Your investments: Do not panic if a U.S. broker is closing your account

The first thing to do if you receive a letter like this is to take it seriously. Failure to act can be incredibly costly. Why? There are two major reasons.

By AARON KATSMAN

AUGUST 9, 2018 21:50

Shekel money bills (photo credit: REUTERS) — Shekel money bills

(photo credit: REUTERS)

Here we go again. It appears that certain US brokerage firms have once again sent out a batch of letters to US citizens living abroad saying they will no longer be able to service their accounts. This has been an issue over the last few years and seems to come in waves.

While I was on vacation, my office received a bunch of calls and I received many emails from desperate investors needing to move their accounts ASAP. They said they received a letter from their US investment firm saying that they have until such and such a date to move their account, or it will be liquidated, since they no longer are living in the US. Keep in mind that these are US citizens who live all over the world! Don’t get all worked up. It is not antisemitism. You could be an American living in Thailand, Switzerland or Zichron Yaakov, it makes no difference. If you don’t have a US address you may be impacted.

Why is this happening? Since 9/11, US firms have taken a very strict approach to non-US domiciled accounts. With the Patriot Act and other new laws, it has become much harder for these firms to accept accounts from US citizens living abroad. Many firms have just decided that they would rather not put themselves into this situation and have taken the step either not to take any new business, or set up a new division to deal with these accounts.

The first thing to do if you receive a letter like this is to take it seriously. Failure to act can be incredibly costly. Why? There are two major reasons. First, somewhere in the letter it says that failure to comply gives them the right to liquidate the portfolio. I recently met with someone who figured they didn’t really mean it, and boy was he wrong. By having the account liquidated he incurred huge, and I mean a huge, capital-gains tax liability.

The second reason is that firms also retain the right to send all your shares to a transfer agent. What is a transfer agent? Well without getting into the minutiae of how this business works, transfer agents are used by publicly traded companies to keep track of the individuals and entities that own their stocks and bonds.

THE PROBLEM with having your shares sent to a transfer agent is that to release the shares back to you can take months. It is a very onerous project, sometimes requiring a medallion signature, something that is not so readily available in Israel. If you need money, it will take time to get it liquidated from the transfer agent.

A few years ago, a couple came in who had never opened up the mail they received from their brokerage firm. They figured they were just monthly statements. Well, one month they decided to look and they actually received a monthly statement and it showed a value of just a few dollars. They panicked as they figured their money was stolen.

What had actually happened was that they received a letter politely asking them to move their account somewhere else, and if they didn’t by a specific date, all securities were going to be transferred to the agent. And sure enough, that’s what happened. They owned somewhere near 30 stocks. Needless to say, it took more than a year to get all these shares booked in a brokerage account.

I often hear that after receiving these letters the decision is to bring the money to Israel. In many cases that’s a bad decision. First, because US citizens are severely limited in how they can invest in Israel without incurring high taxes due to PFIC, passive foreign investment company issues.

Second, if the account in question is a retirement account like an IRA, moving it to Israel will almost certainly be considered a distribution and again the tax man will take a big chunk.

There are some US brokerage firms that take on these accounts. There are certain Israeli Facebook groups that can be searched for information on who these firms are. There are also local professionals licensed both in Israel and in the US who have arrangements with US brokerage firms that can handle these accounts. Take these letters seriously but don’t panic. There are good solutions available.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

The writer is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing. aaron@lighthousecapital.co.il.