Meyer Wilson

Recovering Losses Caused By Investment Misconduct

FINRA Cautions Against Stock-Based Loan Programs

Stock-based loan programs allow investors to obtain "non-recourse" loans from third-party lenders (typically unregistered and unregulated) by pledging fully paid stock as collateral. Generally, the pledged stock is transferred to the lender at the time the loan is obtained. "Non-recourse" means the lender's only recourse in the event of default is to collect the pledged stock, regardless of whether the stock has increased or decreased in value.

In an investor alert issued this week, FINRA said it has recently brought a number of enforcement actions against firms for activities related to stock-based loan programs. According to the self-regulatory organization, common marketing ploys tout the programs as a way for investors to "leverage" an existing or new stock purchase to buy new financial products, or as a way to "tap the value" of an existing portfolio without tax consequences or sales fees. As with most marketing campaigns, the risks of the products are left for investors to discover on their own.

According to FINRA, stock-based loan programs can be both costly and dangerous for investors. Some of the biggest risks to consider include:

  • the possibility that the lender may not return the stock after the loan is repaid;
  • the possibility that the lender may sell the "pledged" stock immediately after transfer;
  • possible tax consequences, if the IRS considers the transaction a taxable event; and
  • potential fees and charges associated with the transaction, especially if the proceeds are used to purchase an annuity or other financial product.


FINRA cautions investors who wish to obtain a stock-based loan to conduct a thorough investigation of the program. Investors should be able to answer the following questions:

  • Are the lenders and promoters registered?
  • What happens to the stock once it is pledged as collateral?
  • What are the costs and risks of purchasing a financial product with the proceeds?
  • Are there restrictions on the use of the proceeds?

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