PARTNER RISK DISCLOSURE DOCUMENT

  

RBI’s Liberalized Remittance Scheme

 

What is it?

The Reserve Bank of India (“RBI”) allows overseas remittance of up to $250,000 per year per PAN number. 

 

Who’s responsible?

The user’s Indian bank is responsible for following various underlying regulations:

  • Foreign Exchange Manage Act (“FEMA”) compliance
  • Source of funds
  • Purpose of remittance

 

Details of the RBI Guideline: https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9899#18

 

 

What is the purpose code of this remittance under RBI?

S0001 – Portfolio Investments in foreign securities.

 

Who determines if the appropriate purpose is disclosed?

  • Investor’s Bank is responsible.
  • Investor is responsible. All investors/remitters are required to sign mandatory terms and disclosures.

 

 

Protection of Assets

 

Under the Financial Regulatory Authority (“FINRA”) of the United States, all accounts are regulated under the Securities Investor Protection Corporation (“SIPC”) scheme with account insurance of up to $500,000. Under the unlikely event of dissolution of any one stakeholder, the customer’s securities and cash are always secure.

 

 

How are the customer assets secured?

 

In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm. Multiple layers of protection safeguard investor assets. For example, registered brokerage firms must keep their customers' securities and cash segregated from their own so that, even if a firm fails, its customers' assets will be safe. Brokerage firms are also required to meet minimum net capital requirements to reduce the likelihood of insolvency in the first place, and to be members of the SIPC.

Stockal's brokerage partner, DriveWealth LLC, a member of the Securities Investor Protection Corporation (SIPC), will serve as the custodian for your securities account. In the event that DriveWealth LLC fails and is placed in liquidation under the Securities Investor Protection Act, securities in your brokerage account may be protected up to $500,000.  For details, please see www.sipc.org.


 SIPC protection comes into play in those rare cases of firm failure where customer assets are missing because of theft or fraud. 

 

 

Who are the custodians of customer accounts? 

 

The assets of the customer are owned by the custodian which services multiple brokerages who are in turn registered with the United States Securities and Exchange Commission(“SEC”) and regulated by FINRA. The custodians in the case of Stockal are Axos Clearing and Citibank which has many large brokerage clients in their portfolio and is one of the largest institutional custodians in the world. 

 

 

What is the role of the SIPC? 

As a member of the Securities Investor Protection Corporation (SIPC), funds are available to meet customer claims up to a ceiling of $500,000, including a maximum of $250,000 for cash claims. The SIPC fund protects over 3,500 brokerage firms and has advanced $2.9 billion in order to make possible the recovery of $139.8 billion in assets for an estimated 773,000 investors until 2020. 

One of SIPC’s main duties is to oversee the orderly liquidation of SIPC member brokerage firms. Under the Securities Investor Protection Act (“SIPA”) liquidation is similar to a U.S. bankruptcy case. The liquidation is administered in a federal bankruptcy court under the Securities Investor Protection Act and applicable U.S. bankruptcy laws and procedures. SIPC initiates the liquidation process when it receives a referral from a securities regulator such as SEC or a securities self-regulator such as the FINRA. A referral is made and liquidation occurs when a firm fails and cash and/or securities are missing from customer accounts.

When starting liquidation proceedings, SIPC asks the court to appoint a Trustee to liquidate the firm and protect its customers. In larger cases, the Trustee usually is a lawyer with experience in bankruptcy and securities law. In smaller cases, SIPC may be appointed as Trustee. In the smallest brokerage firm failures, SIPC deals directly with customers, outside of court, in a Direct Payment Procedure. 

 

Workflows: What happens when anyone in the ecosystem stops business

 

If Brokerage ceases to exist 

  1. Stockal will facilitate the movement of customer assets to another broker where Stockal has a relationship.
  2. Customer will also have the ability to move accounts directly at the brokerage but it’s generally not needed. 
  3. If brokerage account cannot be moved or liquidated (due to the Custodian also going out of business), SIPC will appoint a Trustee and follow due process.

If Stockal ceases to exist 

  1. Stockal will arrange for direct contact between its customers and their respective brokers (relevant contact information is always directly made available even when Stockal exists).
  2. All trade confirmations and regulatory statements are sent to customers directly by the brokerage firm – all the time. So customers have constant access to their brokerage account. 
  3. Customers can access and operate their accounts at the brokerage front- end and /or liquidate their accounts and /or move to a different brokerage by coordinating directly with the exchange. Stockal shall also facilitate the process if needed. 

KYC and FATCA Compliance Responsibilities

 

  1. As a referrer, the partner is not liable and responsible for customer Know Your Customer (“KYC”) procedures.
  2. KYC, Anti-Money Laundering (“AML”), Foreign Account Tax Compliance Act (“FATCA”) compliance is undertaken and fulfilled by the US Brokerage partner involved – Drive Wealth LLC in this case.
  3. Stockal’s responsibility is to facilitate KYC by providing digital infrastructure.
  4. Regulatory reporting requirements are at the foreign regulator (SEC and FINRA) and at the Indian bank. These are managed by the US brokerage and the respective Indian banks. Stockal facilitates as and when needed, by providing relevant data to all.

 

Investor profiling

 

  1. Mandatory investor profiling is automatically completed while opening the brokerage account with the US Broker.
  2. Facilitation for profiling is done by Stockal (by gathering requisite information from the investor).
  3. Final approval/rejection and filing is carried out by the US broker.
    Any and all products that are not allowed by the RBI are periodically monitored by Stockal and removed from the platform if required. The final responsibility of not investing in any disallowed product lies with the investor.

US Broker Credentials

 

FINRA Brokercheck: https://brokercheck.finra.org/firm/summary/165429

 

Regarding Risks to Partner

 

Business

  1. All accounts are cash accounts, so there is no margin that any referral partner (or US broker or Stockal) will provide to the customer.
  2. RBI does not allow any speculative investments under LRS so the platform does not provide derivative products, futures and options and therefore none of the platform partners carry any risk on that front.
  3. All accounts are DIY (“Do IT Yourself”) accounts, so the partner will not be placing trades on behalf of customers and does not carry the risk of being targeted with false or malicious claims with regards to order placement.
  4. The partner is not liable for advisory services because advisory, as and when made available on the platform, will be offered by separately regulated advisory firms.

 

Compliance

  1. Foreign investments do not come under the purview of the Securities and Exchange Board of India (“SEBI”) so there are no obligations of the partner to SEBI with regards to managing investors who make overseas investments.
  2. Stockal has a SEBI registered advisory entity and shall be reporting to SEBI in case the platform provides any advice to any investor (which it doesn’t, as of now).
  3. Taxation is not an item that the partner has to support or handle for its customer, the partner does not provide tax advice and you should consult your tax advisor before engaging in any transactions. Please note :
    1. There is no capital gains tax in the US for foreign investors. All funds are credited, as-is to the investor’s accounts and investor can freely repatriate such funds to his/her Indian (or any jurisdictional) bank account. The partner is not required to do any reporting in this respect.
    2. Dividend payments are credited to the investor’s account after US tax withholding automatically. This is handled by the US broker and facilitated by Stockal. Investors can request for tax-paid acknowledgement directly on the Stockal platform. The partner has no role to play in this respect either.

 

Currency

  1. Currency conversion is a subject of bank authorized remittances only and so the partner does not bear any risk on currency fluctuations.
  2. Investors can plan their remittances to and back from their investing accounts based on their preferred currency rates.