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

WASHINGTON–(BUSINESS WIRE)–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 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



Investor Alert: Securities-Backed
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Financial Industry Regulatory Authority (FINRA)
, 212-858-4387