One of the most frequently asked questions I receive from investment advisers is whether they can enter into an advisory relationship or manage assets for a client located in a foreign country. Like the United States, foreign jurisdictions have laws that require registration for rendering investment advice to individuals residing within their jurisdiction. This post is intended to provide a bit more context for advisers trying to work through these issues.
Custodian Representations and Paperwork
Every major investment adviser custodian (i.e., Schwab, Fidelity, TD Ameritrade) requires an investment adviser to complete additional paperwork when opening oan account for a client in a foreign jurisdiction or when a client requests to receive their account statements in a foreign jurisdiction. That paperwork serves a few different purposes, but most importantly it is designed to protect the custodian from regulatory risk. Among other things, the paperwork requires an investment adviser to represent that it is either appropriately licensed in the foreign jurisdiction or exempt from licensing in the foreign jurisdiction due to its relationship with the client in the foreign jurisdiction. For example, the exact language of the TD Ameritrade representation is below:
Chief Compliance Officers and principals at investment advisers have to make difficult decisions when weighing their ability to make this representation. Without becoming authorized to render advice in the foreign jurisdiction or knowledge of an exclusion from registration under the law in the foreign jurisdiction, it could be quite difficult to make this representation in good faith.
What is an Investment Adviser to Do?
1. Treatise Research
This is a really tough question. As a practitioner in this area, I rely on a treatise called International Survey of Investment Adviser Regulation to start the analysis. Unfortunately, this approach is extremely limited for the following reasons:
- The most recent edition was published in 2012 and may not contain the most current information.
- It only contains a survey for roughly the 40 wealthiest nations.
- It doesn’t account for Brexit.
I find myself hoping that Marcia MacHarg would update the treatise, but it appears that she is now retired. I’ve considered publishing a simpler treatise focused solely on cross-border wealth management, but then I break out in cold sweats.
2. Online Research
After reviewing the treatise, I perform an online search to either confirm my early research or find an initial answer. At this point, I cross my fingers and pray that I can locate a copy of the local law in English. Most often an English version or translation is available. Sometimes it is not. Even if it is available, it is often extremely ambiguous. In the best cases, I can determine that there is a clear exemption or exclusion for cross-border services. However, at this point, if the answer isn’t clear, I reassess with the client. Sometimes the client is comfortable making a business decision to proceed on the limited information that is available. Sometimes they want more definitive guidance, in which case we seek out local counsel.
3. Potential Engagement of Local Counsel
If a client is still uncomfortable making the representation and the client relationship is sufficiently valuable, then it may be worth exploring engaging local counsel. I have addressed these issues for many years now and have developed relationships with legal practitioners across the globe.
4. Conclusion
I’d be happy to assist your firm in assessing the risk of making representations to your custodian or facilitating guidance under local law. There is nothing I enjoy more than helping clients find solutions to their problems. Nothing disappoints me more than having to say “no” to an entrepreneurial client.