Our firm has previously reported on the growing trend of brokerage firms recommending non-purpose loans secured by their brokerage accounts to clients. See Investors Risk Big Losses with Loans Secured by Securities Collateral Accounts. Recently, the state of Massachusetts charged Morgan Stanley with conducting unethical – high-pressure – sales contests among its financial advisers to encourage clients to take out loans. According to newsources, from January 2014 until April 2015, the firm ran two different contests involving 30 advisers in Massachusetts and Rhode Island with the express goal of persuading customers to take out securities-based loans (SBLOCs) with their securities accounts serving as collateral. Advisers were promised bonuses of $1,000 for 10 loans, $3,000 for 20 loans and $5,000 for 30 loans. The contest was alleged to have generated $24 million in new loans and was run despite an internal Morgan Stanley prohibition on such initiatives.
As a background, these lines of credit allow investors to borrow money using securities held in the investment accounts as collateral and allow the investor to continue to trade securities in the pledged accounts. An SBLOC typically requires monthly interest-only payments until repaid. Thus, when an investor losses a significant amount of their portfolio the investor has made very little progress in repaying the loan and may have few to no options to pay the loan back. Recently FINRA issued an “Investor Alert” entitled “Securities-Backed Lines of Credit – It May Pay to See Beyond the Pitch” recognizing the conflicts between brokerage firms incentivized by “SBLOCs [that] can be a key revenue source for securities firms” and those same firms “placing your financial future at greater risk.”
According to Fortune, firms such as UBS, Bank of America, Merrill Lynch, Morgan Stanley, Wells Fargo, and JP Morgan are recommending that their high net worth investors take out loans against their brokerage accounts at an alarming rate. The Wall Street Journal reported that securities based loans increased by 28% at UBS between 2011 and 2013. According to Fortune, a Wells Fargo advisor told the writer that the loans are so lucrative for the brokers that they refer to the money they make as their 13th production month. Another contact with Morgan Stanley reported that a regional manager would like to automatically send paperwork for loans with every single new account form.
The investment fraud attorneys at Gana LLP represent investors who have suffered losses due to inappropriate advice concerning their investment accounts and securities loans. The majority of these claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.