investors? Do not think so. At the end, not you, but US would be responsible.
Valuethinker
Posts: 49035
Joined: Fri May 11, 2007 11:07 am

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by Valuethinker »

Hyperborea wrote: Tue Jan 18, 2022 3:51 am This is a difficult topic to bring up here because it could easily become derailed. Please keep discussion to the direct questions and please don't stray into politics.

How insulated are brokerage subsidiaries from political influence from the country hosting the parent company? To take one example, if the US were to tell Interactive Brokers to expropriate all non-US citizens' funds that they hold is it possible to do so? Would the laws of the country of the subsidiary, custodians of the funds, etc. be able to prevent that if the funds were held in a subsidiary (EU. Japan, HK, etc)? Similarly, if due to prolonged civil unrest the parent company ceased operation (temporarily or permanently) what would happen to funds held in the subsidiary companies?

On a related question, the same issue as above but for an ETF. How independent is say Vanguard UK and the Irish domiciled funds from home country government influence on the parent company?
I think it is extremely difficult to tell.

However the reach of the US authorities is very long. To anywhere, basically. At least that's what I have observed. In that sense, the US has a unique power in global finance.

This particularly applies to anything to do with embargoed countries and in particular, Iran.
User avatar
Topic Author
Hyperborea
Posts: 956
Joined: Sat Apr 15, 2017 10:31 am
Location: Portugal

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by Hyperborea »

Thanks for the replies. I'm still trying to piece together a plan for my assets in the chance something untoward happens in the next few years in the country of the head office of my brokerage (something that Ray Dalio puts at about 30%). Such a scenario would certainly upend the contents of my portfolio but I also worry about the totality of the portfolio.


Laurizas wrote: Tue Jan 18, 2022 12:16 pm Depends on a man pulling the trigger. Imagine that US governmental agency shows up at IB headquarters, comes to the asset manager and tells him to transfer all assets from IB subsidiaries to some governmental account at Fed and for not complying to this request he could get 20 years in prison. Imagine being this guy? Would you really care about all the investors? Do not think so. At the end, not you, but US would be responsible.
This is one of the scenarios that I worry about that would have been unthinkable in the not too distant past. The question is can that person in the US head office actually execute such an action or can they just tell somebody in the branch office to execute it? Is there some failsafe - action needs to happen in the branch office, systems won't allow such a move of assets without a review process, custodian won't allow it, etc. The reply from beyou above indicates that there are.


Valuethinker wrote: Thu Jan 20, 2022 3:43 am However the reach of the US authorities is very long. To anywhere, basically. At least that's what I have observed. In that sense, the US has a unique power in global finance.

This particularly applies to anything to do with embargoed countries and in particular, Iran.
Not really worried about the Iran, etc. scenarios in fact kind of the opposite where the country of the head office of my brokerage goes rogue. At that point, I think the financial reach would be diminished.
It’s not just that facts don’t seem to matter anymore. It’s that it doesn’t seem to matter that facts don’t matter.
alex_686
Posts: 13320
Joined: Mon Feb 09, 2015 1:39 pm

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by alex_686 »

Hyperborea wrote: Thu Jan 20, 2022 8:53 am Is there some failsafe - action needs to happen in the branch office, systems won't allow such a move of assets without a review process, custodian won't allow it, etc. ... Not really worried about the Iran, etc. scenarios in fact kind of the opposite where the country of the head office of my brokerage goes rogue. At that point, I think the financial reach would be diminished.
I am going to avoid the improbability and political nature of your statements.

I am chucking that you are calling the act of a head of office sizing your assets per a government request as "going rouge". You are in fact looking for the exact opposite - a rouge broker who is willing to defy government orders and requests.

But I don't think you are looking at this correctly.

First, the value of assets is backed by the real economy. If the economy does collapse due to civil war then the value of assets will probably colipase. What is the value of a stock if the underlying value of the stock is zero?

