Due 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.