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FINRA

FOR RELEASE:
CONTACTS:
Monday, September 15, 2003
Nancy A. Condon 202-728-8379
Michael Shokouhi 202-728-8304

 

NASD Alerts Investors of the Risks Associated with Using Margin to Purchase Securities

Washington, DC — NASD today issued an Investor Alert to inform investors on the risks of trading securities "on margin." NASD issued the Alert because investor purchases of securities on margin have grown dramatically, reaching $174 billion in July, and many investors may underestimate the risks associated with trading on margin and misunderstand margin calls and how their holdings can be liquidated.

"In the first seven months of this year, the amount of debt used to purchase securities has risen 25 percent," said Mary L. Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. "Due to this dramatic increase, NASD wants to alert investors to the potential risks involved with the use of margin - and the consequences that can result from its use."

 

Investors who cannot satisfy margin calls can have large portions of their accounts liquidated under the market conditions at the time, favorable or unfavorable. That liquidation can result in substantial losses. Some of the risks associated with opening a margin account that are explained in the Alert are:

  • Firms can force the sale of securities in accounts to meet a margin call,

  • Firms can sell securities without contacting the account holder,

  • Account holders are not entitled to choose which securities or other assets can be sold,

  • Firms can increase its margin requirements at any time and is not required to provide advance notice,

  • Account holders are not entitled to an extension of time on a margin call; and

  • Account holders can lose more money than is deposited in a margin account.

A specific risk that is discussed in the Alert is the fact that some investors mistakenly believe that a firm must contact them first for a margin call to be valid, which is not the case. Most firms will attempt to notify their customers of margin calls, but they are not required to do so. Even if an account holder is contacted and provided with a specific date to meet a margin call, the firm may decide to sell some or all of the securities before that date without any further notice. For example, the firm may take this action because the market value of the securities has continued to decline in value.

 

Along with explaining the risks involved with margin, the Alert provides some basic facts about purchasing securities on margin. The Investor Alert can be found at, Investing with Borrowed Funds: No "Margin" for Error.

 

NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web site at www.nasd.com.