News Release

FINRA, SEC Issue Investor Alert: 10 Questions Investors Should Ask About Securities-Backed Lines of Credit

For Release: 
Monday, December 21, 2015
Contact(s): 

Ray Pellecchia (212) 858-4387

WASHINGTON — As a growing number of securities firms are marketing and offering securities-backed lines of credit (SBLOCs) to investors, the Financial Industry Regulatory Authority (FINRA) and the staff of the Securities and Exchange Commission (SEC) today issued a new Investor Alert, Securities-Backed Lines of Credit – It May Pay to See Beyond the Pitch.

"We want to provide investors with the basics of SBLOCs, how they are marketed and the benefits and risks you should consider before posting your investment portfolio as collateral," said Gerri Walsh, FINRA's Senior Vice President for Investor Education. "SBLOCs might seem like an attractive way to access extra capital when markets are producing positive returns, but market volatility can magnify your potential losses, placing your financial future at risk."

SBLOCs are loans that are often marketed as an easy and inexpensive way for investors to obtain cash by borrowing against their portfolio without having to liquidate the securities. However, they carry risks, including potential tax consequences and the possibility that investors may have to sell holdings if the value of those holdings declines, which could have a significant impact on investors' long-term investment plans.

FINRA and the SEC staff's alert explains how SBLOCs work, including details about credit limits, interest rates and repayment, and suggests 10 questions investors can ask to help ensure they understand the potential benefits and risks of these products. Among the key questions:

  • What if the value of my portfolio decreases? The firm might sell your securities if you receive a maintenance call and are unable to meet it. SBLOCs are classified as demand loans, which means that the lender may call the loan at any time. If you are unable to pay some or all of the loan on demand, the firm may liquidate securities and reduce your credit limit.
  • Does my investment mix matter? If your portfolio is concentrated in a particular stock or sector, a single market event could cause its value to drop precipitously and trigger a maintenance call. That could lead to being forced to sell your securities at the bottom of the market. If your portfolio is heavily concentrated, consider whether other assets might serve better as collateral. If you do pursue an SBLOC, consider whether you should take less than the maximum credit being offered to you.
  • How is my broker compensated with SBLOCs? Your broker or adviser may receive additional compensation or a portion of the fees generated by SBLOCs sold to customers. Some firms pay salespeople based on how much money you have borrowed on the line of credit. In addition, because SBLOCs allow the securities to remain in your account, a broker or adviser who is paid based on assets in your account might prefer an SBLOC instead of having you sell some of your securities to raise cash, which would reduce the size of the account and broker's compensation.

In addition, the alert covers topics such as the potential impact of higher interest rates; tax consequences if your securities are liquidated; knowing the identity of the lender, as well as the details of the loan agreement; and the fact that it might not be easy to move your account to another firm if your securities are pledged as collateral for an SBLOC.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2014, members of the public used this service to conduct 18.9 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA's Disciplinary Actions Online database. Investors can also call FINRA's Securities Helpline for Seniors at (844) 57-HELPS for assistance or to raise concerns about issues they have with their brokerage accounts and investments.

FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.