Second, ultimately ownership rights are defined and enforced by the government. If the government changes the rules why does it matter if your assets are held by a rouge brokerage? Lets say you have a stack full of physical stock certificates of US companies in a swiss bank vault. And then the government goes to the custodian who keeps the books and records of ownership and orders them to remove your certificates? Or just sizes the companies.

If this is a true concern of your don't worry about what the government might do with your brokerage account. Instead focus on your supplies of gold, canned tuna, guns and ammo. Or even better yet, proactively engage in world so this dystopia never comes to be.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
sean.mcgrath
Posts: 786
Joined: Thu Dec 29, 2016 5:15 am
Location: US in NL

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by sean.mcgrath »

I'll also ignore probabilities, I do see the risk management aspect as interesting from at least a theoretical perspective. I think you will struggle with a general solution to the problem; to make it concrete I will use my own example.

My account is with Interactive Brokers Ireland Limited, which is "regulated by the Central Bank of Ireland (CBI, reference number C423427), registered with the Companies Registration Office (CRO, registration number 657406)." I am willing to bet (and would love to hear the views of the posters with actual knowledge) that it is not possible for the IB US head office to access my account directly, and I would doubt that the Irish subsidiary would break local laws simply because their HQ told them to.

HOWEVER

1. I checked for last year, and all of my trades went through ISLAND and IEX (both US based).
2. The funds I bought (ITOT, IXUS, etc.) are all listed on US exchanges.

So, back to the pertinent question of "where is the vault?" I guess there are two vaults: Ireland has my account information and the US has the exchanges. I am also willing to bet (and curious to hear other views) that the US could seize all exchange assets owned on US exchanges that are maintained by IB Ireland. I don't see any reason why they couldn't.

As mentioned above, the US is in a special position. I also expect that if they wanted to, they could put plenty of pressure on the Irish government to go after my assets in other ways as well (not via IB Ireland).

If I were genuinely concerned about US political risk specifically, I would probably follow the single stock replication strategy for IXUS to mitigate for half of my portfolio. I would probably still use IB Ireland, although I suppose one could argue for a European broker.

I think you need to look at it at this level of granularity if you want it to be actionable.

EDIT
"IBIE uses its affiliates Interactive Brokers LLC ("IBLLC") and Interactive Brokers (U.K.) Limited to custody financial instruments." So yes, as I thought, the US exchange products are custodied in the US. IB LLC may not know that they belong to me, but custody of the assets is sitting in the US.
Last edited by sean.mcgrath on Thu Jan 20, 2022 11:33 am, edited 1 time in total.
alex_686
Posts: 13320
Joined: Mon Feb 09, 2015 1:39 pm

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by alex_686 »

sean.mcgrath wrote: Thu Jan 20, 2022 11:19 am So, back to the pertinent question of "where is the vault?" I guess there are two vaults: Ireland has my account information and the US has the exchanges. I am also willing to bet (and curious to hear other views) that the US could seize all exchange assets owned on US exchanges that are maintained by IB Ireland. I don't see any reason why they couldn't.
The exchange is not a big issue. You can trade US stocks on foreign exchanges. There are technical issues why this is not common but it can be done.

The big issue is that ITOT et. al. are US companies, so the custodian of the books and records of ownership are located in the US. Does it matter if you can trade a stock if you can't record the change of ownership?

I would start by reading up on the history of this. There is a long and colorful history. A example.

During the Asina crises Malaysia forbade foreigners from trading securities which basically froze all US investors into their current positions. IIRC this freeze lasted 10 years. There was a US ETF that only held Malaysian stocks. Becuase trading was frozen, the assets held by the ETF were fixed and thus de facto became a closed end fund. The ETF still traded on the US exchange with a decent spread to Malaysian market. But this was becuase US investors where trading shares of the ETF.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
sean.mcgrath
Posts: 786
Joined: Thu Dec 29, 2016 5:15 am
Location: US in NL

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by sean.mcgrath »

alex_686 wrote: Thu Jan 20, 2022 11:29 am
sean.mcgrath wrote: Thu Jan 20, 2022 11:19 am So, back to the pertinent question of "where is the vault?" I guess there are two vaults: Ireland has my account information and the US has the exchanges. I am also willing to bet (and curious to hear other views) that the US could seize all exchange assets owned on US exchanges that are maintained by IB Ireland. I don't see any reason why they couldn't.
The exchange is not a big issue. You can trade US stocks on foreign exchanges. There are technical issues why this is not common but it can be done.

