finra

FINRA

 

For Release:
Contacts:
Tuesday, April 10, 2007
Nancy Condon (202) 728-8379
Sarah Bohn (202) 728-8988

 



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

Washington, DC — NASD today issued an updated Investor Alert warning investors about the risks associated with trading on margin. Since the release of a previous Alert on this topic in 2003, the amount of debt taken on by investors to buy securities has reached a record high of $321.2 billion in February 2007.

"We are concerned too many investors are unaware they could suffer substantial financial losses by using debt to purchase securities," said Mary L. Schapiro NASD Chairman and CEO. "By updating our Alert on this topic, we hope to remind investors not to underestimate the risks involved."

The Alert, Investing with Borrowed Funds: No "Margin" for Error, explains that 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 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 margin requirements at any time and are not required to provide advance notice.
  • Account holders are not entitled to an extension of time on a margin call.
  • Account holders can lose more money than is deposited in a margin account.
  • Account holders should ask whether they will automatically be placed into a margin account and, if so, what the rate of interest will be and what circumstances would trigger a margin loan.

Along with explaining the risks involved with margin, the Alert provides some basic facts about purchasing securities on margin and where to turn for help. Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge. In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasd.com/brokercheck. Investors can also access this service by calling (800) 289-9999.

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 registered firms. For more information, please visit our Web site at www.nasd.com.