Securities-Back Lending Risks Step Back Into the Spotlight Amidst Market Declines

shutterstock_140186524-300x298Due to recent market decline and volatility, the investment attorneys of Gana Weinstein LLP have been contacted by a number of investors who hold non-purpose loans secured by their brokerage accounts.  Due to market movements, investment losses have jeopardized their ability to repay the loan. In other situations advisors have been slow to reach out to clients in order to take steps to either voluntarily sell assets or increase their collateral to protect their accounts.

In recent years all the major wire houses have become involved in selling their wealthier clients on securities-backed lines of credit (SBLOCs). These loans that are often marketed by brokerage firms to investors as an easy way to cash out your securities accounts by borrowing against the assets in your portfolio without actually having to liquidate securities.  The concept is conceptually similar to margin but the loan is issued by a bank and held in a different account then the investments.

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 requires 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.

Due to the increase in sales of these investment arrangements, The Financial Industry Regulatory Authority’s (FINRA), the industry’s self-regulatory watchdog, issued an “Investor Alert” entitled “Securities-Backed Lines of Credit – It May Pay to See Beyond the Pitch.” The article highlights 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.”

Investment advisors have obligations in selling and monitoring these products.  One of the primary responsibilities is to fully explain the risks and make suitable recommendations.  The advisor should also be contacting you if you are likely to experience a call on the loan due being under collateralized.  In some cases, advisors simply sell off investments without discussing the situation with the client.  The advisor can then generate additional losses through unintended capital gains consequences due to the sale of long-term holdings.

Investors who have suffered losses on securities backed loans should contact Gana Weinstein LLP at (800) 810-4262 for consultation.  At Gana Weinstein LLP, our attorneys are experienced representing investors who have suffered securities losses due to the mishandling of their accounts.  Claims may be brought in securities arbitration before FINRA.  Our consultations are free of charge and the firm is only compensated if you recover.

Contact Information