Need Cash and Considering a Stock-Based Loan? First, Consider the Risks.

Stock-based loan programs can be incredibly risky. Investors would do well to consider the risks before committing to this option.

In their latest investor alert, the Financial Industry Regulatory Authority (FINRA) outlined the risks of stock-based loan programs, especially those that involve non-recourse loans from unregistered lenders. These loan programs can appeal to investors who need cash, or those who want to keep their investments while tapping into their portfolio value.

Stock-based loan programs can be risky on their own, but made even riskier when they involve non-recourse loans. These loans are typically characterized by third-party lenders that are unregistered and unregulated.

Non-recourse loans limit the lender's options in the event that a borrower cannot repay what they owe. When a borrower can't pay back the lender, the lender's only real recourse is to accept securities pledged as collateral – regardless of any decreases in the securities' value.

If you have been approached by a financial professional regarding a non-recourse, stock-based loan program that they describe as “low risk,” it's important that you understand the full scope of the risks and potential ramifications. Some of those include: lender failure to return your stock even after you've repaid the loan; potential for the transaction to be deemed a taxable event; fees; and surrender charges.

The FINRA investor alert provides information regarding what stock-based loan programs are, who markets them, and how they work. The alert also shows the various risks involved, including the following:

  • Unregistered salespeople who may promote non-recourse stock-based loan programs. These individuals are not required to look for suitability when recommending securities transactions to their customers. This increases the risk of potential misconduct.
  • Loan proceeds restrictions because they are generally considered margin loans. The use of proceeds is restricted by regulations set forth by the Federal Reserve Board which includes limitations of using proceeds for securities transactions. This means the customer may not be able to use the proceeds the way in which they want.
  • Conflicts of interest regarding whether the broker or brokerage firm is making recommendations solely to generate commissions on the products you may purchase with the proceeds from the loan.
  • Availability of funds needed to repay the loan may be an issue due to the short term period of the loans and whether you invested in a long-term product or investment.
  • High costs, high interest charges are common in these stock-based loan programs. Over the course of the loan, the pledged stock would have to appreciate enough to keep the interest charges from costing you money. The interest rates may even be higher than the rates brokerages typically charge for margin loans.

FINRA’s investor alert also provides tips to investors to protect themselves from the possible risks of a stock-based loan program. They suggest investors check to make sure the promoter or the lender is registered with the agency or with bank regulators. They don’t have to be registered, but if they are not, it increases the risk of potential fraud. Check with the Securities and Exchange Commission to see if the lender has had any past financial audits or been cited for any irregularities.

It’s best to do your research before making any type of investment decision, and stock-based loan programs are no exception.

Meyer Wilson represents investors who have suffered substantial losses through stockbroker fraud and misconduct. We invite you to contact our lawyers today for a free review of your legal rights and options.


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