The big issue is that ITOT et. al. are US companies, so the custodian of the books and records of ownership are located in the US. Does it matter if you can trade a stock if you can't record the change of ownership?
Yep, I realized what I meant was custodianship, and was updating in parallel. The Malaysia example is interesting. It is still not allowed for Israel based persons/entities to have commercial relations with Malaysia.
alex_686
Posts: 13320
Joined: Mon Feb 09, 2015 1:39 pm

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by alex_686 »

sean.mcgrath wrote: Thu Jan 20, 2022 11:19 am EDIT
"IBIE uses its affiliates Interactive Brokers LLC ("IBLLC") and Interactive Brokers (U.K.) Limited to custody financial instruments." So yes, as I thought, the US exchange products are custodied in the US. IB LLC may not know that they belong to me, but custody of the assets is sitting in the US.
The exchange something is traded on is a big fat red herring. There are a fair number of foreign securities that trade on US exchanges where the books and records are located in a foreign country. They are technically 2 separate functions.

This is what the books and records looks like.

You have a bank serving as custodian for the books and records.

The actual stock is held at Depository Trust Company (DTC). They will have a slug of stock in "Interactive Brokers (U.K.)" name. i.e., street name. This is the finest granular detail that the US has without the UK's government help.

I am not sure how UK brokers work, but in the US it is up to the broker to keep straight who owns what shares in street name.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
sean.mcgrath
Posts: 786
Joined: Thu Dec 29, 2016 5:15 am
Location: US in NL

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by sean.mcgrath »

alex_686 wrote: Thu Jan 20, 2022 11:53 am
sean.mcgrath wrote: Thu Jan 20, 2022 11:19 am EDIT
"IBIE uses its affiliates Interactive Brokers LLC ("IBLLC") and Interactive Brokers (U.K.) Limited to custody financial instruments." So yes, as I thought, the US exchange products are custodied in the US. IB LLC may not know that they belong to me, but custody of the assets is sitting in the US.
You have a bank serving as custodian for the books and records.

The actual stock is held at Depository Trust Company (DTC). They will have a slug of stock in "Interactive Brokers (U.K.)" name. i.e., street name. This is the finest granular detail that the US has without the UK's government help.

I am not sure how UK brokers work, but in the US it is up to the broker to keep straight who owns what shares in street name.
IB LLC is the parent company in the US. What I meant by the quote is that they are indeed (to your point) held by the US company as custodian. So yes, it seems you confirm my edited post above.
alex_686
Posts: 13320
Joined: Mon Feb 09, 2015 1:39 pm

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by alex_686 »

sean.mcgrath wrote: Thu Jan 20, 2022 12:30 pm IB LLC is the parent company in the US. What I meant by the quote is that they are indeed (to your point) held by the US company as custodian. So yes, it seems you confirm my edited post above.
Well, to be supper specific to make sure we are on the same page - I am assuming that "Interactive Brokers (U.K.)" is a separate entity and falls under UK laws and regulations. That it is the UK legal framework that governs.

What I am describing is how it would look for a brokerage that only had a legal presence in the UK.

That "Interactive Brokers (U.K.)" is a subsidiary of a US company does not factor into my view.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
LadyGeek
Site Admin
Posts: 95696
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Subsidiary Brokerages and ETF Resistance to Political Interference from the Parent Company's Domicile

Post by LadyGeek »

This thread has run its course and is locked (political policy, conjecture on political actions). See: Non-actionable (Trolling) Topics
If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:
  • US or world economic, political, tax, health care and climate policies
  • conspiracy theories of any type
  • discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Locked